Fear and greed: The consulting sector faces a reckoning

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It started with a simple announcement from the Tax Practitioners Board in late 2022. Former PwC partner Peter Collins’ tax licence had been suspended because of alleged integrity breaches.

But rather than being consigned to being another footnote in the Byzantine world of taxation, the TPB’s announcement has ended up creating a whirlwind that’s almost certain to unravel not just PwC but the entire professional services sector.

As the full extent of Collins’ alleged misdeed – attempting to leverage confidential government tax plans to drum up business with corporate clients keen to cut their tax commitments – came to light, a subsequent Senate committee inquiry has sent one of the country’s most powerful and secretive sectors into crisis mode.

The big four have been put under the spotlight following the PwC tax scandal. Credit: Les Hewitt

The likes of PwC had built their aura of credibility from the financial scrutiny of our largest corporations, as well as government departments such as the tax office and federal police. But PwC and its peers had been accountable only to themselves and had been spared the kind of external oversight and scrutiny they deliver to others.

Beyond the Collins controversy, an opaque partnership model had allowed a culture of bullying, racism, sexual discrimination and rapacious greed to be hidden. This only adds to the alarm over the fact that consultants have been embedded into the heart of our public service over the past decade at a huge cost to taxpayers.

How did we get here?

This day of reckoning has been pending. Almost 10 years have passed since Collins signed the first of a series of confidentiality agreements with federal Treasury to advise the department on its plans to combat multinational tax avoidance. The legislation was dubbed the Google tax.

But it was not until January this year that it was revealed that Collins had been disciplined for allegedly sharing this confidential information with other PwC partners and that the blowtorch had finally been fired up.

A political uproar and numerous parliamentary inquiries at national and state levels have triggered investigations, including a criminal probe by one of PwC’s clients – the Australian Federal Police. To date, police have taken no action against Collins. But we are yet to get a complete picture of how this scandal festered for so many years and almost escaped unnoticed.

What we do know is that there were a number of deficiencies in the system that aided in keeping Collins’ alleged breach away from stringent scrutiny.

The Australian Taxation Office (ATO) has said privacy laws prevented it from sharing the substance of its information with ministers and other departments, and this led to two criminal investigations failing to proceed.

And the scandal has also highlighted an uncomfortable cosiness between consultancy firms, businesses, politicians and government departments.

Nothing highlights how deeply the industry’s tentacles stretch into the highest echelons of government and the corporate sector than the man who presided over PwC for most of the timeframe covering the tax leak scandal: Luke Sayers.

Blues president Luke Sayers in happier times after a win in 2022.Credit: Getty Images

The Carlton Football Club president is a close friend of the club’s former No.1 ticket holder, former treasurer Josh Frydenberg, as well as Liberal Party fundraiser and Helloworld Travel chief Andrew Burnes.

Across the political aisle in Victoria is Sayers’ mate Daniel Andrews and a circle of friends that includes the billionaire Fox family.

After refusing to say anything for months, Sayers was forced to break cover this week when the ATO released details of meetings over its battles with PwC. Sayers is expected to be called before a Senate inquiry triggered by the scandal.

“I was not aware of the existence of a confidentiality agreement signed by [former PwC partner] Peter Collins until I read about it in the media this year,” Sayers said in a statement this week.

The Senate hearings have also shown how unfettered access to the corridors of power had bred a terrible culture of profit at all costs, where rules can be bent when convenient and broken when necessary.

The cultural rot

And PwC is not alone. This cultural rot permeates the entire sector.

A Deloitte ethics survey revealed that 6 per cent of its 13,000 staff felt pressured to compromise their ethics.

“That’s 780 people in your organisation,” Greens senator Barbara Pocock told the firm’s senior executives at a Senate hearing last month.

An independent review of EY’s workplace culture, following the suicide of an employee last year at its Sydney office, revealed that 15 per cent of current and former female employees who participated in the review had experienced sexual harassment over the past five years, and that 17 per cent had been bullied.

Earlier this week, Four Corners aired whistleblower allegations that KPMG was submitting inflated bills to the Defence Department.

It has been denied by the firm and the department, but the allegation comes on top of testimony before parliamentary committees that has highlighted the dangers of the slow erosion of government bureaucracy, which spent $21 billion on external contractors just last year.

This week, the Centre for Public Integrity reported that the costs of consultancy contracts with the Commonwealth had ballooned by up to 5000 per cent more than originally promised under tender.

The multibillion-dollar consulting industry is squirming, and the only certainty is that its long, free ride as the unquestionable high priest of capitalism is over.

It may have been a shock to the public, but it hasn’t been to politicians who have for years been hearing stories of malfeasance and warnings on the hollowing out of the public service.

“For the whistleblowers, who have been trying to blow the whistle internally and blow it to regulators over several years, particularly in the last 10 years, this is the day where they are finally feeling their voices are being heard,” Labor senator Deborah O’Neill says.

