Big 4 field questions on political donations, income splitting, audit breakoffs

In response to questions on notice, big four firms rejected claims that a cap should be put on partnership sizes and that they should be prevented from offering consulting services to an entity they have previously audited.

The questions, posed by Greens Senator Barbara Pocock, touched on a range of topics raised in the wake of the PwC tax leaks scandal.

Political donations

Each year, the Australian Electoral Commission publishes details of all political donations made over $15,200. In questions on notice, Senator Pocock asked the firms to address the connection between their donations and government procurement.

PwC Australia led the way federally, in donating $224,000 to Labor and nearly $146,000 to the Coalition.

The firm announced last year, however, that it will be ceasing its political donations to rebuild trust following the tax leaks scandal.

PwC chief executive, Kevin Burrowes said the donations “don’t align with community expectations … While we can’t change the past, we can take the positive steps we need to take in order to improve our governance standards – and that’s exactly what we’re doing.”

Asked whether it would follow suit, EY defended its donations – which ranked second among the big four at $227,853 for the 2022-23 financial year – stating they were made “primarily for the purpose of facilitating discussion and the exchange of ideas between business, the broader community and government in the formation of policy,” reported The Australian Financial Review.

According to Senator Pocock, Deloitte donated $177,126 to the major parties and secured $222 million in government contracts over the same period.

In response, the firm said it provides no cash donations and that its donations are not made to “gain favour” with the government or political parties.

KPMG told the Senate that it is conducting a review of its political donations policy and has paused all donations in the meantime. In FY2024, the firm said it had spent $15,278 on political donations, which were made before the decision to review its policy and to pause its donations.

This is a substantial decrease from its $163,200 donations to the major political parties in 2022–23. The firm said it makes no cash donations and that the outcome of its review will be considered by its National Executive Committee in April 2024.

Size and scope

Since the inquiry began, Senators have asked witnesses to justify the partnership structures of the big four consulting firms. In questions on notice, Senator Pocock asked Deloitte and KPMG what they made of the calls for tighter partnership caps and bans on providing consulting and advisory services to the same entity.

In an interview with Accounting Times last month, Pocock said “I’ve yet to hear a convincing piece of evidence about why there is a cap of 400, for example, on law practice partnerships, but there is a cap of 1,000 on accounting firms.”

Asked whether there should be a cap of 50 partners among accounting firms, Deloitte said it believes “there is no merit in establishing a strict number of partners in accounting firms.”

It added, however, that it supported uniform regulation of professional partnerships over a certain threshold.

Senator Pocock said conflicts of interest are “built into very large firms” that offer consulting services alongside auditing.

KPMG said 8 per cent of its revenue comes from auditing and all such engagements comply with the requirements of the APES110 Code of Ethics for Professional Accountants and recommendations of the auditing inquiry.

Deloitte too said it supports strong guidelines but that an outright ban on providing consulting and auditing services to the same client would not be “in the best interests of our clients.”

Income splitting

An Everett assignment is a legal form of income splitting in which a partner assigns part of their stake in a firm to a third party, usually to a spouse or family member.

Senator Deborah O’Neill has referred to tax minimisation schemes used by partners, including Everett assignments and service trusts as an “affront to basic principles of equality.”

PwC Australia reported that, as of late March, just under two-thirds of the firm’s partners use Everett assignments (243 partners).

In response to Senator Pocock’s questions, the firm said it has “long established processes in place” to ensure tax compliance and that “as such we do not accept the characterisation of tax minimisation.”

According to KPMG, 121 KPMG partners were using Everett assignments as of June 2023, however, partners are limited to assigning no more than 19 per cent of their income.

“The uptake of Everett assignments among new partners continues to be low, and once a partner has entered such an arrangement, they are considered to be irrevocable,” said the firm, adding the assignments are available to partners of firms of all sizes.

No KPMG partners use service trusts.

Deloitte partners have been prohibited from using the assignments for some time. The firm said its internal services team each year reviews partners’ tax returns to enforce the restriction.

Elsewhere, EY has estimated that around 30 per cent of its partners use Everett assignments.

The ATO has published a risk assessment framework to guide the use of the assignments, though it has suggested it is concerned about certain “high-risk” arrangements.

Accounting Times spoke with Legal Consolidated partner, Brett Davies recently, who explained the legal basis for the assignments might be flimsier than once thought.

Since the ATO updated its approach in 2020, in which it said it anticipated “increased enforcement action,” Davies said many assignments have been “dropping like flies.”

The firms were also asked to produce evidence of the taxes paid on partner incomes. In FY23, KPMG partners paid the highest average effective tax rate of 40.3 per cent, followed by EY at 39 per cent.

The average tax rate for Deloitte and PwC partners was tied at 37 per cent.

Government work

According to Senator Pocock, Deloitte secured $222 million for the delivery of government contracts in FY2022–23, though it declined to share information relating to its profits on that work.

“Where we work with government, we always contract in line with appropriate competitive procurement processes and are transparent in our pricing with the engaging department,” said Deloitte.

KPMG earned $318.4 million for its work on government contracts in the same period and similarly did not disclose the profits.

PwC Australia divested its government consultancy business in the fallout of the tax leaks scandal, though it made $185.7 million in FY2022–23 on government work.