Talk about the modern day robber barons …
The final report into misconduct at PwC and the other Big Four consultancies has recommended 40 changes that would fundamentally alter the way these firms operate. By Jason Koutsoukis.
Final report into PwC misconduct a damning case for consulting reform
In March this year Diana Weiss, global general counsel for PwC International Limited, sent an effusive note to Kevin Burrowes, chief executive of PwC Australia, praising his handling of the tax leaks scandal that had engulfed the firm and continues to pose an existential threat to its global reputation.
“We want to thank you for your commitment during these challenging times,” Weiss wrote. “We look forward to continuing to engage with you and receive updates as you take further actions to build trust and strive to become the leading professional services firm in Australia, built on the highest ethical and professional standards, with integrity at its core.”
Six months on from that letter, whatever actions Burrowes may have taken to “build trust” don’t appear to have registered with the 10 MPs and senators who have just completed their investigation into allegations of misconduct in Australia’s major accounting, audit and consultancy firms.
Tabling the committee’s final report in the Senate on Thursday – three days after Australian Federal Police officers raided PwC’s Sydney headquarters – committee chair Deborah O’Neill delivered a blistering condemnation of the firm.
“Throughout the course of the inquiry the committee contended with varying levels of transparency and willingness among large firms with their respect to their engagement with the committee,” O’Neill said. “In particular, engagement from PwC’s past and present leadership proved to be extremely challenging and highlighted an absence of meaningful commitment to reform.”
She continued: “Evidence given verbally or in documents was far too often constructed in compromising half-truths and obfuscation, and far too often was provided only after protracted delays and resistance to requests from the committee. This failed to meet the standards required by the parliament and also fell short of public expectation.”
The tax leaks scandal first came to light in January last year, when The Australian Financial Review published a bombshell report that PwC Australia’s former head of international tax, Peter John Collins, had left the firm after the Tax Practitioners Board found he had shared confidential information about federal tax changes designed to combat multinational tax avoidance. The information was obtained when the Abbott government invited Collins to advise on the changes.
As Senator O’Neill relates in her foreword to the report tabled on Thursday, it wasn’t until a Senate economics estimates committee hearing a few weeks later that the true scale of the firm’s involvement began to emerge.
“The CEO of the Tax Practitioners Board Michael O’Neill revealed that Peter John Collins – a partner at PwC – had conspired along with ‘20 or 30 people’ to monetise confidential Australian Government information for the benefit of PwC and its clients,” O’Neill said.
Despite the revelation that “20 or 30 people” had conspired with Collins on the confidential information, PwC Australia’s then chief executive, Tom Seymour, told the AFRBusiness Summit on March 5, 2023, that there were “no findings that 30 people got the information” and that “the issue for us is there’s a perception issue and that’s because we didn’t have the right management tool in place”.
What Seymour didn’t know – and perhaps didn’t even contemplate – was that, as he was speaking, the Tax Practitioners Board was preparing to release 144 pages of internal PwC emails detailing the depth of PwC’s deceit.
When those emails were made public in May last year, confirming that PwC’s tax advisers had used the information provided by Collins to develop products that would help its multinational clients avoid the tax laws Collins had helped the federal government to design, Seymour had no choice but to resign. Soon after, the Senate voted to establish an inquiry into the wider accounting, audit and consultancy industries.
Two months later, PwC would be under the ‘‘supervised remediation’’ of PwC International. Within a year, the Australian firm would be broken up, with its lucrative government consulting arm sold for just $1 and renamed Scyne Advisory.
PwC Australia, meanwhile, was banned from tendering for government work, with the firm reduced by a third. Its annual revenue was slashed to the point that it is now the smallest of the “Big Four” accounting and consulting firms, behind KPMG, Deloitte and EY.
“The emails revealed the hidden inner workings of one of the most important entities in the architecture of the Australian financial sector. The resulting scandal shook corporate Australia to its core, as PwC became synonymous with a profoundly disturbing breach of public trust,” Senator O’Neill said. “The subsequent public outrage has ensured the strength of the largely non-partisan and deeply comprehensive parliamentary response, of which this report is a central component.”
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O’Neill was unsparing in her criticism of Seymour and his predecessor as chief executive of PwC Australia, Luke Sayers. Sayers is now president of the Carlton Football Club and runs his own advisory and investment firm, Sayers Group.
Despite both men appearing before the Joint Committee on Corporations and Financial Services earlier this year, the committee found that “the inability of the firm’s former CEOs Luke Sayers and Tom Seymour to robustly describe, evaluate and take sincere accountability for the culture they created is a failure of leadership by any measure”.