She instigated the release of 144 pages of damning PwC emails in May which revealed, for the first time, just how brazen the conduct was.

The emails reveal Collins repeatedly took confidential information from Treasury briefings to help tech giants such as Google and Facebook cut their tax bill.

PwC has yet to fully reveal who helped Collins sell the avoidance plans, and just as importantly, who helped cover it up for years with bogus claims of legal privilege.

The tax office this week revealed it had considered charging PwC with criminal offences relating to its use of legal claims that served to block the ATO’s access to information about the firm’s tax schemes and its clients.

PwC’s legal team has proven less successful at ensuring PwC can fire staff allegedly involved in the scandal. On Friday, a judge found that the firm had improperly forced a partner to retire.

He is just one of a handful of partners who have faced consequences.

O’Neill says it took people a while to grasp the significance of the Collins’ breach when it was revealed.

“If someone who is that senior is willing to take confidential information from their own government, confidently takes it back to their workplace, and lines up an international team to profit from it, that is one almighty reveal of cultural practices,” she says.

“So I’ve been very, very worried from the minute that that became apparent.”

Integrity expert and former counsel assisting the NSW corruption watchdog Geoffrey Watson, SC, says the PwC scandal helps highlight the huge problem of the public service being privatised by stealth.

“The Centre for Public Integrity had tried to ignite an interest in this growing problem for some time, and couldn’t get the attention it required. The PwC scandal was just a godsend,” he says.

There is nothing wrong with having a profit motive, he says, but he takes issue with some of the practices revealed.

“What we’re seeing is valueless services or, in one instance, according to the Four Corners episode, no service at all rendered at a great cost,” Watson says.

A federal government report shows spending on the large consulting firms had grown from about $400 million in 2013 to $3 billion as of 2022.

And then there are the problems at state level.

Watson highlights one of the biggest issues: the revolving door between the public service and the consulting firms which in may cases are the only alternative employer for these senior bureaucrats.

Greens NSW MP Abigail Boyd, who is conducting an inquiry into the state’s use of consultants, has also noted the poaching of civil servants and the parachuting in of former consultants into senior roles.

NSW Greens MP Abigail Boyd has looked into the state government’s use of consultants.Credit: James Brickwood

“What do you get from working in government? A lot of what you get is the contacts and the information. Where is that most useful? In an organisation that trades on contacts and information. And that’s what these consulting firms are,” she says.

Boyd says it has reached a stage where there is a culture permeating of “let’s use consultants wherever possible”.

The government has already announced plans to rein in the billions its departments are spending on consultants. The spending has helped the Australian consulting industry become one of the biggest in the world and it is completely disproportionate to the modest size of our economy.

On Sunday, Treasurer Jim Chalmers said this is just the start, introducing changes that include a 100-fold increase in fines for promoting tax exploitation schemes to $780 million.

Regulators will get sharper teeth and the tax office will get to relax privacy provisions that unintentionally protected PwC due to the ATO being unable to share its knowledge of the scandal with ministers, other departments, the police and criminal prosecutors.

But the recommendation that would make the firms really nervous is a Treasury review that will examine “the regulation of consulting, accounting and auditing firms to consider whether reforms are needed”.

This is expected to include real scrutiny and transparency, and potentially a corporatised model that could dilute the power of the sectors’ partners.

As O’Neill says, the proposed reforms will deal with some of the “critical failure points that are now manifestly obvious to everybody”.

This includes Deloitte’s reporting that it last year recorded 121 substantiated misconduct matters after which 28 staff, including four partners, were fired.

Only one of the 121 Deloitte matters was referred to an external regulatory body. More importantly, the firm has no disclosure requirement for partners fired for misconduct. This means they can walk into a new workplace with a clean slate.

O’Neill said the inquiry: “Where is the transparency? And these people you’re talking about – who exited – could well be a consultant that can get a job with the government and they say, ‘I used to work for Deloitte’.”

The greed machine

Not since the banking royal commission has such a high-profile and supposedly reputable corporate institution faced such upheaval.

But can the government change a sector that has proven itself to be all-powerful, secretive and held to a single rule, the ruthless pursuit of profits?

It is an important question given that the lucrative partner income streams (which have been turbocharged by the 10-fold increase in government spending on consulting services over the past decade) sit at the heart of the bad behaviour that is now recognised as a problem at all the major firms.

You don’t need to listen to disgruntled former employees at the Senate hearings to know this. The independent review of workplace culture at EY provides ample evidence.

“The partnership culture at the end of the day is really about making money,” says one employee interviewed as part of the review process.

“Staff are treated as a resource and we are often told we are replaceable and that we are lucky to work here. There’s a churn-and-burn mentality and partners are incentivised not to care about staff wellbeing, because there’s someone else on the conveyor belt ready to come in.”

