There has been a myopic focus on PwC Australia’s review of its culture and accountability that will be helmed by Ziggy Switkowski, a prominent company director and former chief executive with some serious governance experience.
Switkowski’s review follows PwC being scrutinised internally and externally for a tax leak scandal involving sharing confidential information with multinationals seeking to manage the amount of tax they kick into government coffers. You can only work to design a workaround that sidesteps anti-avoidance measures if you know what’s coming down the tunnel, so the involvement of former PwC partner Peter Collins in confidential government consultation was key.
Collins is no longer at the firm, and former chief executive officer Tom Seymour — head of the tax team at the time — will leave in September, the same month Switkowski’s deep-dive is supposed to be completed and delivered to the firm.
This review is an internal process. What it finds and what the firm does about it is a matter for it. A statement says it will not hesitate to exit more partners or staff if necessary. But what about the rest of the ecosystem in which PwC, other corporations and the accounting profession in general are recognised and registered under law?
Few people are focused on what really needs to be tweaked, so here’s a list.
Federal Parliament
Since the tax leak blew up in January, we have heard a lot from politicians. They have been quoted so often they resemble a special comments panel during breaks in an AFL match. But the only time politicians get really energised about accounting matters is when there is controversy. Focus on the accounting world long enough, and you will observe that political commentary follows the pattern of controversy here or overseas.
Professional accounting bodies such as CPA Australia, the Institute of Public Accountants, and Chartered Accountants Australia and New Zealand are all recognised in various laws. There is no review of the bodies periodically to see what they do about the continuing education of their members. Nothing. Nada. Parliament at a national level has neglected its responsibility to ensure professional bodies who have members recognised under law — accounting, financial planning and otherwise — are doing their job in the public interest.
Parliament should establish a rolling inquiry that looks at the professions that have this specific recognition under law. This should include the service lines of the big four accounting firms — Deloitte, Ernst & Young (EY), KPMG and PricewaterhouseCoopers (PwC) — that engage in audit, assurance, taxation, financial planning and, where relevant, insolvency.
Periodic monitoring makes far more sense than solely relying on inquiries borne out of front-page outrage over individual case studies.
Tax Practitioners Board
The board needs access to a wider range of penalties to properly deal with code breaches. Take a lesson from the change in legislation across several jurisdictions that has seen exponential growth in the fines a regulator can impose against casinos. The same should apply to professional firms where an egregious breach of standards occurs. A significant fine, as well as any other disciplinary orders, may help deter firms from thinking naughty thoughts.
The board can prohibit somebody it has defrocked from reapplying for a tax agent registration for five years. This should be increased to 10 years, and the board should be able to tailor its approach, depending on the nature of the breach or breaches.
Accountants Professional & Ethical Standards Board
It is frequently said professional firms are large donors to political parties, and it is open for an observer to ask what advantages they seek. The other critical question is how the work done by these organisations for government will be perceived by other stakeholders if they have donated to campaigns for political parties or party functions where it is as clear as day that they are paying for access.
Perception can be king in a world where people do not see how a professional executes an engagement. A perceived lack of independence can lead to cynicism and distrust, and impact not only a firm but the broader accounting profession.
The APESB should have a standard that defines political donations as a threat to independence and to ban them outright. The money saved can be donated to charity.
Securing government work
People providing services to government should be independent and be seen to be independent. The procurement rules should prohibit the acceptance of tenders from or engaging with organisations that have made political donations regardless of how weighty the amount is. Firms should choose whether they want to be political donors or providers of professional services perceived as being high quality and independent.
This is separate from a ban on an organisation or individual from being able to provide government services for a time after they’ve buggered something up. A government as a customer needs to consider whether its credibility is impacted by using an organisation or individual to provide a particular service or services. It is spending taxpayers’ money and the community will at some point sit in judgment on how those resources have been used.
The other side of the transaction
A brief point needs to be made about the other side of the ledger.
Advice that is offered must have a willing buyer. Advice that is a bit tricky or clever is only an idea in an adviser’s head until a person in a company considering its financial plumbing decides to give whatever has been recommended a shot. Should we be thinking more about the people on the other side of the table — not just the advisers?
Some good suggestions there. Another step that would help a lot would be to forbid any accounting firm that provides statutory audits of a company’s accounts from providing any other service to that company. The conflict of interest that arises from combining such services should not be permissible. The whole point of these audits is to provide an independent statement of the true condition of the companies finances but it cannot be independent when the auditor is also providing other services. And there must be no loophole permitting such arrangements with so-called ‘Chinese walls’ or the like to separate the auditing function from the other services.
There are already pieces of guidance on non-audit services. There are certain restrictions that already apply but it is worth revisiting the discussion periodically so people know what might be deemed to be a conflict with the core task of financial statement audit. Might flag that with editors at some stage if things keep rolling on. I have been a long-term advocate of parliament actually doing its job as the proxy of the community and having some oversight of professions via its committee process. Audit, non-audit services and the various lines drawn to ensure independence has been a debate that I have both observed and been a part of over the better part of 30 years. Thanks for raising it!
