Australia’s original Big 4 whistleblower, George Rozvany, called for the bust up of PwC, EY, KPMG and Deloitte in these pages eight years ago. These “unregulated private partnerships” have cost Australia dearly.
“The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than the democratic state itself.”
Such were the words of the 32nd President of the United States Franklin Delano Roosevelt.
Franklin was a distant relative amongst many family members who believed in driving positive societal change in such diverse areas as dentistry, law and engineering.
My father, Professor George Senior, summed up the family philosophy as follows:
“Taking the opportunity to advocate positive change if one has the ability to do so is not a choice but a moral responsibility to society,” further clarifying, “such knowledge must belong in the hands of the community.”
My chosen area has been law reform (not whistleblowing) with early career successes in reshaping the environmental protection taxation law through the Taxation Institute of Australia aligning it to conventional thinking and forever changing the foreshore of Sydney Harbour and some ten years working with the ATO in developing a robust transfer pricing regime under the patronage of Commissioner Michael Carmody (all free of charge).
Recognising the desire in the wider community for more ethical corporate practices along with a number of other kindred spirits, including Michael West, I embarked on my campaign for positive corporate change advocating the establishment of a multi-disciplinary corporate ethics centre of study.
The early focus of that campaign was the Big 4 accounting firms given their dominance in international commerce and a number of high profile scandals.
Tightening the regulation around the Big 4 was “encouraged” through a considered and collaborative campaign in Australia and internationally which included topping the ABC National News and writing two draft books for research and discussion purposes “Corporate Tax Ethics” and “Big 4 Big Myth” while making appearances on various foreign radio, TV productions and print media.
the Big 4 or arguably the BIG ONE if we consider common insurance pools.
Ultimately, the object of this work is to strengthen the integrity of the global financial system for all stakeholders, including the Australian people!
As l observed 5 years ago in Big 4 Big Myth:
“There is little doubt that the Big 4 accounting firms collectively and individually have an incredible capacity to manage and control their reputation based on a disturbing level of increasing private power. Whether these firms will continue to survive in their current forms and with their current practices will depend on whether the myths and the illusions (of their marketing) can be maintained successful …
If history is a guide, every edifice set up by man eventually collapses. Like the Nazi Swastika which once tragically adorned most of Europe as a monument to man’s inhumanity to man or the aquila of the Roman Empire symbolising the power of a Roman legion, the names of the Big 4 accounting firms will one day fall from the skylines of the major cities of the world. The question is what will cause this? In my view, the Big 4 accounting firms may well have already sown the seeds of their own destruction!”
Big 4 Big Myth was largely completed in 2016 with substantial opportunity for all stakeholders including the Big 4 accounting firms to provide comments for a final print version and what I had hoped would be a much-needed re-think on self-regulation by the Big 4 or arguably the BIG ONE if we consider common insurance pools.
Another work emerged about the same time from an accounting viewpoint about the Big 4 by Ian Gow and Stuart Kells entitled: “The Big Four – the curious past and perilous future of the global accounting monopoly.”
Despite some suggestion of professional rivalry, there are a number of common themes between the Gow & Kells work and my own including the increasingly sub-standard audit service delivered by the Big 4 accounting firms which is almost now an adjunct to the other more important service lines (to the firm but not the client), problems with the partnership structure, outdated technology, tribal delusion and a culture of averageness and conformity killing off innovation and substantive protections within the Big 4 such as an IPO to raise much needed capital for necessary restructuring.
I was mentioned a couple of times, the more relevant comment being:
“In his career as a tax specialist, George Rozvany worked stints at EY, PwC and Arthur Andersen. In 2016 he argued that the Big Four, by becoming so powerful and pervasive had “sown the seeds of their own destruction”: governments had no option but to pursue a Big 4 break up, just as anti-trust regulators had broken up monopolies in other sectors such as telecommunications, energy and financial services.”
I thought the best and most interesting material was towards the back of the book in the part entitled “The Twilight Years” and I only wish there was more, as there was a strong suggestion that the Big 4 accounting firms had already “sown the seeds of their own destruction” and their time was nigh.
The rest of the 211 page work I would not regard as exactly incisive against the Big 4 but there was a seeming apology for this expressed in the following terms:
“Accounting professionals, even those in academia, are reluctant to be too critical of firms that may well be their future employers or funder. All of us know, after all, where our bread is buttered.”
As a law reformer, one focuses on what regulation is appropriate to protect and safeguard the Australian people, not provide commentary consistent with the interests of those parties that are the subject of a Senate Inquiry.
