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Former KPMG whistleblower Brendan Lyon has won a court ruling that could expose Australia’s most powerful audit and consulting firms to hundreds of millions in uncapped damages.
PwC was embroiled in a tax leaks scandal three years ago. Picture: Gaye Gerard
A landmark costs ruling handed down by the NSW Supreme Court has cleared the way for former KPMG partner Brendan Lyon to press ahead with a legal challenge to scrap the liability protections enjoyed by Australia’s audit and consulting firms.
The ruling comes after KPMG faced a second grilling in Canberra on Friday over its shocking audit scandal that only came to light when a whistleblower’s allegations were aired under parliamentary privilege. A parliamentary committee heard how KPMG’s partners lied in an internal investigation.
In the past six years, the big four have been hit by rolling scandals involving misusing government and corporate documents to win work, cheating on tests (including an ethics exam) and using artificial intelligence to produce client briefs.
Mr Lyon says this is partly due to a legal structure that protects partners financially and allows them to operate in the shadows.
The former KPMG whistleblower turned academic won a rare protective costs order before Justice Tim Faulkner that caps Mr Lyon’s adverse costs exposure for the case at $25,000. Chartered Accountants ANZ, which opposed the application, had put its own estimated recoverable costs at between $400,000 and $460,000 – a gap that, absent the order, would have left Mr Lyon exposed to a bill capable of ending his case before it reached trial.
A trial should be heard this year, and if Mr Lyon wins, clients and shareholders could pursue KPMG, EY, PwC and Deloitte for the true, uncapped cost of bad advice delivered by consulting or tax arms currently sheltered by the scheme. The damages potentially run into the hundreds of millions of dollars.
Bad advice is not as rare as the public might expect. Mr Lyon argues that’s because the big four are not forced to bear the financial consequences of what they deliver. Their liabilities after insurance drop to $1m per firm in most instances, regardless of the scale of damages. That’s a small amount when spread among 700 or so partners.
“In these settings it is entirely rational for a big four partner to accept big fees to overstate asset values or provide risky tax advice now, because any liability is capped to an insignificant amount that won’t usually emerge until years later,” said Mr Lyon.
“Current and recent litigation involving major accounting firms demonstrates that the losses associated with big four advice can run into the hundreds of millions of dollars.”
Case in point is Lendlease. The company is fighting a $160m amended tax assessment resulting from an alleged “double-dipping” tax scheme by its retirement villages, built on tax advice from Greenwoods & Herbert Smith Freehills, later absorbed into PwC.
Not only does Lendlease face a massive tax bill, its shares fell 14 per cent the day it revealed its true liability.
Without a liability cap, Lendlease would have a considerably stronger basis to pursue PwC directly for the assessment, interest and associated costs. Shareholders could consider a class action.
Commonwealth Bank ran into similar trouble after Deloitte advised the bank on $100m of research and development tax concession claims tied to its core banking modernisation project. The ATO challenged the claims, forcing CBA to withdraw its Administrative Appeals Tribunal proceedings and settle.
Separately, EY advised on and modelled transactions intended to generate substantial tax benefits for Gordon Merchant, founder of Billabong. The ATO determined the move to be “asset washing.” Merchant is now suing EY and a former EY tax partner for damages arising from the advice.
Lyon’s case alleges the Professional Standards Council failed to consider mandatory matters when reapproving the Chartered Accountants ANZ scheme, and that the scheme unlawfully extends liability caps to non-accountants providing “category 3” – non-accounting – services. That distinction matters enormously: Category 3 services account for roughly 80 per cent of big four revenue, according to Mr Lyon’s own case materials.
Litigation already under way shows how quickly this could play out. Shareholders in Downer EDI are running a class action in the Supreme Court of Victoria through Maurice Blackburn over alleged accounting irregularities and continuous disclosure failures, and have sued KPMG directly as the company’s auditor. KPMG has filed a defence and cross-claimed against Downer EDI.
Should Mr Lyon’s case succeed, plaintiff firms running that action – and others pursuing big four firms over audit or advisory failures – would gain powerful ammunition to argue liability caps should not apply, or should apply far more narrowly, to non-accountant personnel. Litigation funders are understood to be watching the case closely for precisely this reason.
Chartered Accountants ANZ says that its professional standards scheme “plays a vital role in protecting consumers by ensuring access to insurance-backed compensation when a professional services engagement results in a court-awarded damages claim for loss”.