Why are all these white collar criminals not pursued through the courts? Sentencing a few of them to jail time would I am sure lead to the changes needed to stop them.
The first and biggest reason is that for most of the time no crime is committed. The whole system is constructed to permit or facilitate the conduct being criticised. (It’s much like all those scandals and rorts by ministers which we are told are ok because ‘no law was broken’.) The Big Four accountancy firms and their mates pay our political parties to keep things that way, and they get a remarkable bargain for their money. They also work hard at cultivating close relationships with ministers and will, for example, donate their company’s services to assist influential politicians or offer comfortable sinecures to helpful politicians when they leave politics. There is no sign of any will to take punitive measures against them even when it is possible, beyond occasionally imposing a fine for the most egregious conduct. The best example of the relationship between these firms and our governments comes from the appalling debacle that was the collapse of Enron, assisted by the Arthur Andersen accountancy firm. This exposed the horrifying possibility that all partners in such an accountancy firm could be jointly and severally liable, personally, for the losses when their auditing was so dreadfully bad. The governments’ response was to invent a new sort of legal partnership with limited liability so that the partners’ personal wealth was no longer at risk. So that’s all right.
One of the Keynote Speakers at IOSCO’s Sydney Conference in 2000, was the then Chairman of the SEC. One of his major warning points was exactly that conflict of interest.
Given the scandals in the decades following, it would appear that he was only invited to give the Conference some credibility.
The then chairman of the SEC was Arthur Levitt. I was at that IOSCO conference and remember his speech and that of others well. Levitt was an interesting character. Read his autobiography sometime.
Two things:
1. In case it gets missed, you may be aware that international Big 4 firm “EY” recently had to abandon its lengthy and sophisticated attempt to do voluntarily what you suggest be done statutorily. Enough cardigans in the US firm were unable to stomach the poverty that would result, specifically as a result of their separation from EY tax creatives.
2. Audit (“assurance”) is fiendishly difficult in a substantial minority of engagements. Basically any accountant with the nous to work out what is going on, and the sheer presence needed to get board support for doing anything about it, will already be an investment banker. Pays better and it’s more interesting. Recent big tiicket audit disasters like Carillion (UK) and Wirecard (Germany) illustrate.
Thanks, that’s interesting. Your first point is an example of a problem that arises in all sorts of guises, where anyone attempting to do the right thing voluntarily is quickly undermined and out-competed by those who are less fastidious. The only effective answer is suitable regulation with effective enforcement to keep everyone on a level playing field.
Your second point raises the question of what would happen if there was no choice about finding capable independent auditors even for these difficult cases. If those companies could not find a work-around that allowed them to dodge their legal obligations, they would have to either increase the fees they pay until they can attract the calibre of independent accounting professional who could do the job, or else accept that their corporate structure is untenable and must be simplified because no auditor was willing to sign off the accounts.
Increasing fees is the nub. They’re paid by the examined party and generally suppressed by being “put out to tender” every so often. Confluct if interest right there.
Plausibly, the fee will often enough be lower than would be required to attract people sharp enough to manage the trickier audits. Which is where the cross-subsidy of lucrative non-audit advice work comes in, and I imagine this was the hill that the EY US audit partnership chose to die on.
* conflict of. I’m not a kiwi.
It’s out of control and has been for some time. I worked for a recruitment firm (back during the initial Howard-era outsourcing craze) which faithfully assured several central agencies that all its staff were security-cleared while doing those departments’ HR and recruitment (yes, HR!). In fact, the only staff member doing the work was a Kiwi citizen, therefore didn’t qualify for a clearance, so they hired me as I had one.
Nowadays, numerous recruitment firms win spots on government recruitment “panels”. I’m a sole trader (scribe/recruitment) so I can’t be on a panel. So these recruitment firms get asked to provide scribes for recruitment support; they don’t have any scribes and many of them don’t even know what a scribe is.
So off they go and do word searches on LinkedIn and Seek, find people like me with “scribe” in their bio and send us messages. If we say “yes”, we get the job. That’s all that’s involved.
Then we do the job, and the only involvement from the recruitment firm is that they send the department a bill, and then pay us a small portion of that. And this nonsense is happening across the board.
As Tony Abbott said “whose side are you on”. The degradation of the public service ramped under him. PWC helped the rapacious tax dodging Google, Apple, Amazon and maybe Facebook. They all pay virtually no tax here.
They pay little tax because they don’t really do anything of substance here. Selling iPhones made offshore is a low margin business.
It’s the US taxpayers who are the ones getting properly ripped off. That actually suits us fine because the services for the Google etc are somewhat subsidised by the US taxpayer.
“Firms involved in audit, taxation, financial planning and the like should face severe fines to deter them from even thinking of going astray.”
Not fines. They should suffer jail time.
Maaates. Ziggy Switkowski leading an independent (Independent, INDEPENDENT) review into PwC? Sounds like the beginning of a joke. I’ll await the punchline but something tells me I won’t be laughing.