Now I understand that there are some “powerful folk” in the major consulting firms who don’t want change but based on my discussions with Big 4 Partners over 30 years most do – the chilling case of Aishwarya Venkatachalam being the strongest of reminders between marketing representations and reality amongst many issues facing the Big 4.
Notwithstanding, whoever thought in 2019 that it would be appropriate to interfere with the testimony of an acknowledged international expert requested by the Senate Inquiry into the Regulation of Accounting by way of cyber-attack and wiping of research material should be seriously reconsider their actions – not only is it un-Australian, it is also illegal!!
But time has moved on and I have been asked for a submission to the Parliamentary Joint Committee on Corporations and Financial Services – Inquiry into Ethics and Professional Accountability in Audit and Advisory Firms. The first logical consideration is what failed in the first inquiry to cause the second? Well, rather a lot it would seem!
In April 2019, the United Kingdom, the Competition and Markets Authority (CMA) recommended an operational split between the audit and non-audit practices of the Big Four to address the perceived conflicts between audit and the other service lines of the largest firms.
A similar approach was argued by former AAAC Chairman Professor Fels and the Australian Greens before the first Senate Inquiry.
The Big 4 argued not unreasonably on paper that access to multi-disciplinary services was important for the audit process which appears ultimately won the day with the Senate.
A perhaps curious and telling point appeared in the Senate’s Interim Report:
“Adjunct Professor Stuart Kells drew the committee’s attention to the practical implications of structurally separating the Big Four firms, commenting that the “practicalities of doing that, we think, are probably prohibitive.”
So does this infer that the Big 4 has trouble managing itself under its current structure?
Catastrophic failures
As most in Australia are aware, there have been a number of catastrophic management failures in recent times within the Big 4 relating to non-audit consulting work including:
- PWC’s leaking of confidential Government tax material and attempts to cover up;
- EY’s workplace culture of clearly institutionalised bullying and subsequent internal report by former Sex Discrimination Commissioner Elizabeth Broderick;
- EY, KPMG, PWC and Deloitte charging for Australian Government work which was not reviewable by Senate Estimates; and
- KPMG’s audit work of Lendlease as an example of other audit process failures.
There is little doubt that the central principles of auditor competence and auditor independence are being severely tested – if I was an auditor I would be extremely concerned about the recent developments as I know the various audit partners were who interviewed confidentially for Big 4 Big Myth.
There is more than enough evidence to require a sensible rethink on how international commerce is governed and regulated and what the role of major unregulated and private partnerships should be within it some of which date back to 1845, as is the case with Deloitte.
Fortunately, the answer is not complicated, but it does require political will and broad acceptance that change is necessary.
While the continuation of auditing and allied skills is necessary, the partnership model is well and truly redundant given the sheer number of scandals resulting from the actions of uncontrolled “rogue” partners, cells of partners or indeed entire member firms within the Big 4 and other major consulting firms.
Cult of mythical infallibility
One must recognise that the ‘cult’ of mythical infallibility results in part from the “individual ownership” of partners and the need within this culture to place individual reputations above professional excellence. Such a model is unquestionably toxic to a new generation of employees, along with the scourge of bullying, as the EY scandal has sadly shown.
A corporate structure with centralised management and control and appropriate risk management and compliance practices largely eliminates such problems.
Finally, the question of government contracts requires some comment.
There is no doubt that contracts granted to unregulated private partnerships without the oversight of Senate Estimates is simply a recipe for excessive charging, as the Australian experience has shown. The Australian people require a more disciplined solution!
Again, not difficult to fix through regulation by way of a robust licensing scheme and an appropriately formed board, including independent directors responsible for risk and compliance matters.
Of course, even entities which are licensed such as our major banks and insurers can fall foul of the regulators if they don’t comply as a result of aggressive external advice and deservedly so – more about this later.
I estimate that by failing to introduce even the most basic regulatory regime in relation to the Big 4 and other major consulting houses following the last Senate Inquiry has cost the country some $2 billion!
Click here for a link to download free copies of George Rozvany’s books on Corporate Tax ethics.
George Rozvany is Australia’s most published expert on transfer pricing, which is one of the principal ways large corporations pursue cross-border tax avoidance. Rozvany stepped down in 2015 as head of tax in Australia for the world’s biggest insurance company, Allianz. Formerly, he was an insider at Ernst & Young, PwC and Arthur Andersen.