Senate Inquiry

An Australian Senate Inquiry, prompted after Pricewaterhouse Coopers' (PwC) misused confidential Government information obtained during its involvement in tax law developments, has raised broader questions about Government consultants' conflicts of interest. The Inquiry commenced as an investigation into the Government consulting activities of the Big Four accounting firms (PwC, KPMG, Ernst & Young [EY], and Deloittes), but has since expanded to encompass the whole consulting industry. The issues raised about Government reliance on consultants are just as pertinent in New Zealand, as in Australia.

PwC's senior international tax partner, Peter Collins, signed confidentiality agreements with the Treasury so he could participate in tax law developments intended to make transnational companies, such as Apple or Google, pay tax on their sales in Australia. This is important because avoidance of such taxes means less public money is available for the provision of public services.

At the same time, Mr Collins breached those confidentiality agreements by sharing the confidential information within PwC Australia and internationally, so PwC could advise clients how to avoid the very laws he was helping to devise. As a consultancy firm seeking to profit from all its activities, working for both sides boosts its profits. In this case PwC profited from Mr Collins' activities advising Treasury how to devise the tax law to collect the tax; and profited again from selling on to its clients means to avoid the tax, and thus to defeat the new tax law.

When companies promptly avoided the new tax PwC claimed legal professional privilege to "prevent the ATO (Australian Tax Office) obtaining documents and emails that would have revealed the plans that certain PwC partners had for the confidential information that Mr Collins had acquired from his role as an adviser to Government".(2)

Deregistered

After investigation by the Tax Practitioners Board (TPB), Mr Collins was deregistered, and both PwC and Mr Collins were found to have breached their required codes of conduct. The particulars were that Mr Collins had not acted with honesty and integrity as required, neither he nor PwC were managing adequately their conflicts of interest, and both had failed to report their breaches of the code of conduct.

In short, Mr Collins and PwC were playing both sides and lying about it. This did not come to public knowledge, or it seems, to politicians' knowledge until earlier in 2023 when an alert journalist at the Australian Financial Review wrote about the TPB investigation and outcome. The Senate Inquiry was promptly launched, and PwC attempted damage control.

PwC's then-managing partner tried the "just one bad apple" defence by suggesting the wrongdoing involved Mr Collins alone. However, PwC's internal emails obtained during the TPB investigation and passed on to the Senate Inquiry revealed many PwC local and international staff, including that managing partner, had been party to PwC's internal discussions about making profitable use of the confidential information with its corporate clients.

Resigned & Dismissed

PwC's managing partner stepped down, the firm reported the dismissal of nine partners, ostensibly for their involvement in this scandal, and commissioned its own narrowly-focused internal review into the firm's governance structure, its culture, and how its leaders were held to account. PwC also sold its large Government consulting arm to a private equity fund for $A1, and moved about 130 PwC partners and 1,750 staff to this new consulting entity, now called Scyne Advisory. Scyne is an old English word that means beautiful, or fair. Beautiful Scyne may be, but the stench remains, and the expanded Senate Inquiry continues.

The report of the expanded Senate Inquiry (to encompass the whole consulting industry) is not expected until 2024, but the Senate has now published one report titled, "PwC: A Calculated Breach Of Trust", a title that reflects both the breaches of the confidentiality requirements and PwC's multiple calculated attempts to conceal its profitable misuse of that confidential information. PwC has also published its internal review on its Website.

Despite the narrow focus, that internal review acknowledges PwC's drive for profits has eclipsed ethical honesty and integrity obligations: partners who bring large amounts of money into PwC are reportedly known as "rainmakers" and "untouchables"; "the rules don't always apply to them" and as the report admits, one consequence of their highly profitable activities may be that their ethical responsibilities are ignored. (3)

Most recently, the Senate Inquiry learned yet more PwC partners are being investigated for similar breaches. At the same time, PwC quietly published on its Website a "Statement Of Facts" that admits to having breached signed confidentiality agreements in relation to several different projects: the GST treatment of digital currencies; the Treasury's Black Economy Task Force Reference Group; the Treasury's Tax Treaties Advisory Panel; and a draft Organisation for Economic Cooperation and Development (OECD) report about profit shifting. (4)

Damage Control: The "One Bad Apple" Defence

Now, evidently also in damage control, PwC Global has also tried the "one bad apple defence" claiming these practices are confined to PwC Australia, (5) and there is no evidence that the confidential information was used for gain by PwC partners outside Australia. Senators involved in the Senate Inquiry are sceptical, citing excerpts from some of the PwC' internal emails released to them by the TPB which indicate involvement beyond Australia. They suggest PwC Global is attempting to avoid damage to its "brand" by "desperately trying to lay the blame squarely at the door of PwC Australia." (6)

PwC's behaviour is not confined to Australia, and PwC is not alone among the Big Four accounting firms for this type of behaviour. At the time Peter Collins became involved in these Australian tax law developments, PwC was also under investigation in the United States for its tax avoidance advisory activities benefiting multiple companies; additionally, as revealed in the Luxembourg Leaks, PwC had long assisted major companies to avoid federal taxes. (7)

