Thursday, August 08, 2024

Why regulators need more power to investigate large firms

 

Why regulators need more power to investigate large firms  

 The Mandarin

August 8, 2024 Thursday


The Mandarin  / TOM RAVLIC


Do regulators such as the Australian Taxation Office, Tax Practitioners Board and the Australian Securities and Investments Commission have sufficient power to seek information from and properly investigate large, complex organisations such as Big Four accounting firms?

This question has opened up partly due to the opacity of aspects of the PwC tax leaks scandal. It’s also relevant because complex organisations, such as accounting firms, do essential work in the public interest regulated by law and enforced by regulatory agencies.

The PwC case study highlights areas that merit further exploration by a parliamentary committee to determine what, if anything, can be done to shine a brighter light on economically and politically significant entities that provide regulated services and consult to government.

Opacity of global structures

One of the issues that emerged throughout multiple inquiries and routine Senate estimates committee interrogation is the inability of public servants working within regulatory agencies to pierce the corporate or institutional veil of a firm such as PwC Australia.

Consider for a moment that the firm in Australia has insisted it can’t provide what is known as the Linklaters report to committees that have been poking and prodding the practice. They want more details on the six mysterious figures apparently involved in handling Australian policy information.

The firm has told Parliament it is not getting 
the Linklaters report. The Australian chief executive officer Kevin Burrowes has been told he’s not getting it from PwC Global either.

PwC Australia has an Australian partner, Paddy Carney, on the global board. But Carney has been recused from considerations of the Australian tax leak circus.

This means even the Australian partner is incapable of telling Parliament what is in 
the Linklaters report because she was not involved in its considerations.

One thing must be stated before this goes on: the firm is entitled to claim the report or advice from Linklaters as its own material over which it can claim legal professional privilege. But this isn’t necessarily the optimal situation for a class of curious politicians and bureaucrats who want to understand what went on outside Australian  borders.
 
The other matter pointed out by former PwC Australia CEO Tom Seymour during last Friday’s Big Day Out for PwC scandal tragics is that the local firm threw its domestic partners under the bus, but the six overseas partners or staff remain anonymous.

Seymour noted it was difficult to accept the difference in treatment between the global and Australian firm.
 
That anonymity is only possible because the report on which the firm’s announcement in September last year about the six folks who were disciplined is being withheld. Their identities are being kept quiet.

The information gap that exists for staff working for parliamentary committees, parliamentarians and regulatory or enforcement agency raises a question: What more can be done to provide greater transparency?

Complex structures have hidey holes

What makes this little gem of a case study more complex is that the Linklaters report is a document (or documents) that doesn’t exist within the Australian firm.

The global network has the document in an entity called PwC International Limited -- an organisation that is a non-trading private company registered in the United Kingdom.

This turns the issue of getting a more complete understanding of what went on across the PwC network into mission impossible for some politicians and bureaucrats. These are the people charged with developing law, shaping policy and regulating practitioners in a firm that is influenced by domestic management and global control.

People need to better understand how these global structures work and what limitations parliamentarians and regulators have in seeing the inside of a calculator-driving beast.

PwC is not the only firm that has a complex global structure. But it is the firm that has opened the door to a series of questions about whether investigators working for various agencies have sufficient powers to investigate misconduct.

A question that could be asked by a parliamentary committee is whether the scope of information-sharing treaties or agreements is sufficient to open the door of large organisations and discuss things they don’t particularly want to talk about.

Professional firm networks as foreign influencers

An observation made by the TPB’s chief executive officer Michael O’Neill about the tax leaks saga during an estimates committee hearing earlier this year about the sharing of policy information across networks raises another question.

O’Neill said that some of the information shared across the global network by PwC partners may have been part of the accounting firm’s efforts to coordinate a response to global tax rule changes being considered by the OECD.

Should the larger practices engaged in government procurement and lobbying across jurisdictions entities be listed as lobbyists? Are there grounds for complex entities, such as accounting firms, to be registered as entities that have a foreign influence?

The ultimate purpose of such a requirement is to ensure that there is a greater deal of transparency about what these entities do.

What should another inquiry look at?

PwC Australia is not the only global professional services firm operating in Australia. Neither is the accounting profession the only one with global networks.

A separate parliamentary inquiry needs to examine the nature and structure of global professional services firms. It also needs to look at what challenges Australian regulators face when they are dealing with accounting, law and other consulting firms with a global reach.

It is also necessary to examine the kinds of network arrangements that exist and the extent to which each type of network controls network firms.

The PwC Australia case study makes clear the global firm can keep a local practice on a short leash. This is the price paid by a domestic firm to have access to a global brand.

What are the arrangements with other professional services firms, such as law firms and entities like Accenture and the Boston Consulting Group?

These structures need to be understood. They also need to be looked at in the context of what Australia’s parliamentary and regulatory institutions observe when the conduct of a firm (or part of one) heads southwards.

What steps will ensure the power of a global network is more visible to the community?

One measure, for example, could be a requirement for a local firm that has a global entity controlling its operations to provide detailed disclosures when it (or its partners) registers to do company audits.

This could also apply when firms as organisations register to be tax agents as an entity.

Why shouldn’t people know more about the organisations that have the capacity to override a local firm’s operations in the manner the PwC global network has done in Australia’s case?

It should not just be a product of media revelations nor something that drops out of the mouths of witnesses when politicians ask questions at parliamentary hearings.

Knowledge about what global organisational rules impact on the way a firm is regulated under Australian law.

The ability of a global accounting firm to influence the way a local firm operates should be noted upfront in registration documents as a disclosure so there is some clarity on how the firm is governed.

A committee would, however, need to conclude on the best way to facilitate such disclosures as well as review what treaties and information-sharing agreements exist for regulators to get their hands on the good oil they need to properly investigate alleged misconduct of professional services firms.

The PwC case study opens the door for people to observe the power of a global network. But what is required is a broader examination of how the global structures can be made more transparent so that regulators acting in the interests of the Australian community can do their job more effectively.
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