PwC tax leak scandal shines light on consulting industry practices | The Business | ABC News

there's a long history of these sorts of

episodes going back decades if not if

not a century

um so it's it's really coming out of

something that's fundamental to the

structure of the big four uh today

having said that

um the PWC people are right to be

worried because it is pretty serious and

it seems to have um really galvanized

people's thinking about you know the big

four of what they're what they're around

what people ask them to do and and what

sorts of things that happen inside the

firms so yeah they're right to be

worried well let's talk about the

fundamental structure that you mentioned

there Ian Jim Chalmers has said that

he's displeased with PWC and is

considering further action what does

this incident say about the relationship

of these large consulting firms and

governments I mean are they

intrinsically always going to be

conflicted

I mean yeah there's always going to be

issues I mean clearly the government is

a is a big customer a big client of

these firms

um but I think that also speaks to the

risks right uh the these firms are in

such diverse areas of business whether

it's with with business whether it's

with the government that uh an incident

like this which basically creates

reputational risk that applies to you

know they've was it one partner was it

was it was it uh seven Partners or

Thirty Partners uh we're not sure at

this stage but you know it's thousands

of people whose livelihood is

potentially affected by you know the

potential consequences that the

government might take in response to

this well let's talk about some of those

potential consequences to it if the

penalties in this country were perhaps

stronger would this type of behavior be

prevented I mean what goes on overseas

well there's all sorts of different

kinds of consequences including direct

legal and financial ones but also in the

case of Australia the potential for an

anti-corruption lens to be applied to it

through the history of big four tax

scandals there's been all sorts of

consequences but also a reluctance to go

too hard against the big four because

they're so concentrated and so

um you know all pervading there was a

fear for example in 2005 when KPMG were

at the center of a big tax scandal in

the U.S there was a fear that if it was

criminally prosecuted we'd end up with

the big three now I think Ian and I

would argue that that it's a false

analogy to think of these organizations

as systemically important or as too big

to fail they're not too big to fail they

are very big but they can fail as as

Arthur Anderson showed and it'd be wrong

to think that they perform an essential

systemic function because actually what

they do is very contestable so Ian then

how do you think about starting to fix

the system because the government you

would presume will always need some

level of external consultation when

creating policy right so I think part of

it is just um are these firms too big

are they in too many businesses

um and so one possibility that's been

talked about ey was sort of certainly

pursuing this so the idea is splitting

up to into multiple firms so that some

of the conflicts have resolved

structurally in some ways and and part

of part of that was not only coming from

uh ey itself but you know there's been

discussion among Regulators in the US in

the UK in particular that there is there

are these conflicts that maybe need to

be addressed through structural remedies

and that's certainly one one remedy that

might be considered uh in the Australian

context sure what are some of the other

New Frontiers that might exist when it

comes to strengthening integrity and

auditing well um 100 the idea of

splitting auditing which is a

fundamentally a pro-social activity from

things like aggressive tax of avoidance

advice which is essentially an

anti-social activity so structural

remedies are very important but we

shouldn't be reluctant to apply a very

high standard of Integrity to these

organizations and to pursue exactly as

Senator O'Neill is doing now to pursue

them very very rigorously so there's

things that people have proposed in the

past for example if if a large

Professional Services firm is engaging

in inappropriate conduct Banning them

from government work and having other

kinds of sanctions but also thinking

about the clients because the clients

are the ones that are looking to the big

four for this kind of advice and then

they're also looking to engage with

governments so in the UK in one of the

big tax scandals there there was a push

to say well companies that are engaging

the big four for for aggressive tax

advice should be banned from working

with government as well Ian can the big

four be trusted I think the big four can

be trusted

um if they have the right sort of

incentives to be trusted so I mean they

all started they started out to to a

large extent as audit businesses sort of

focused on sort of this reputation for

probity for ensuring that the financial

reporting was done in an appropriate

fashion but what we've seen in recent

years is the firms have grown

dramatically

um three of the big four actually spun

off the Consulting practices around 2002

2003 time frame but they've now gone

back into that business and has grown

rapidly much more rapidly than sort of

the the core uh historical part of their

business and I think those conflicts uh

leading to uh the big four into

situations where perhaps they can't be

trusted and I think structural remedies

uh will be something that's sort of put

back onto the table that the firms

themselves might be looking at at this

stage so what next for PWC

well they're very much in damage control

um I don't want to say too much about

PWC specifically because Ian and I are

historians of the big four in general

some of the things that they're doing

um are um you know obviously very

sensible so engaging people to look at

culture and those sorts of things but

the risk is that they won't look at the

fundamental conflicts and it's really

really hard to change those things in

the big four because they don't have a

conventional corporate structure they

have what's essentially a franchise

structure so things like head offices

and and brands are owned jointly by the

national practices so doing things like

what eui ey plan to do with the D merger

is extremely difficult because you need

to get the the different National

practices to cooperate so unwinding or

fundamentally changing

systems Integrity is is very very

difficult in the model that we've got at

the moment for the big four so one of

the things that Ian and I have said is

they really need to think about

different models possibly corporate

models certainly structural change but

again getting agreement from the big

four to do that voluntarily is extremely

difficult Ian Gale and Stuart curls

thanks for joining me

thanks cat that was pretty scary