In a statement, it went on to say the scheme does not limit liability for damages arising from a breach of trust, fraud or dishonesty.
“As the proceedings are ongoing it is inappropriate to comment any further,” it wrote.
With costs protection secured, the case likely heads to a hearing, where the Supreme Court will determine for the first time the outer limits of who can be covered by a approved professional standards scheme.
Bias in tax administration has again come to light, with the Tax Ombudsman giving the ATO quite a rebuke.
In its just-published report of a review of the system, the Tax Ombudsman has warned that unchecked bias in tax administration can have serious consequences for taxpayers.
It has found the Australian Taxation Office (ATO) should do more to manage the risk.
The review was initiated after an investigation into historical allegations of ATO maladministration involving bias and prejudice.
It examined whether the ATO’s current processes, guidance and training prevented bias or prejudice from influencing its decisions, particularly where they can significantly affect a person’s livelihood.
A review of the ATO’s management of a complex and long-running case, along with a follow-up review, considered broader systemic risks of bias or prejudice in the ATO’s decision-making and inappropriate disclosures of taxpayer information.
It examined whether the failings identified in the historic case could occur now and whether the ATO’s current controls were effective in mitigating such risks.
Tax Ombudsman Ruth Owen said the review found that while the ATO had strengthened its controls to improve decision-making in response to weaknesses identified 10 to 15 years ago, there remains plenty of room for improvement.
“The ATO has improved how it makes decisions about taxpayers in recent years; however, this review shows there’s more to be done, particularly by explicitly recognising bias as a risk and strengthening controls so they are embedded in the ATO’s everyday processes,” she said.
“Guarding against bias is not a set-and-forget exercise. It requires ongoing vigilance, regular review, and a willingness to continually challenge assumptions as circumstances, data, and risks evolve.
“The community expects the ATO to act impartially, lawfully, objectively and without bias or prejudice, regardless of a taxpayer’s past behaviour or history.
“The ATO’s decisions must always be based on evidence, applied fairly and regularly checked against the risk of bias.”
Ms Owen said she was also concerned about the ATO breaking its own rules or processes because it believes it is acting in the public interest.
She said she had heard concerns from taxpayers and tax professionals that once a taxpayer is labelled as “bad” it is difficult for them to remove that label, and this could ultimately undermine public confidence in the ATO’s impartiality.
The review found some of the ATO’s processes were not designed to counter bias, meaning staff were not explicitly prompted to consider the risk of bias in their decision-making and to retain an open mind in considering the facts.
Bias and prejudicial conduct can impact tax administration in many ways, she said. For example, officers may depart from procedures or the law to reach a predetermined outcome because they believe they are acting in a “noble cause”.
Alternatively, investigators can give too much weight to past compliance behaviours instead of looking at current evidence with fresh eyes.
“While bias exists in all organisations, the risk is heightened in teams regularly dealing with non-compliance or suspected wrongdoing,” Ms Owen said.
“Strong bias controls are not about second-guessing ATO officers; they are about protecting people from avoidable harm, supporting good decision-making and maintaining public confidence in the tax system.”
The review has made two recommendations to the ATO:
Assure itself and the community that its controls against bias and prejudice in compliance and enforcement actions and decision-making are working effectively, and
Develop and implement a plan to address identified gaps in bias controls, including strengthening explicit bias checks, training, assurance guidance, data and monitoring, and the language used in disclosures.
Given the nature of the topic that was reviewed and the ombudsman’s specific focus on the ATO’s internal controls, it did not seek broad public input for the review. Instead, it undertook targeted consultation with selected tax professionals and associations.
The ATO has accepted both recommendations.
“The ATO welcomes this report and its contribution to maintaining community confidence in fair, objective and evidence-based tax administration,” Second Commissioner of Taxation, Jeremy Hirschhorn, said in the ATO’s response.
“We recognise that public trust in the tax and superannuation systems depends on confidence that ATO decisions are made impartially, consistently and in accordance with the law.
“We are pleased that the review recognises the significant controls already in place within the ATO to support objective decision-making and manage bias.
“We welcome the opportunity to build on those foundations and reinforce community confidence in the integrity of our decisions and actions. The ATO agrees with both recommendations in the report.”
The Tax Ombudsman will monitor the ATO’s progress in responding to her recommendations.
Original Article published by Chris Johnson on Region Canberra.
