Chris D’Souza
“Many years ago, there used to be something called ‘conflict of interest.’ No longer, I’m afraid. Today, we all bathe in the same river.”― Gore Vidal, The Last Empire: Essays 1992-2000
The final report of a Senate investigation that was sparked by the PwC incident is now out. The report, prompted by the PwC tax leaks scandal and concerns over the extensive use of consulting firms by the Australian government, presents a comprehensive examination of the issues and proposes a series of recommendations.
Interestingly, much of the issues highlighted in the Report have been covered over the years by CMA (ANZ) CEO Professor Janek Ratnatunga, in his CEO Blog, as shown in this article.
The inquiry was initiated due to revelations in early 2023 that PwC had leaked sensitive Australian government information to major corporations, including Google (Ratnatunga, 2023a).
The final report goes well beyond this initial revelation. The Senate investigation has looked into the PwC issue as well as the general usage of consulting firms by government agencies. It highlights Australia’s disproportionate spending on consultancy services compared to other countries, noting that the Big Four consulting firms that come from accounting and audit origins (Deloitte, EY, KPMG, and PwC) dominate this sector. Well before the Senate report, many academics have called the government to seriously regulate the Big Four (Ratnatunga, 2023a) and the non-accounting consulting firm, McKinsey and Company (Ratnatunga, 2023b)
Background and Context
The Senate investigation, which started in March of last year, focused on the interactions between consulting businesses and the larger Australian public sector. At first, it concentrated on allegations that PwC participated in internal government conversations and utilised this private knowledge to assist its clients in creating tax minimisation plans. Then-CEO Tom Seymour resigned as a result of the stunning revelations that were reported by the Australian Financial Review (Belot, 2023).
Not only is every Australian impacted by this problem, but tax avoidance is also a global problem that affects many economies, especially developing ones. Avoiding corporate taxes damages the budget’s financial position in impacted countries. Less money will be available for cost-of-living assistance, hospitals, pensions, and schools. PwC’s efforts were geared to reducing the amount of tax that private companies have to pay, not only in Australia, but globally. Taxpayers would have been forced to pay more or governments would have run a bigger deficit if it had gone undiscovered.
Interim Reports
The two critical interim reports came out before the final report. In the first report, under the heading “A calculated breach of trust,” the company was charged with improperly hindering the investigation.
According to the second report, “The cover-up worsens the crime,” PwC did, in fact, misuse secret government information. It also stated that PwC’s failure to truly reform is evidenced by the firm’s failure to be fully transparent and honest in accordance with the committee’s recommendations from its first report.
In fact, the Senate committee could not see how PwC can rebuild its credibility while it keeps hiding things.
Clearly, PwC’s culture needed to be altered, according to the interim assessments. It is also true that these reports have already resulted in PwC losing one CEO.
Key Findings and Recommendations: of the Australian Senate Final Report
The major finding in the final report is that there has been an increased reliance on consultants, and that this has hindered the growth of the Australian Public Service (APS), raised concerns about conflicts of interest, and prompted questions about the transparency and value for money of consultancy work (Bartos, 2024).
Government expenditure on consultants has risen significantly, tripling between 2010 and 2020 and reaching $2 billion under the previous Morrison government in 2021-2022 (Khadem, 2024).
Among the recommendations were:
- Transparency and Accountability: Publish the names and positions and other detailed information about those involved in the breach of confidential government information.
- Contractual Reforms: Introduce clauses in government contracts requiring consulting firms to prioritise the public interest in their service delivery. Contracts to be designed to ensure “transfer of knowledge” from consultants to public servants. The government’s Supplier Code of Conduct to include a requirement for service providers to act in the public interest and follow professional standards that align with “public sector values”.
- Financial Reporting: Mandate the Minister for Finance to publish biannual reports detailing all consultancy contracts worth $2 million or more, including contract details and any conflicts of interest. The report recommends that the Senate adopt a resolution requiring the finance minister to present biennial reports on public sector expenditures for consulting agreements totalling at least A$2 million.
- Conflict of Interest Management: Establish a central register for breaches of conflicts of interest by contracted parties. the Department of Finance guidelines require government contracts to include a clause stating consultants have a duty to act in the public interest when doing government work and have better training for officials doing procurement work
- Legislative Review: Review legislative frameworks and partnership structures, particularly focusing on partnerships with over 100 partners. [Concerns were raised about the opacity and regulatory oversight of large partnership structures within consulting firms, suggesting they may facilitate tax avoidance and need more stringent scrutiny or regulation.]
- Training Enhancement: Improve training for APS officials involved in procuring consultancy services to ensure better value-for-money assessment. As discussed above, the report mentioned that, during the previous 30 years, the growth in consulting expenses has almost tripled per decade.
- Separation of Audit and Consultancy. Separate auditing and consulting services. There is a call for broader reforms in the consulting industry, potentially separating auditing and consulting services to prevent conflicts of interest and improve regulatory oversight (See Ratnatunga, 2019).
