The problem with PWC and the Big 4 – treason is the business model

Attached is a note from PwC to its big clients telling them how to dodge the new tax laws shortly before they were passed in Parliament in 2015. PwC was advising the Government on the design of these laws while advising its clients how to avoid them. Michael West reports.

It’s all in plain sight. You can find this on the internet. “Let’s talk” it says at the end of the missive, displaying the contact details of PwC’s International Tax Partners in the US and Australia, including Peter Collins, the man at the centre of the scandal, the man the other partners tried to scapegoat as the rogue culprit who was entirely at fault for the whole caper.

It has been fascinating to watch the PwC scandal evolve. It began with a leak from an obscure little industry body most people had never heard of, the Tax Practitioners Board, which disclosed PwC partner Peter Collins had copped a 2-year ban for acting as a tax practitioner. That went public, and snowballed spectacularly.

PwC chief executive Tom Seymour was the next casualty, shot by the partnership after declaring at a conference that the leaks were the work of just one rogue partner Peter Collins. The problem with Seymour’s PR strategy was that a trove of emails shortly emerged showing dozens of partners were in on the rort. 

The cover-up proved more deadly than the crime; it was fuel to the fire of suspicions over Big 4 conflicts of interest which had been smoking for years. And now the rolling revelations from the Senate Inquiry into Consultants.

Forest for the trees

Peeling back these trees to behold the forest of Big 4 conflicts however and the problems are deeper, more systemic, more shocking than this inquiry alone can plumb.

The entire business model of the Big 4 is predicated on financial treason. PwC, EY, KPMG and Deloitte actively and deliberately prey on the Australian government to deliver profits for their foreign multinational clients.

That is, they advise their multinational clients such as Google, Exxon, Chevron or Vodafone on how best to siphon profits from their Australian business to their related companies overseas with minimal “leakage” of tax to the Australian Tax Office. In so doing, they are deliberately starving the public purse of money to fund hospitals, roads, police, schools, nursing homes, the army … everything.

How did it get to this? The Big 4 began quaintly as audit companies, but were able to frame themselves as the “Gatekeepers of Commerce” by auditing the financial statements of the largest companies in the world. That delivered them credibility, and inside knowledge. Then they morphed.

Oligarchs of the Treasure Islands

 

This was the first story we published as an independent media practitioner 7 years ago, Oligarchs of the Treasure Islands, which set out clearly – with on-record quotes from former PwC tax partner George Rozvany – exactly what was going on.

“The Big Four have, under a Rasputin-like cloak of illusion strayed from their original and critical role of verifying the accuracy of financial accounts for all stakeholders, to be “accountants of fortune” merely representing the accounting position for multinationals and developing aggressive international tax avoidance practices,” said Rozvany.

Things have got worse since then because the Coalition government gutted the bureaucracy by giving the Big Four hundreds of millions of dollars a year in consulting work. Government has been privatised, outsourced to these firms, and others like McKinsey, Boston Consulting and Accenture. It is now a billion dollar a year business – federal government consulting income alone – yet nobody seems to have stopped to ask: how can it be efficient to take work from a public servant who knows what they are doing and give it to an external consultant whose charge-out rate is $1,000 an hour?

Poachers *and* gamekeepers

The difference with the Big 4 over other consultants is that the enormity of their conflicts of interest. They have three main businesses: consulting, tax advice and audit. We have already covered the untenable conflict between advising governments on how to capture tax and corporate clients how to evade it.

Yet the conflict between their tax and audit divisions is equally preposterous. How can the same firm tell the same corporate client how to be as aggressive as possible dodging taxes in Australia then mark its own homework by reviewing and signing the accounts as “true and fair”?

These conflicts are precisely what the last Senate inquiry into the Big 4 heard. Yet the inquiry into audit standards, despite gross evidence to the contrary, was a whitewash. 

Such was the influence and interference of the Big 4 in the political process that the inquiry was swiftly killed off and buried. Behind the scenes this is what is happening again now, although the damage this time will be harder to repair for the big firms and their armies of PR people and lobbyists.

Dawn of understanding

This time, things are starting to click in a public understanding sense; not nearly enough, but enough to begin the process of what inevitably must happen – the bust-up of the Big 4.

Themes to emerge in testimony and interrogation (particularly by senators Barbara Pocock and Deborah O’Neill):

• excessive secrecy
• legal professional privilege
• Big 4 partnership structures
• conflicts of interest
• standards and cultural decline
• political donations
• no effective regulator

Distinct from the companies they audit, the Big 4 are partnerships. Their only duty of disclosure is once a year filing a “Transparency Report” which makes only one number transparent, their total income. This has been soaring by double digits year after year as the Coalition increasingly privatised government and sprayed the Big 4 with consulting work.

