Wednesday, December 20, 2023

At PwC, it’s the revenge of the auditors


At PwC, it’s the revenge of the auditors

After decades of playing second fiddle, PwC’s audit division is now expected to be the growth engine and the governance model for the future.

Edmund TadrosProfessional services editor

For decades, Sue Horlin watched her PwC consulting colleagues bring in the prestige clients, high-profile assignments and the big fees. But this year’s catastrophic tax leaks scandal has reset the table at the big four accounting giant and now audit and assurance – long the humbler, more straight-forward and less risky arm of the firm – is expected to be the growth engine and the governance model for the future.

“It has been a really challenging year. And I felt that both emotionally and professionally… and [so have] all of our people,” she tells The Australian Financial Review.
“[But] we are, in the assurance practice, still winning work ... we, I’m proud to say, are still delivering great quality work and great quality service for our assurance clients.”
Horlin is now responsible for one in every three dollars brought into the firm, up from one in four pre-crisis. For the firm to retain its spot as the country’s largest corporate auditor, she has to convince nervous audit committees and boards that they should stick with the embattled firm – while also winning contracts from her big four rivals Deloitte, EY and KPMG.
There is some evidence of the former, at least. She won’t name the clients, but in the past few weeks, PwC has retained the auditing role for an ASX 100 company and a large private company.
These previously unreported bits of good news for the firm have helped offset earlier blows to PwC’s auditors, such as being dumped by Westpac as external auditor last month, and having Lendlease stop short of awarding its auditing contract to the firm in May after the extent of the tax leaks scandal became apparent.
The irony isn’t lost on the senior PwC partner that the firm’s brand, once its greatest asset, has now become an obstacle.
The tax leaks matter involved a former partner sharing confidential government information within the firm that was used to develop schemes to sidestep new tax laws he was helping to develop. The scandal has rocked PwC’s local operation and heightened scrutiny of the multibillion-dollar consulting sector.
The scale of the damage the scandal has done to PwC’s business is only now coming into view. The firm generated revenue of about $3.35 billion in FY23, but had to sell its public sector consulting arm for $1 after being effectively cut off from new Commonwealth work in May for not revealing the extent of the tax leaks scandal at the start of the year. (A rival valued the business as being worth almost $1 billion.)
That public sector consulting business, now renamed Scyne Advisory, had generated about 20 per cent, or $670 million, of PwC’s FY23 billings. That firesale, along with the damage done to PwC’s public standing, has badly hurt the firm’s consulting arm. It hasn’t helped that high interest rates and fewer M&A deals have led to a downturn in the use of consultants by private sector clients around the world. (The firm’s third major division in Australia, financial advisory, has also been hit by the brand damage and the economic downturn.)
What this all means is that the leadership at the now smaller, and perhaps humbler, PwC is hoping Horlin’s audit and assurance division will be both the growth engine and the governance model for the future. Annual revenue in the division was up 13 per cent, to $743 million, in FY23.
While growth in the division may vary from year to year, these types of services tend to be immune from economic cycles because they are either legally required (in the case of audit for large companies) or sought after as a form of operational insurance (in the case of assurance).
‘The future is bright’
Horlin, a PwC veteran of almost two decades who has worked around the world for the firm, is a believer. She took up the leadership role because she believes in her staff and believes they can deliver work that is valuable to their clients.
And, like all good advisers, she only sees a glass that is half-full. The current state of the firm and its standing in the community isn’t a problem, it’s an opportunity.
“I’m genuinely excited about the challenge we have to learn and be a better firm, and to help lead our people to achieve their potential and meet the many exciting market opportunities ahead,” she says.
Her enthusiasm for the detailed and extensive work is obvious, too. It’s no surprise that she is a stickler for routines. For example, around her busy work and family life, she is known to (almost) never miss her Sunday morning run.
“I’m optimistic for two reasons. Firstly, the future of assurance is bright,” she says. “Organisations are going to need confidence in the information that they’re making decisions on more than ever in the future, and that’s financial information. As well as, of course, in two years’ time, [it will also be environmental, social, and governance] information.”
A second reason for her optimism is the increasing demand for assurance. This is a service where the firm’s personnel check that aspects of a company’s operations, such as a computer system, a process, an algorithm or some other type of control, work as expected. It might, for example, involve testing that a sales report is accurate and based on the correct data.
“Clients are going to need assurance” over the digital aspects of their organisation, including checking that their cybersecurity systems are up to scratch and that they are using artificial intelligence responsibly, Horlin says.
Helping boost her belief in the firm’s auditors is the endorsement of the division in the often scathing governance report into the firm by former Telstra chief executive Ziggy Switkowski over the tax leaks matter.
Switkowski wrote that a “shadow” culture that tolerated bad behaviour in the pursuit of profit “growth at all costs”, a lack of governance that “went unexamined and uncorrected for many years”, and an all-powerful CEO who could not be challenged, all contributed to the scandal.
Horlin is quick to point out the report also singled out the auditing and assurance division as having “model” governance and risk management practices that should be emulated throughout the firm.
‘Stronger understanding of risk’
Switkowski wrote that the auditing and assurance practice had “a stronger understanding of, and practices relating to, risk management compared with the other business lines”.
“[The] firm should seek to leverage its internal capability and intellectual property, and look to these strengths as it rebuilds,” he wrote.
The firm has accepted all of Switkowski’s recommendations and made sweeping changes to the way it operates, including adopting any ASX corporate governance principles that can be applied to private partnerships, although these will have no formal legal effect.
The firm will also make other changes, such as PwC now formally assesses the legal, reputational and financial risks of potential client work as it moves to stop partners providing the types of risky, fee-driven advice that led to the scandal.
Horlin says the changes made under CEO Kevin Burrowes show the firm has learnt from its mistakes.
“Our [audit and assurance] clients are starting to say we can see the opportunity and the differentiation in that going forward,” she says.
And so, please hear me say this with humility and gratitude, and there is no arrogance ... we’ve learnt from what’s happened ... we genuinely see an opportunity to be different that’s come out of the experience that we’ve been through.”