The committee pulled no punches when it came to current PwC Australia chief executive Kevin Burrowes.
“I also hold grave concerns about the leadership of the current PwC Australia CEO Kevin Burrowes,” O’Neill wrote in her foreword to the committee report. “PwC International’s secret side-payment to Mr Burrowes and the firm’s continued refusal to hand over the Linklaters Report and related documents into the foreign PwC network partners involved in the scandal demonstrates a dismissive attitude towards the Australian Parliament and a failure to identify a glaring conflict of interest.
“It is for these reasons the committee has taken the view that PwC and related entities should be excluded from tendering for government work until the completion of all ongoing investigations, and resolution of outstanding matters still at large in the public sphere,” O’Neill added. “We have also recommended that government consulting firms should be required to publicly declare if and when they are subject to international remediation and reveal the terms involved. Australia’s national sovereignty should not ever be compromised by international franchise actions or contracts.”
In less than two years, PwC Australia and PwC International have accomplished the rare feat of uniting Labor, the Coalition and the Greens in a push to reform an industry the company once dominated – both in terms of profits and public esteem.
If the Albanese government adopts the Joint Committee on Corporations and Financial Services report’s 40 recommendations, which were made without dissent, it will lead to a comprehensive overhaul of the regulatory framework that defines how auditing and consulting firms are allowed to operate.
The report’s first recommendation is that PwC and its related entities remain barred from government work until the completion of all ongoing investigations “including but not limited to those by the Tax Practitioners Board, Australian Federal Police and Australian Taxation Office”.
It also recommends that before PwC is eligible to tender for government work again, “it must demonstrate it has taken all appropriate remedial action in response to the outcomes of the investigations”.
The committee also recommended the establishment of a regulatory body to oversee large partnerships, cap the number of partners at 400 to align with the limits of legal partnerships, and for there to be improved accountability for misconduct.
Large firms should also be required to adhere to the Corporations Act 2001 standards for governance and be designated as public interest entities, with increased transparency requirements, including the disclosure of fees.
On the question of audit quality and independence, the committee recommended that firms be required to implement operational separation between their auditing and consulting divisions, as well as increasing the oversight power of the Australian Securities and Investments Commission to cover all partners within multidisciplinary firms, regardless of which part of the firm they work in, and a legislative requirement that ASIC publish all individual audit firm inspection reports.
When it comes to longer-term governance reforms, the committee recommended the integration of accounting and audit boards with the Financial Reporting Council and the establishment of an independent disciplinary board to handle auditor misconduct.
Other recommendations included measures to ensure the independence of regulatory bodies, whistleblower protections, and the harmonisation of codes of conduct and conflict of interest disclosures across relevant regulatory agencies. It also recommended ways to encourage competition in the audit sector, such as mandating tendering and firm rotation for auditors, and that public interest entities be subject to joint audits that include smaller firms.
The latest set of proposed reforms to auditing and consulting industries follows a series of reforms already introduced, including the tightening of laws governing tax advisers, and new rules that impose penalties of up to $780 million for tax promoter breaches, new promoter penalties, changes to tax office secrecy and wider powers for the Tax Practitioners Board.
The Albanese government has also leveraged the PwC tax leaks scandal to deliver on a campaign promise to reduce the Commonwealth’s reliance on external advisers and contractors, with the Department of Finance significantly tightening rules around the use of consultants.
As a result, spending on the largest consulting firms has been slashed by nearly 50 per cent, down to just over $600 million in the year to June 30, a move which has hit all the Big Four firms hard, not just PwC.
Greens Senator Barbara Pocock, who along with Senator O’Neill was largely responsible for establishing a separate Senate inquiry that specifically examined PwC’s conduct, said the evidence uncovered by the Joint Committee on Corporations and Financial Services was of international significance, with the report’s recommendations involving a vital step towards change.
“This is an important report which responds to a public scandal in PwC and the consulting industry more broadly, including all of the Big Four,” Pocock said. “This scandal has shocked Australians – and many beyond our shores. Meaningful reform cannot wait. The evidence is in. Reprehensible behaviour has thrived in gaps in our regulatory framework and bent the cultures of some of our largest private entities, much of whose income and profit comes from the public purse.”
The report, Pocock added, revealed “global challenges that beset effective governance, behaviour and structures in some of the world’s large entities – that too often put their own interests before those of the public”.
“Australians want to see action that prevents any repeat into the future. They want their government to ensure that these very large partnerships no longer operate beyond regulatory scrutiny in opaque, poorly governed, profitable secrecy,” she said. “We need comprehensive legislative, cultural and structural change to fix these organisational failures. There is a strong case for change. Shared outrage is not enough. It is essential to see action.”