Unregulated, aggressively profit-driven: Senator speaks on the big 4

After months of public hearings and ongoing inquiries into the consulting industry, Greens senator Barbara Pocock said it is clear that “the current system is not working”.

“It is not working in terms of communication, accurate communication between bodies, but also we have bodies that don’t have the real architecture that’s needed for regulation,” she said.

The inquiries have unearthed failures at all critical points, from the structures and cultures of the big four to the regulatory environments in which they operate.

While Senator Pocock declined to pre-empt the recommendations to come from the report beyond her own priorities, she did make clear what seems to have gone wrong.

‘Who audits the auditors?’

“We’ve had evidence in recent days both at the [Parliamentary Joint Committee] and the Finance and Public Administration Committee, that essentially partnerships are not regulated,” said the Senator.

“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.”

Calls to abandon partnership structures at the level of the big four have existed for some time. The consulting inquiry, when hearing evidence around the partnership question, often echoed earlier reviews, such as the 2020 parliamentary inquiry into the regulation of auditing where Greens senator Peter Whish-Wilson repeatedly asked: "Who audits the auditors?"

By operating as partnerships, the big four are not subject to federal corporations’ law and are therefore not required to submit audited financial statements, instead their reporting obligations are outlined in partnership agreements.

Bonnie Taylor, partner at EMS Legal, explained that most larger partnerships were set up when that was the preferred model. Now, the tax and vesting implications are too great for most to justify incorporation.

“[Partnership] law really only deals with extreme situations ... it really is not set up for big and complex businesses, the partnership laws are just not equipped for it,” said Taylor.

“They basically say that partnerships are self-regulated, they’re regulated by contractual agreements between the partners”, she added, “they don’t really deal with the daily bump and grind of operating a business”.

Andrew Greenwood, former Federal Court judge and non-executive director of the incorporated Scyne Advisory, PwC's repurposed government consulting arm, said "I think a corporate governance model is now appropriate."

"The flaw in a partnership model is that it can be too inward looking unless great care in governance is taken to ensure the outward looking checks and balances are in place," said Greenwood.

"Had there been independent persons on the PwC Governing Board, I suspect the tax TPB issues would have been addressed differently."

Conflicting interests

The size of the partnerships is one issue, the breadth of their offerings is yet another.

Conflicts of interest are “built into very large firms” that offer auditing services alongside consulting, said the Senator.

Calls to “break up the big four” have existed for a long time. Professor Allan Fels told the Senate Finance and Public Administration References Committee that legislation to that effect was necessary.

“The big four argue that there are benefits from combining consulting and advisory work in a business that does audit,” he said.

“This is a rather dangerous argument for them to run, because it seems to admit there is indeed a connection between consulting and advisory activities and audit despite their claims that they can be kept separate.”

Senator Pocock said this is a global issue, adding “there will definitely be … recommendations about areas like that, that need attention”.

Greenwood was responsible for ensuring the appropriate checks and balances were in place to avoid conflicts of interest from repeating, adding the governance structures at PwC had "discouraged people from speaking up, especially young people."

"I agree with Graeme Samuels and Alan Fels (both of whom I know) that any accounting firm providing audit services of auditing the statutory accounts of a corporation ought to be disqualified from providing consulting services to that company," he said.

"And I strongly support the Scyne model that there should be a complete separation of public and private sector consulting roles."

Failure to regulate

On the role of professional associations such as CA ANZ and CPA, Senator Pocock said their approach seemed “slightly schizophrenic”.

“There are claims about co-regulation, there are claims about red flags … but then it’s very unclear exactly what disciplinary action is available to them, and whether it is genuinely and vigorously enforced,” she said.

Greenwood highlighted the challenges of governing organisations involved in "sophisticated market behaviour" through traditional professional conduct regulators. Though this did not mean that professional standards must be abandoned, "quite the contrary," he said.

Senator Pocock added that CA ANZ’s wrongful acceptance of former member and PwC partner Peter Collins highlighted the failures of co-regulation between the professional associations and the TPB.

“There certainly seem to be a lot of organisations without clarity about who is exactly a member … if the regulator is not aware of what you’re a member of, then the regulation is deeply flawed,” she said.

On Tuesday, CA ANZ told the Senate inquiry it accepted the internal failures that led to the resignation of Collins, but that the broader system was also at fault.

CEO Ainslie van Onselen said CA ANZ was urging the government to remove the impediments to “appropriate and necessary” information sharing between professional associations and agencies, among other recommendations.

Van Onselen said the government should act on the recommendations of the 2020 parliamentary inquiry into the regulation of auditing, adding “there has been no response from the government to date”.

Senator Pocock said van Onselen’s apology over Collins’ resignation was “useful”, and that it struck a “very different tone” to her letter to the joint committees.

“When an error is made, I think it’s the leader’s responsibility … to apologise,” she said.

Moving forward

While Senator Pocock said no recommendations had yet been made, she did add that a number will likely be specific to PwC and its behaviour surrounding the tax leaks scandal.

“I think we’ve got some important issues around professional regulation of consultants, the absence of professional standards with any real enforcement, the fact that there is a plethora of professional bodies in the accounting are with no effective form of information sharing or regulation,” she said.

“I think there may be differences between senators, but I think there’s a very, very strong sharing of our perspective that things have really gone wrong here, and that they need to be governed differently.”

Senator Pocock said she will personally be pushing to “break the link” between political donations and large consulting companies and others who receive government business.

“I think that needs to end and so I’ll certainly be making recommendations on that issue,” she said.

Since referring PwC to the National Anti-Corruption Commission mid-last year, Senator Pocock said she has yet to receive any updates.

At the time of making the referral, she said it was important to complement the work of the investigations of the AFP, to address “wider issues … to ensure that our systems of government are not open to corruption”.