Ross Stitt summarises the ugly saga so far in PwC's fall from great heights, as a go-to consultant for the Australian federal government. The splatter is spreading although not yet to obvious revulsion by its private sector clients

‘Completely unacceptable’ says the Australian Prime Minister Anthony Albanese.

‘A shocking breach of trust’ according to the Australian Treasurer Jim Chalmers.

Just two of the verdicts on the tax scandal rapidly engulfing Big Four accounting firm PwC.

How did it come to this?

About ten years ago, international tax expert at PwC Peter Collins advised the Australian government on the design of laws aimed at protecting the country’s tax base from multinational profit shifting. This was part of the OECD’s ‘Base Erosion and Profit Shifting’ (BEPS) initiative. Mr Collins’ role required him to sign numerous confidentiality agreements.

The Tax Practitioners Board (TPB), a national body for the registration and regulation of tax agents, subsequently carried out an investigation into Mr Collins and concluded that he had breached those confidentiality agreements. The TPB deregistered him last November and he resigned from PwC.

At the same time, the TPB found that PwC had failed to properly manage its conflicts of interest regarding the BEPS consulting. The following observation was particularly telling.  

Internal communications within PwC indicated an awareness amongst the internal PwC recipients … that the confidential knowledge gained from the consultations with Treasury would be leveraged to market PwC to a new client base and influence the structures of existing clients in a manner that may be perceived to circumvent the intent of the proposed legislation regarding the OECD BEPS provisions.

Things started to unravel publicly in January when the TPB released its findings, together with a press release entitled ‘Former PwC partner banned for integrity breach’.

The Treasurer’s response was immediate and blunt. He described himself as ‘absolutely furious, absolutely ropeable’ and the country as ‘absolutely filthy about what’s happened with PwC’. He said ‘we cannot have a repeat of this absolutely appalling episode, where people were monetising government secrets’.

At that point, it should have been ‘absolutely’ obvious to PwC that a serious response was required. Instead, CEO Tom Seymour sought to downplay the issue as a decade-old, isolated incident that PwC had taken steps to prevent recurring.

But new evidence rapidly emerged to challenge that assessment.

In February, a TPB executive appearing before a Senate Estimates hearing in parliament reckoned that between 20 to 30 PwC partners and staff, in Australia and overseas, were involved in ‘the monetising of this matter’.

In May, at the request of a Labor Senator, the TPB released to parliament 144 pages of PwC internal emails. Based on those emails, the Australian Financial Review reported that PwC ‘charged $2.5 million in fees to advise 14 clients how to sidestep new multinational tax avoidance laws in 2016, relying on leaked intelligence from disgraced tax partner Peter Collins’.

Not a good look.  

Inevitably, Tom Seymour stepped down as CEO and the firm went into crisis management. That included an independent review of ‘the firm’s governance, accountability and culture’, standing down nine partners, and the ‘ringfencing of the Federal Government business to minimise conflicts of interest and enhance governance’. PwC also agreed that any partner and staff who knew about the confidentiality breaches would not work on any existing or future contracts with the government.

In an ominous turn of events for the Big Four firm, Treasury announced on May 24 that in light of the PwC emails released by the TPB, it had ‘referred the matter to the Australian Federal Police (AFP) to consider commencement of a criminal investigation’.       

A week later, the ATO Commissioner told Senate Estimates that in 2018 the ATO had raised its concerns about PwC and confidentiality with both Treasury and the AFP but had been hampered by various factors including restrictive secrecy laws. It was the ATO that then referred the case to the TPB.  

It’s still early days in this scandal but the reputational damage to PwC is enormous. As is the probable financial cost. PwC secured more than half a billion dollars of contracts with the federal government in the last two years. That’s unlikely to be repeated any time soon.  

The secretary of the Department of Finance, like so many others, has appeared before Senate Estimates to vent her concern about PwC’s behaviour. Part of her response was the issue on 19 May of a pointed ‘Procurement Policy Note’ reminding public servants that when assessing the suitability of a potential external consultant, they must consider that consultant’s ‘performance history’. Relevant to that history is ‘any unethical behaviour and/or deficiencies in performance under prior contracts (including failure of the tenderer to abide by substantive requirements such as confidentiality provisions)’.  

That doesn’t augur well for PwC’s government practice.

And the damage is not limited to public sector work. In recent weeks, five of the nation’s largest superannuation funds managing over $750 billion have suspended entering into new contracts with PwC and, according to the AFR, more are looking at following suit.      

So far there’s been no similar ‘pile on’ from the wider corporate sector, at least not publicly.

Another key issue for PwC is the internal damage from the ongoing scandal. It must be a major distraction and a source of significant conflict within the partnership. And no doubt PwC’s competitors are now actively seeking to poach the firm’s best staff and partners.    

Just last week, the firm paused its partner admission process, a dramatic step for a professional organisation that relies on constant renewal both to maintain its technical capacity and to attract new staff. As if to highlight PwC’s dilemma, this week KPMG announced the appointment of 94 new partners.

Unfortunately for PwC, this scandal isn’t going away any time soon. Both the Labor government and the Greens Party are making political mileage out of it. For the Greens in particular, the scandal resonates with their narrative that large companies, especially multinationals, do not pay their ‘fair share’ of tax in Australia. They will continue to dig for more information about the tax planning undertaken by PwC clients and what those clients knew about the confidentiality breaches.  

Various enquiries are now under way at both the federal and state level and they go to the core question of the role of consultants to government. Many people are asking whether the hollowing out of government departments and the outsourcing of work to consultants has gone too far in Australia.

Are PwC Australia’s troubles just a local problem or do they have implications for the wider PwC group offshore? PwC is a worldwide brand, and the global firm must be concerned at the risk of reputational damage in other markets. The Australian debacle has certainly been reported in the international press and senior international PwC executives have visited Sydney since the story broke. 

No doubt PwC New Zealand will be watching developments in Australia closely, both in terms of specific reputational risk and the wider issue of the relationship between consultants and government. As a beneficiary of referral work from its Australian firm, PwC NZ could suffer from any downturn at PwC Australia. 

The PwC tax scandal is a painful reminder of Benjamin Franklin’s wise words – ‘It takes many good deeds to build a good reputation, and only one bad one to lose it’.

*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.