And in the UK, the House of Commons Committee of Public Accounts has long been concerned about the obvious conflicts of interest arising when staff from the Big Four accounting firms seconded to the Treasury to design new tax laws also advise their clients on how to avoid those laws. (8) For example, KPMG brochures advertised to clients its involvement in designing the UK laws, and that, "legislation is a business opportunity to reduce UK tax and that KPMG can help clients...". (9)

At least PwC Australia was not quite so blatant when, in 2015, just five days after the proposed new tax legislation to prevent transnational companies' avoidance of tax had been introduced to Parliament, PwC's International Tax Service promotional "Tax Insights" document outlined the nature of the proposed legislation, the need for speed to avoid that legislation, and listed contacts, including Peter Collins, for clients and potential clients seeking "deeper discussion".

"Octopus-Like Entities"

Consultants' conflict of interest-riven behaviour is not confined to tax related activities, or to the Big Four accounting firms. According to Senator O'Neill, Chair of the committee conducting the Senate Inquiry, consulting firms have "morphed into octopus-like entities with up to a thousand partners and their hands in everything, seemingly caught in the cross-currents of incredible conflicts of interest." (10)

Among the examples of problems arising from the extensive involvement of the Big Four:

• how the Australian Federal Police (AFP) manages its conflicts of interest came into question in relation to the discontinuation of its criminal investigation of PwC's misuse of the confidential information, because PwC is also the AFP's internal auditor. (11)
• Deloittes reportedly obtained early access to confidential information within the Department of Home Affairs "about the tender process for a major contract in which it advised both the Department and one of the bidders, in breach of a written undertaking". (12)
• Once a firm obtains access to a department via one consulting contract, it is known to adopt a “land and expand” approach by creating and pursuing opportunities for additional work and contracts. In one example, the Secretary of the Agriculture Department cited an Australian National Audit Office (ANAO) report that PwC staff had attempted to use information gained through one of 11 contracts with his Department to leverage a new contract. (13)

While the Big Four firms like to suggest they observe ethical codes, the Senate Inquiry thus far, suggests their approach differs little from that identified in a 2022 book "When McKinsey Comes To Town" in which one chapter is titled, "Playing Both Sides: Helping Government Help McKinsey". As Greg Waite sums up in his recent review of this book, "McKinsey doesn't believe in conflict of interest, because working for both sides means more fees for them...". (14) Greg Waite's review of "When McKinsey Comes to Town" is in Watchdog 163, August 2023.

Public Service Loses Capacity To Perform Its Function

But there are also other concerns about such extensive use of consultants in Government departments because it means the public service "loses and fails to replenish skill and institutional memory" and consequently loses the capacity to perform its function. (15) The same danger has long been a concern in New Zealand, as noted by both the State Services Commission in 1998, (16) and the Controller and Auditor General in 1999.

Whereas the public service exists to serve the public good, the consulting firms exist for their own profit-seeking purposes which may be maximised by playing both sides as shown here: earning fees from helping one client (the Government) to design the new tax laws, while also earning yet more fees from helping many other clients (their transnational clients) to anticipate and defeat those laws.

Endtnotes:

1. The Senate Finance and Public Administration References Committee, 2023, "PwC: A Calculated Breach Of Trust", p.3-4.
2. Belot, H (2023), "PwC's 'Rainmaker' Partners Often Pursue Profits Ahead Of Ethics, Scathing Review Finds", Guardian, 27/9/23.
3. Belot H (2023), Guardian, 27/9/23, PwC Australia reveals more breaches on heels of scathing report into consultancy scandal.
4. Belot H (2023), Guardian, 28/9/23 PwC tax leak scandal not isolated to Australia, senators claim.
5. Belot H (2023), Guardian, 28/9/23 PwC tax leak scandal not isolated to Australia, senators claim.
6. McKenzie-Murray M (2023), "The PwC Tax Scandal: Should Private Consultants Be Trusted?"", Saturday Paper, 20/5/23
7. Sikka, P (2015), "No Accounting For Tax Avoidance", Political Quarterly, Vol 8, no 3, 427-433.
8. Sikka, P (2015), "No Accounting For Tax Avoidance", Political Quarterly, Vol 8, no 3, 427-433.
9. Saturday Paper, 27/5/23, Karen Middleton, "Police Doubted In PwC Scandal".
10. Saturday Paper, 27/5/23, Karen Middleton, "Police Doubted In PwC Scandal".
11. Saturday Paper, 22/7/23, Karen Middleton, "Deloitte Breached Undertaking On Home Affairs Advice".
12. Saturday Paper, 17/6/23, Tim Moore, "The Big Four Consultants Have Captured Universities".
13. Waite G, 2023, Watchdog 163, August 2023 (Reviews).
14. Brett J, 2023, "PwC And A Question Of Character", Monthly, August 2023.
15. State Services Commission, 1998, "Taking Care Of Tomorrow Today", Wellington: State Services Commission.
16. Controller and Auditor General, 1999., Third Report For 1999, Wellington: Controller and Auditor-General.