Critique of the Final Report
In the wake of the interim reports, does the final report allay our concerns? We do not think so. In fact, the committee members “remain concerned,” according to the final report, and that PwC still did not provide enough transparency regarding the specifics of the incident.
Note that this report is just the beginning. It is fair in that it acknowledges that hiring consultants is not always the right decision. It is also encouraging to see the ideas for greater transparency.
That being said, it is a little too naive to assume that consulting firms will adhere to professional standards that are consistent with “public sector values.” In fact, on the notion that contracts ought to mandate consultants’ actions to serve the public interest — most consultants say they already do this.
In general, the report states that systemic issues still exist because the public service has lost important abilities, and as a consequence, consulting firms have become so important in public life that government departments now rely too much on them. As a result, Australia is in considerably worse shape because its public service today is no longer able to perform tasks that the public service once could. This was caused, in part, by public service budget cuts. However, some governments held the ideological view that hiring experts from the private sector was a good idea without fully appreciating the hazards.
One significant step towards resolving the issue would be to impose limitations on public employees’ ability to work for private consulting firms after leaving the government. As things stand, however, there is a strong incentive for those public employees to award the consulting firms extremely expensive contracts so they may later take jobs with the same firms. In this case, there is a clear conflict of interest and financial risk to the government.
The current report acknowledges that the “revolving door” phenomenon is a problem, but it offers no concrete suggestions for resolving it. It’s likely that using consultants excessively will remain an issue.
Critics, including Senator Barbara Pocock of the Australian Greens party, argue that the recommendations do not go far enough. They propose stricter measures such as banning firms involved in scandals from government contracts, reducing external service spending by departments, and enforcing a cooling-off period for personnel moving between government and consultancy firms.
Response and Future Steps
In conclusion, the Senate committee’s report underscores the need for significant reforms in how government contracts with consulting firms are managed, aiming to restore public trust, enhance transparency, and ensure effective use of taxpayer funds in Australia’s public sector operations.
There is no certainty, however, that any of the report’s recommendations are certain to be put into practice. It is not necessary for governments to take the Senate recommendations seriously. In actuality, Australia is still awaiting the adoption of all of the recommendations made by the Banking Royal Commission, which presented its final report in 2019 (see Ratnatunga, 2018), as well as the major recommendations made by the Royal Commission into Aboriginal Deaths in Custody in 1991.
Over the past several years, there has been a noticeable shift away from public sector workers towards greater reliance on private consultants. Rebuilding the capacity and expertise within the public service will be a long, arduous process that will take decades to achieve. We must manage our expectations and recognise that there are no quick or easy solutions.
And finally, we must ensure that these decisions are not influenced by the Big four and lobby groups with deep pockets!
“After overcoming the conflict of interest, one can realise and understand the public interest; it builds and reaches the plan of welfare action.”― Ehsan Sehgal
Chris D’Souza is Deputy CEO of CMA (ANZ)
References
Bartos, Stephen (2024), “‘We remain concerned’: Senate inquiry into PwC tax scandal calls for reform, but overuse of consultants will likely continue.” The Conversation, June 12, https://theconversation.com/we-remain-concerned-senate-inquiry-into-pwc-tax-scandal-calls-for-reform-but-overuse-of-consultants-will-likely-continue-232251
Belot, Henry (2023), “PwC Australia chief executive Tom Seymour resigns in wake of tax policy leak”, The Guardian, May 8. https://www.theguardian.com/business/2023/may/08/pwc-australia-chief-executive-tom-seymour-resigns-in-wake-of-tax-policy-leak
Khadem, Nassim; Hutchens, Gareth; and Terzon, Emilia (2024), “Big Four consulting firms ‘operating in the shadows for too long’ as Senate committee demands new rules for government contracts”, abc.net, 12 June, https://www.abc.net.au/news/2024-06-12/big-four-consultancies-new-rules-senate-final-report/103967978 in the shadows for too long’ as Senate committee demands new rules for government contracts
Ratnatunga, Janek (2023a), “PwC Tax Scandal’s Aftermath: It’s Time to Seriously Regulate the Big 4’, On Target, May 18, https://ontarget.cmaaustralia.edu.au/pwc-tax-scandals-aftermath-its-time-to-seriously-regulate-the-big-4/
Ratnatunga, Janek (2023b), “Consulting Firms: Big Bucks but Little Value for Governments” On Target, April, 11. https://ontarget.cmaaustralia.edu.au/consulting-firms-big-bucks-but-little-value-for-governments/
Ratnatunga, Janek (2019), “Auditors to the Slaughter: Why Audit Opinions are ‘Untrue’ and ‘Unfair’”, On Target, August 7. https://ontarget.cmaaustralia.edu.au/auditors-to-the-slaughter-why-audit-opinions-are-untrue-and-unfair/
Ratnatunga, Janek (2018), “The Key Findings of Australian Banking Royal Commission Interim Report: A Summary and Critique”, On Target, October 1. https://ontarget.cmaaustralia.edu.au/the-key-findings-of-australian-banking-royal-commission-interim-report-a-summary-and-critique/