Double digit rises in, not profit, but revenue. Who else gets that?

Where their clients file publicly available financial reports at least once a year with the corporate regulator, the Big 4 are completely opaque.

Paradise Papers: media ignores the real tax culprits

The public knows so little about their structures – the deals between the hundreds of global partnerships – that former partners have speculated the Big 4 may even be “The Big One”. Although this may sound conspiratorial, nothing is known of their insurance arrangements, leading to speculation they insure each other – therefore themselves, therefore they own the same risk, therefore they are one.

We have asked them for years who audits them, who audits the auditors, who guards the guards? It emerged in testimony in the Senate inquiry that PwC audits itself. That is an immense conflict, almost comical.

The toxic issue of Legal Professional Privilege also emerged. Over the past decade the Big 4 have been buying up lawyers and law firms in a grand tactic to stonewall the ATO and other regulators in the event of one of their clients being dragged into court. Assistant Commissioner Jeremy Hirschhorn has long complained of this and PwC has been the arch offender.

It means that if there is a lawyer in the room signing off on any deal, that deal can be kept from the prying eyes of regulators and courts because it is “privileged”. It is a cynical tactic, deployed in the case for instance of the prosecution of multinational meat exporter JBS.

The abuse of legal professional privilege goes further to secrecy, to regulatory impunity and to turbo-charging the profits of foreign companies. Bear in mind that the biggest clients are multinational corporations, the biggest Australian clients such as Rio Tinto and BHP, although listed, are more than 80% owned by foreign shareholders, therefore the Big 4 are inevitably acting in the interest of foreign shareholders – particularly as the bulk of Australia’s income derives from exporting our natural resources.

Above the law and beyond it

A measure of the sheer power and ubiquity of the Big 4 can be found in the treatment of the big tax leaks, the Paradise Papers and Panama Papers. The International Consortium of Investigative Journalists (ICIJ) holds this information, this giant database, but refuses access to anybody but its “media partners” and disseminates the odd leak when it sees fit.

Big Four the winners as cosy journalist clique conceals mountain of tax haven data

Where are the Wall Streeters, the Big 4 and the blue chip multinationals in all this? The ICIJ is happy to leak personal information of people rich but not powerful, or of political targets like Jeffry Epstein, yet when we requested access to its database (where more than 90% of the information remains hidden, we had a curt “not for you” in response from its director Gerard Ryle.

The irony is, while these investigations focus on second tier law firms like Mossack Fonseca, again the Big 4 are hiding in plain sight. Check this office location map of PwC in the Caribbean. The Big 4 have a presence in every tax haven in the world.

The Big 4 are too big for their boots. In 2018 they were asked to appear before the Joint Committee of Public Accounts and Audit (JCPAA). Instead, they gave Parliament the bird and refused to appear.

In the 2020 Audit Inquiry, they dodged evidence and swung politicians into burying the whole thing. This despite strong evidence of failing and falling audit standards, evidence ignored in the end by politicians who had been co-opted.

Then there was the KPMG cheating scandal where KPMG Australia failed to identify that more than 1,100 of the firm’s employees, including more than 250 auditors, were involved in cheating on tests for mandatory training courses.

As former top bureaucrat Paul Barratt testified to a previous parliamentary inquiry here was no evidence to support the view that spending on external consultants was more efficient than the public service, yet public service expertise was being eviscerated in favour of the Big 4.

Part of the problem here is that there is no regulator for consultants so the Big 4 are arbitraging the gaps between their roles as tax advisers, government advisers and auditors. Asked by Senator Deborah O’Neill how many consultants were registered with the peak body Institute of Management Consultants, IMC spokesman Peter Westlund conceded none were.

Indeed on 300 were registered even with the association although there are 90,000 nationwide. And unlike other lobbyists, the Big 4 people don’t deign to register as lobbyists when carousing around Parliament House drumming up business.

So they fall between the gaps of regulation and oversight and as one former PwC operative told us last week, the problem is Defence. The biggest portion of their recent income surge has been advising Defence. “If they are selling information to foreign clients, what is to stop them from selling information to associates of the Chinese government?”

Further, outsourcing confidential government work escalates the hacking risk exponentially.

Again, how did we get here to this place where government has been enfeebled to such a point that it is now being conducted by four private firms who act in the interests of foreign corporations and one in PwC who has demonstrably betrayed this country?

The problem is essentially culture, a pernicious decline in ethical standards in favour of chasing money, one which is costing us all dearly, is sabotaging good government and enriching foreign shareholders.