The consultancy industry’s grip on the Australian public sector is set to be significantly loosened, as the PricewaterhouseCoopers tax leakage scandal has prompted the government to reverse a trend that has been denounced as “privatization by stealth”.
With the Big Four dominating PwC, Deloitte, EY and KPMG, Australia’s consulting sector has grown to become the fourth largest in the world by revenue, behind only the US, UK and Germany, according to think tank The Australia Institute.
Its influence on government policy was starkly cast by the PricewaterhouseCoopers scandal, in which one of its associates, Peter John Collins, was implicated. He had leaked to colleagues confidential information obtained during Treasury discussions in 2016 about developing laws to prevent multinational companies from avoiding taxes, an act PwC admitted was a betrayal of trust placed in it.
“Having the right advice on tax law can be very beneficial,” said Max Bruce, Lecturer in Accounting at the Australian National University, about the decision to bring in PwC for its expertise. “But judges and academics may be more appropriate in advancing tax laws than corporations with a clear vested interest.”
Collins was banned from working as a tax agent for two years in February and the scandal erupted in May when the Senate released internal emails that showed several PwC employees around the world discussing new business won on the back of directives he had provided, with plans to win more. As part of the North American project.
The scam was spotted and stopped by the Australian tax authorities. They argued that sabotaging the tax avoidance laws would have cost the taxpayer A$180 million ($120 million) a year.
The case has provided ammunition for the Labor government as it looks to reduce the leverage and cost of consultants in favor of a stronger public service. “They can now go to binary option – a greater public service in return for these advisory issues,” Bruce said.
Government departments have now enacted a shadow ban on awarding new employment to PricewaterhouseCoopers. Some companies and a growing number of pension funds have followed suit. The pressure continued to build after a new Senate investigation into the entire consulting industry last week.
Deborah O’Neill, the former schoolteacher turned senator who released the emails, said the PwC scandal was just “the tip of the iceberg.” It highlighted issues such as the “revolving door” between government departments such as the Australian Tax Office and the Big Four consultants, along with the use of legal professional privilege by consultants not to disclose information such as client lists, which she compared to “the cloak of invisibility in Harry Potter”.
“It’s the effect of contagion. It’s like a disease and it will spread,” the senator said.
Andy Shmolo, associate professor at the University of Wollongong’s School of Law, said there was a strong temptation through for-profit partnerships to misuse information when they were brought into the “inner sanctuary” on issues such as the tax law. In his previous career as a consultant, he said, he was pressured into showing colleagues drafts of the clandestine work he was doing. “It was like the Wild West,” he said.
The mood at PricewaterhouseCoopers is bleak, according to a partner who works for the firm who did not wish to be named, with dozens of colleagues looking to leave in the wake of the scandal. Anger has arisen in recent weeks over how the issue has been handled, much of it directed at PricewaterhouseCoopers’ former management team. Tom Seymour, who was chief executive of PwC Australia, resigned in May after admitting he had received emails relating to classified government information.
The broader advisory industry is also feeling the effects as the Labor government begins to rebuild public sector expertise after decades of what Shmulu calls “the slow privatization of the civil service by senior advisers”.
Figures from the National Audit Office show that federal government spending on consultants was A$888 million in the 2022 financial year, up from A$352 million in 2013. The big four consultants won the lion’s share of contracts over the nine-year period, achieving a It totaled A$1.3 billion, according to NAO.
But the tide is starting to turn with Labor cutting back, with government spending on chief consultants and auditors reported to have more than halved year-on-year so far in 2023.
There were also moves statewide, with New South Wales, Australia’s most populous, on Thursday imposing a three-month ban on PricewaterhouseCoopers working on any tax-related contracts. Finance Minister Courtney Hosos said the move was a “proportionate response” given the investigations surrounding PricewaterhouseCoopers.
Houssos is a member of the state’s Labor government, which was elected in March and has pledged to cut spending and use outside advisers to free up money for essential services.
PwC’s competitors also failed when the federal police were asked to investigate. Deloitte’s Australian leaders sent an internal email about the scandal saying it was “extremely troubling, disappointing and attracting justifiably significant scrutiny and backlash”.
Andrew Yates, chief executive of KPMG in Australia, appeared before the Senate last week and called his rival’s actions “manifestly unethical and unacceptable” and “disturbing”. Yates has defended his industry, which he says has employed tens of thousands of people in Australia who have done nothing wrong.
The CEO said he was open to stronger regulatory oversight of the consulting industry, and provided details of his company’s recent scandals. They include a contract with the State of New South Wales whereby its consultants were working with two separate administrations competing for the same bid, creating a conflict of interest. KPMG was also at the center of a storm in 2021 when it was revealed that 1,100 of its employees had cheated on tests designed to ensure its consultants acted with integrity.
The government has moved to bolster the powers of the Council of Tax Practitioners – the body that banned Collins in February – through measures such as a dedicated oversight budget and closing loopholes exploited by the consultancy industry. She has since said she is open to further action, as the fallout from the PricewaterhouseCoopers scandal continues.
For some, it provided an opportunity to highlight the “cross-contamination” between audit and advisory functions in the industry and to question the incentives of those who were motivated by financial gain at the expense of the public interest.
“Those who put the love of money above integrity had a field day,” O’Neill said. “PricewaterhouseCoopers has bartered its core values.”