Former partners and employees of other major consulting firms say this is at the heart of the power that partners have at the firm and the relentless pursuit of billable hours at any cost.

“These people literally just work you to death and then push you out,” says one former executive who spoke to this masthead of her departure last year.

“The effects of intense workload include suicidal thoughts. All I do is work all night and day,” says another EY employee in the review, which was conducted by former sex discrimination commissioner Elizabeth Broderick.

The equation is a simple one: while a lot of effort goes into winning these big contracts, partner income is dependent on how few employees, who are on fixed pay, are assigned to do the work.

What often follows is a brutal level of overwork to deliver the maximum profit margin to partners.

‘It wouldn’t be uncommon for me to work from 10am to 5am every day for up to five months.’

“We don’t have enough staff to do the work but that’s part of the business model. It wouldn’t be uncommon for me to work from 10am to 5am every day for up to five months,” one anonymous EY employee told the review.

About 46 per cent of respondents said their health had been harmed as a result of working long hours.

“There’s a real irony in getting invited on to a partner’s boat to hear them all talk about when their Ferrari is arriving. All of the conversation is so elitist and there is no sensitivity to how that all sounds to the staff when they all feel burnt out, demoralised and insulted,” says another.

The overwork problem is so bad that EY has started work trials to assess partners on revenue measures but not profit margin, “enabling resources to be allocated to complete client engagements within time and quality parameters while reducing the need for long additional hours”.

The pay packets that the big four firms have been forced to reveal for the first time at the Senate inquiry show just how lucrative this practice is.

Former PwC chief executive Tom Seymour was on $4.5 million and Deloitte’s Adam Powick topped $3.5 million, but an astonishing stream of wealth is shared by the entire partnership.

PwC has 300 partners earning more than $1 million a year. EY has 700 partners with an average pay packet of $950,000.

Deloitte has more than 1000 partners with average earnings of up to $600,000 a year. Meanwhile, it had staff turnover of 3000 out of 13,000 employees.

KPMG has yet to report, but from the numbers that have been reported, it is clear that a few thousand partners at these firms earn billions between them.

Absolute power

Just as insidious is the absolute power that these partners have. And more specifically, the partners who bring in the work.

All the testimony makes clear they are untouchable within the firm and that the so-called executive leadership is ineffectual when it comes to keeping them in check.

The problem is that while these firms mimic the executive and board structure of companies such as the Commonwealth Bank, it is a facade. These boards possess little of the power associated with a corporation.

“It is a Potemkin village,” former KPMG partner Brendan Lyon told a Senate committee last month.

“It is set up purely to simulate and allude to the types of obligations and requirements that are created under Corporations Law.”

This power imbalance with the money-making partners then creates the perfect environment for toxic behaviour to run amok as one female employee at EY noted of sexual harassment issues.

“He is known to have problematic behaviours but nothing is done because he brings in a lot of money.”

Another says: “A couple of colleagues have experienced blatant sexual harassment, bordering on assault by being touched inappropriately.”

Despite complaints about the perpetrators, they were still employed by EY.

“The message is ‘that’s OK. He is a partner and part of the boys’ club’.”

The reckoning

A number of investigations and inquiries are under way to hold people to account about the PwC tax leak scandal, but one of the questions that has been asked is whether a royal commission is needed to provide the exposure, and changes, needed to fix up these firms, which provide crucial auditing services for the largest organisations in the country.

Members of the Senate inquiry into consultancies say a royal commission might not be needed given what the Senate process has accomplished already.

O’Neill says: “This is how the system is designed to work. This is how we force scrutiny into places where people don’t want it.

“It doesn’t appear that we need the cost of a royal commission.”

PwC has also been referred to the National Anti-Corruption Commission.

Pocock says there is plenty more to do still, and she was clearly unhappy that PwC’s government business, which was spun off for just $1 to private equity to save it from a government ban on work with the firm, is already finding itself back in favour.

“It’s disturbing to see that even before any of the current investigations into the tax leaks scandal have been completed, the new PwC offshoot, Scyne Advisory, has been invited back to the table of government consulting work,” she says.

“Despite all the bad publicity and temporary loss of government work, PwC have yet to pay any real penalty for the gross misconduct that has occurred there.”

Former competition regulator Allan Fels says that given what we now know, structural change may be the only solution.

“Self-regulation can’t be relied upon, nor can government regulation. We therefore need legislation to break up the big four – and, in time, other audit businesses – and to prohibit businesses from doing consulting, advisory and other forms of business,” Fels told the Senate inquiry.

But only one thing is certain. Even with the best endeavours to wean the public service off its consulting dependency, the big firms will be making a lot of money for years to come, according to Watson.

“I would say it’s going to take years,” he says. “And in the meanwhile, the same members of the private sector will be gloating over the piles of money that they’ll make. While the government has to go through the painful process of disentangling its relationship with the private sector.”

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