Reforms coming in Australia in a big crackdown on tax adviser misconduct. Tax promoter penalty laws will be expanded 'so they’re easier for the ATO to apply to advisers and firms who promote tax avoidance'

What started as a tax scandal for PwC in Australia is rapidly morphing into a potential ‘polycrisis’ for all the big four accounting firms. It’s too early to tell where it will end and what it means for the firms’ Trans-Tasman cousins. 

PwC’s initial problem was dealing with the immediate fallout from the disclosure of a major breach of client confidentiality in relation to tax advice provided to the government. Unsurprisingly that became a public relations disaster for the firm which in turn has fed a raft of troubles from the loss of clients, revenue, and staff to the sale for $1 of much of the firm’s government consulting business to a new private equity-backed entity, Scyne.   

Inevitably there was an element of schadenfreude on the part of PwC’s major competitors. KPMG, EY, and Deloitte appeared to be big beneficiaries as they picked up former PwC clients and staff. But that initial impression is starting to fade as politicians, regulators, and the media shift their focus from PwC to all the big four firms.

The first sign of trouble was when the Senate in Canberra commenced a comprehensive “inquiry into the management and assurance of integrity by consulting services”. The NSW Parliament followed suit with its own inquiry into “the NSW Government's use and management of consulting services”.

While these enquiries were initially set up in response to the PwC scandal, there’s no doubt they will wander far and wide looking for evidence of malpractice by all the top consulting firms. And they won’t hold back on recommending major changes, none of which are likely to benefit those firms.

A few years ago, the banks were viewed as the bad guys of Australian business. The consulting firms are now vying for that honour. 

Never before have the big four featured so prominently in the news headlines. Every day seems to bring a new story about their confidentiality breaches, their overcharging, and their conflicts of interest.

A recent highlight was a press release from the Greens Party based on information from the Department of Defence. Over the last decade the big four consultancies have billed Defence over $3.7 billion. KPMG is the biggest winner, having won Defence contracts worth more than $440 million in 2022 alone.

And it’s not just the money. The Greens argue that these consultancies represent “a major national security risk” because of their propensity to breach secrecy requirements. Indeed a week after the Greens press release, there were reports of unauthorised sharing of Defence material by KPMG staff.   

At a time when many Australians are enduring a cost-of-living crisis, the Labor government can see the political dangers and opportunities of the public’s perception that wealthy consultants are misbehaving and ripping off taxpayers.     

The most dramatic response came on 6 August when the government announced “ the biggest crackdown on tax adviser misconduct in Australian history”. Once again, while the catalyst for the announcement was the PwC scandal, the ramifications will be consequential for all government consultants and the big four in particular.

Three measures were announced. First, the integrity of the tax system will be strengthened by increasing the “maximum penalties for advisers and firms who promote tax exploitation schemes from $7.8 million to over $780 million”. That will certainly grab the attention of tax planners.   

Tax promoter penalty laws will also be expanded “so they’re easier for the ATO to apply to advisers and firms who promote tax avoidance”.

The second measure is increasing the power of regulators to facilitate identifying and disciplining people who break the law in tax matters.

The third, and most significant, measure is described as “strengthening regulatory arrangements” and it goes well beyond the tax area. It relates to the “integrity of our taxation and superannuation systems, and the integrity of our capital markets”.

Treasury and the Department of Finance will review numerous issues such as secrecy provisions, information gathering powers, and confidentiality arrangements. However, the one to watch for the big four accounting firms will be “a Treasury examination of the regulation of consulting, accounting and auditing firms to consider whether reforms are needed”.  

Who knows what reforms that examination might produce.

And not only is the government reviewing how these firms are regulated. It’s also planning to reduce the work they receive from government departments. The Minister for Finance, Katy Gallagher, recently stated that “we’ve found $3 billion in savings among the spending on consultants that we have removed from agency budgets”.

All the above indicate increasing challenges for the tax advisory and consulting arms of the big four accounting firms. Thank goodness for the traditional audit business? Maybe not.

Last week, an ABC investigation questioned the quality of corporate audits in Australia. It drew attention to the Audit Inspection Report from the Australian Securities and Investment Commission for 2022. Reviews of “key audit areas in audit files” revealed negative findings in 50% of Deloitte’s cases and 48% of KPMG’s. There are now calls for ASIC to increase its scrutiny of audit firms.  

Professor Allan Fels, former chairman of the Australian Competition and Consumer Commission, described poor audits as a sleeper issue that could trigger a major corporate collapse. No doubt he’ll have something to say to Treasury during its review of the regulation of audit firms.   

For many years, there have been advocates for the separation of audit services from tax and other consulting services to avoid conflicts of interest. Some people have even proposed that the big four firms be broken up.

Internationally, EY attempted to voluntarily spin off its consulting business earlier this year, but the deal failed to win partner approval. TPG Capital, a private equity player, is currently exploring a similar restructuring with the firm.  

Perhaps the Australian firms should explore voluntary restructuring now before it’s forced upon them by government intervention.

*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.