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Fix the guardrails and carry on seems to be the approach of PwC, but its tax secrets scandal has changed the game forever.
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The year that rocked foundations of big 4
05 January 2024
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12 minute read
If there were enduring images from 2023 that sum up the year in professional services, then it’s hard to go past the chief executives from the accounting big four squirming awkwardly under questioning before the Senate inquiry into consulting.
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Who – outside the leadership teams of PwC, KPMG, EY, or Deloitte – could fail to enjoy the sight of Greens senator Barbara Pocock or Labor senator Deborah O’Neill training a spotlight on their manoeuvres in the dark?
The parliamentary scrutiny made household names of high-flyers who had become used to operating under the radar of public opinion or corporate accountability. The big four partnerships lack the reporting strictures of a listed company, yet operate as trusted assessors of their financial probity. No one votes them into power, yet they are relied upon to help steer public policy. They had become used to operating with a latitude they would be unlikely to sanction in anyone else.
However, 2023 will be remembered as the year that the gap between public expectations and actual practice at the big four was exposed like never before. An almost routine sanction by the TPB of a former PwC partner Peter Collins broke the seal on a scandal: the tax whisperers to Treasury had been playing a double game. The Australian Financial Review broke the story and the more the media looked, the more there was to see. Before long, there were tranches of internal emails that began to reveal the extent of the problem and how PwC had used the information to benefit clients. A whole pandora’s box was opened by the Senate inquiry that took in how the ATO and TPB operated in light of what they knew and it cast an enduring pall of doubt over whether the big four deserved the trust placed in them.
In his message for PwC’s Transparency Report in November, CEO Kevin Burrowes again offered a mea culpa for behaviours of the firm that “threw into question our governance, culture, and accountability practices”. He referred to a number of partners – the dozen or so forced to leave – who “had failed in their professional, ethical, or leadership responsibilities” and the spur to change from a review by former Telstra boss Ziggy Switkowski that reported in September and found multiple flaws in PwC’s results-focused culture.
“We are sorry for our failings and for the culture that allowed these behaviours to go unchecked for many years,” Mr Burrowes said. “We are committed to taking the actions required to rebuild trust” and 2023 would be remembered “as the year significant action was taken in order to reset”.
As well as spinning off its consulting division into Scyne Advisory – along with 1,500 staff and a substantial revenue stream – it had developed five key commitments to change and a “comprehensive action plan that provides a roadmap to becoming the leading professional services firm”.
But those reassuring words, from a CEO parachuted into the Australian operation to prevent the scandal from going global, really served to highlight how the mood around the big four has changed and their blinkered ability to carry on as though it’s just a case of fixing the guardrails.
The PwC scandal highlighted how much Australia’s public service has grown to rely on consulting services rather than developing its internal expertise and the sheer amount of taxpayer money involved. The result has been a huge retreat from the use of consultants and a question mark in the public mind over every future contract, such as Deloitte’s $70 million deal with the Defence department in the financial year 2023.
It also revealed the inherent conflict of interest in multidisciplinary firms where auditing and consulting operate alongside one another.
This contradiction, which constrains a firm’s ability to pitch for work, was recognised by fellow services giant EY, but an attempt to divide itself in two was stymied by its US division. Project Everest was a year in the planning and failed at a cost of US$600 million; widespread job cuts have been the result.
So EY failed to split when left to its own devices while PwC was forced to split when it had little choice; it’s difficult to imagine a situation better designed to feed the fire of public scepticism. It also sounds like a story whose ending has yet to be written.
In the meantime, other strands of the PwC fallout narrative are being written by stakeholders. The gilt-edged job offer from a big four firm has lost its lustre, with mid-tier and smaller firms increasingly preferred by graduates, futurist Ben Hamer told the Intuit Get Connected event in November.
“More and more workers are pulling away from working for large corporates,” he said. “Instead, they’re wanting authentic organisations that live their mission and values.”
Many graduates who do join the big four will be incentivised to defer their start dates and join operations with high turnover rates or existing staff facing lay-offs.
The professional body most closely aligned with the big four, CA ANZ, investigated PwC following the TPB sanction early in the year and handed down a $50,000 fine in November that showed it was “committed to ensuring the highest standards of professional ethics and performance”, CEO Ainslie van Onselen said.
The maximum fine it can impose will rise to $250,000 in the wake of a review of its disciplinary procedures after its much-criticised handling of the KPMG exam cheating scandal last year. In reality, neither amount looks sufficiently potent next to the revenue of any big four firm.
Instead, the real upshot of the industry’s inability to police itself is a government determined to drive through a massive shake-up of the profession. It announced in August a whole suite of measures that tighten regulations, hugely increase penalties, and strengthen the regulatory bodies. The profession, and the professional bodies, have been left to respond within short consultation periods and with the overwhelming weight of public and government sentiment against any dilution of the crackdown.
The initiative has been lost by the big four and it now looks like an open question whether their partnerships structures can survive the wave of negative opinion that looks certain to keep rolling through 2024.
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