What exactly should we learn from the PwC scandal?

David Havyatt

Anyone interested in public policy, including innovation and technology policy, must be interested in what we can call ‘the PwC scandal’. And there are three aspects to the scandal that stand out.

The first is that anyone is surprised by the conduct. The second is how long it has taken for substantive action. The third is how governments have collectively facilitated the growth of the “big four”.

To recap, the substantive story is that a partner at PwC was ‘invited’ by Treasury to advise on plans to combat tax avoidance by global corporations, and he briefed other partners about the plans so that PwC was able to offer clients advice about how to avoid the government’s new rules as soon as the government introduced them in the 2015 budget.

For context, the Australian government had clearly flagged its intent to go after the “dirty thirty” global corporations by embedding tax offices in those companies to understand their practices.

The engagement of a leading tax practitioner to advise the government seems, on the face of it, to be a reasonable way of getting advice on how effective a scheme might be.

green parliament

However, while the reports refer to the partner as being “invited” to assist, there were confidentiality agreements (three of them). Whether this partner was giving his advice for a fee or free doesn’t matter to the question of the wisdom of the action.

PwC is a partnership; all the partners gain from all of the partners’ income. So how much effort can a partner in such a firm be expected to contribute to assisting a project designed to reduce the revenue available from the very sizeable revenue available from tax advice?

A consequence of the business model is the fundamental principle in any ‘consulting’ (or advisory) firm is to look for ‘extensions’.

Extensions, further work identified from the engagement, can be longitudinal (future work with this client), lateral (do this kind of work for other people in the same industry as this client), or they can be vertical (using what was learnt with this client to do work for firms who work with this client).

That this is entrenched practice can be demonstrated with one simple example. Way back in the late 1980s (or 1990, I can’t be sure of the date), the Corporate Customer Division of Telecom Australia (as it was then) engaged a consulting firm to interview all our corporate customers to advise us of what their expectations were of Telecom as a supplier.

When some staff at Telecom had a query about part of the results and asked for some of the data, the person at the consulting firm sent the entire directory of files relating to the research.

One of those files detailed the extensions that the consulting firm had identified, which included going back to some of Telecom’s corporate clients and helping them in ways contrary to the interests of Telecom.

When Telecom’s managing director was advised, he rang the consulting firm to find that their managing director was on a flight to London. At Telecom’s insistence, he turned around at his stopover in Singapore to come back and explain the behaviour.

Since the business model of these firms is well understood, and the incentives on individuals so clear, no one should be surprised by the conduct.

The Big Four accounting firms reportedly earned $1.7 billion from the Australian Government in the five years to 2017, with $888 million spent in 2021-22.

We should ask how many more cases exist of these consulting firms leveraging these engagements in ways that might or might not breach contractual undertakings.

The second aspect, how long it has taken for any action, reflects poorly on public administration.

Apparently, the Australian Taxation Office became aware of a problem with PwC based on how quickly clients of PwC had structured their taxation affairs to circumvent the new laws. More correctly, taxation officers became aware.

However, the confidentiality provisions contained in Division 355 of the Taxation Administration Act 1953 bind these officers (full reference Schedule 1 Chapter 5 Part 5–1 Division 355 Confidentiality of taxpayer information).

There are exemptions, including for disclosure to the secretary of the department, of information that does not include the name, contact details or ABN of any entity and for the purpose of the design of a taxation law or the amendment of a taxation law.

But there is no matching exemption for the minister.

This confidentiality provision seems to be a fundamental breakdown in the Westminster concept of ministerial responsibility; the Prime Minister must task Attorney-General with suitable drafting to fix it.

But even now it has become public, there seems to be a reluctance by government to do anything substantive about it. If the government was paying PwC for the advice from the partner who had signed the confidentiality clause, then there should be litigation against PwC for the damage caused to the Commonwealth.

The basis of the claim is either for the breach of confidentiality or for the inadequacy of the advice provided, given the new laws were so easily circumvented.

Somehow the Commonwealth needs to be enabled to declare how much tax revenue was avoided (through legal minimisation schemes) directly due to this advice.

Ultimately, however, the blame the Commonwealth must bear, along with other governments worldwide, is for allowing the Big Four to be in this position.

Not least of the issues is that the Australian government has long been aware that the Big Four are the masterminds of multinational tax avoidance.

As one 2016 article nicely said, these “firms are largely unregulated and unaccountable and have infiltrated governments at every level”.

And it is a global issue with another 2016 item from the UK noting that accountancy regulators cannot act because they are dominated by the very firms they are meant to police”.

In the 20th century, we referred to the Big Eight accounting firms formed from mergers of big US and UK accounting firms, shrinking to six in 1989 with the mergers that created Ernst & Young and Deloitte (then Deloitte & Touche).

Nine years later, it became the Big Five with the merger that formed PwC. The final shrinkage came following the Enron scandal and Arthur Anderson’s insolvency due to its audit failures.

The Big Four leveraged their “financial and personal capabilities” to enter the advising business. Enron’s failure led to a reconsideration of whether auditors should also be consultants.

Consequently, PwC, KPMG and Ernst&Young all shed their consulting businesses. However, their consulting businesses have grown much faster than their accounting businesses.

Furthermore, while governments have deployed the model of the corporation across many of their functions and the entities they fund or control, the Big Four continue under the partnership model.

This partnership model creates the illusion of greater personal risk and hence responsibility, but it is matched by a lack of controls.

Of course, the Big Four aren’t the only consulting businesses; the other big consultants are referred to as MBB for McKinsey, Bain, and Boston Consulting Group. However, the MBB consultants focus more on strategy and working with the ‘C-suite’, while the Big Four focus on implementation and work with middle management.

And just like in the era of mainframe computing, no one got fired for buying IBM, no one gets fired for hiring one of the Big Four or MBB.

But ultimately, their biggest clients are multinational corporations. So any advice they give to government is unlikely ever to harm the interests of their biggest clients. What has played out with PwC on tax is probably playing out in every engagement by the Government of any of these firms.

And that has to be a particular concern to anyone involved in innovation which is typically focused on new firms and business models challenging incumbents.

David Havyatt is a former telco executive, former adviser to Federal Labor ministers and former advocate on behalf of energy consumers. He is a long term observer of Australian innovation policy.

Do you know more? Contact James Riley via Email.

Leave a Comment

Related stories