Thursday, June 13, 2024

The PwC scandal sparked scrutiny of advisory firms. Is Australia’s consulting sector about to see a reckoning?

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A federal inquiry is due to release its final report into consulting services on Wednesday in long-awaited findings that could redefine how the sector operates in Australia after the PwC tax leaks scandal.

The parliamentary committee is set to address issues of accountability and regulation in its recommendations, as it grapples with the risks posed to the public sector by the growing reliance on a small number of consultants.

The final report will also address the transparency of work undertaken by consultants and measures required to prevent conflicts of interest, according to the terms of reference.

What sparked the Senate inquiry?

The inquiry was triggered by allegations PwC Australia used its role as a government adviser to obtain confidential information to help its international clients avoid tax, rubbing against attempts by authorities to combat the rise of tax havens and other opaque structures.

The scandal raised questions about the structure of the broader professional services sector, dominated by the big four – PwC, Deloitte, EY and KPMG – and apparent conflicts of interests.

Timeline

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PwC Australia’s international tax chief Peter Collins consults to Treasury after signing confidentiality arrangements. This includes work on designing tougher multinational tax laws.

Collins sends emails to colleagues that are part of the 144 pages of internal PwC correspondence that has underpinned Senate estimates inquiries. Redactions in the documentation have frustrated some of the senators.

The ATO becomes suspicious at how quickly some multinationals quickly restructured operations in response to new tax avoidance rules. There are also related concerns over confidentiality breaches.

The ATO refers information to the Australian federal police and Tax Practitioners Board (TPB).

The TPB terminates Collins’ tax agent accreditation. It gives the reasons for the decision in January, and is reported by the AFR.

Treasurer Jim Chalmers says he’s furious that confidential government briefings were shared.

The scandal widens after details emerge that potentially dozens of PwC personnel received or monetised the confidential information from Collins.

PwC Australia chief executive Tom Seymour resigns.

Federal treasury refers Collins to Australian federal police.

PwC Australian issues open apology. It directs nine partners to go on leave pending outcome of internal investigation.

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The inquiry heard that the practice of advising government departments on the design of tax laws, while creating tax arrangements for clients, created a potentially devastating conflict. In PwC’s case, the alleged breaches occurred despite there being confidentiality arrangements in place.

PwC has since divested its entire government consulting business in Australia and retrenched staff while it faces multiple investigations. It has also overhauled its internal governance structures, although the bipartisan Senate committee has described some of the changes as largely “symbolic”.

Why are the issues important?

The scrutiny of PwC showed there was a heavy reliance by government departments on a handful of firms, exposing the apparent hollowing out of the public service.

Consultancy firms have been described as “a shadow public service” and the inquiry was warned they may be tailoring advice to earn more money, instead of giving frank and fearless advice in the best interests of taxpayers.

Professional services firms are paid by the government to provide policy advice and are then often retained to help implement the recommendations. At the same time, separate divisions within the firms charge businesses for their insights and specialist knowledge.

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The issue also shone a light on potential tax avoidance, which can deprive a country of anticipated income, an area of significant focus for the Australian Taxation Office in recent years.

Cross-border tax avoidance occurs when a company declares profits in a low-tax jurisdiction when the income was generated in a higher-taxing country.

What has the inquiry found so far?

There have been two interim reports, both critical of PwC.

The first recounted a “calculated breach of trust” and called on PwC to cooperate fully with investigators, while being “open and honest” with the parliament and public. The second accused PwC of attempting to cover up the tax leaks scandal and criticised extensive leadership failures by the firm’s former executives.

The parliamentary committee and PwC’s head office have clashed over the professional services firm’s refusal to comply with a request from the federal parliament to release a report detailing the actions of international partners, citing legal professional privilege.

PwC CEO apologises to Australia as Senate inquiry chair calls business practices ‘crap’ – video

While the committee members have accused PwC of hiding behind legal privilege in order to contain the fallout to the Australian operations, the firm has argued it has a “basic legal right” to not release the report.

PwC was contacted for comment on Tuesday.

The firm has previously said it had taken considerable steps to transform, which includes the appointment of an independent board chair – being the first big four consulting firm to do so in Australia.

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