After a year of scandals, bad publicity and a carousel of parliamentary inquiries shining a light on the shadowy world of the big four global accounting firms, it’s time for reform.
State and federal governments fork out more than $1 billion a year on auditing and consulting services delivered by the big four — EY, KPMG, Deloitte and PwC.
Yet the structure of these high priests of commerce enables them to shirk more than $100 million a year in tax.
A NSW parliamentary report tabled on Wednesday described the big four as “pseudo-corporations” that should be taxed accordingly.
The NSW inquiry, chaired by Greens MP Abigail Boyd, released a series of hard-hitting recommendations that included requiring the large consulting firms to pay payroll tax on partnership earnings.
Boyd, who chaired the inquiry, estimates that if adopted the recommendations would add between $50 million and $60 million per year in payroll tax to NSW coffers alone — equivalent to more than $200 million over four years. She told parliament the figures had been validated by external accountants.
If the other states follow suit, such tax changes would add up to a significant amount of money that could be used to help fix the public housing crisis or boost a long list of other areas crying out for funds.
“We … recommend that the NSW Treasurer [Daniel Mookhey] advocate to federal counterparts that consulting firms not be excluded from paying company tax. We also recommend that the NSW government introduce legislation to amend the Payroll Tax Act 2007 to require large consulting firms to pay payroll tax on partnership earnings,” the parliamentary report says.
It’s a move the industry will fight hard to stop.
Is lack of competition the problem?
A federal inquiry is set to release a second report into the big four on June 12, with expectations it will also address the lack of accountability, regulation and conflicts as well as a partnership structure that allows these multi-billion-dollar leviathans to minimise tax.
Labor Senator Deborah O’Neill, who has led the charge in the federal inquiries into the big four, said in reference to the NSW inquiry and the ongoing work of the senate, said what’s important is how the public sector has been a weakening of the public sector.
“What we’ve seen through these inquiries, both in the Senate, and now at the state level, is the way that there has been a hollowing out of capacity in the public service through the use of these firms,” she said.
“The scrutiny we have been able to apply, and the response of the Albanese government, means going to a consulting firm is no longer the default for government agencies.
“There is still a role for consulting, where it is in the public interest and can be justified.”
O’Neill added that the committee’s work was focused on ensuring the ethical framework and accountability measures were there to make sure it stacked up for taxpayers.
Against this backdrop, the federal Treasury released a consultation paper last month with submissions to close on June 28.
The consultation paper examines the big four’s structure, the adequacy of governance requirements for large partnerships, the adequacy of current professional standards, regulations and laws — including those relating to independence and the management of conflicts of interest —and the protection of whistleblowers, given a partnership is not a “regulated entity” for the purposes of the whistleblower laws in the Corporations Act.
Treasury is also looking at the lack of competition given the dominance of the big four across ASX-listed companies. To put it into context, in 2022 Deloitte, EY, KPMG and PwC audited 96.5 per cent of the top 200 ASX-listed companies.
But as Treasury warns: “Market concentration reduces choice for directors and shareholders, weakens resilience of the audit sector and creates risks to the supply of high-quality audit services in case of adverse events (such as firm collapses).”
Things have unravelled before
The PwC tax leaks scandal, which involved PwC partners leaking secret government tax plans to help their private clients such as Google, avoid a law they had helped write, exposed serious deficiencies in how the big four are regulated and the power they wield.
Over the course of the year the spotlight turned to the other big four including KPMG and its role in advising a rail corporation set up by the former NSW government to artificially inflate the state budget by billions of dollars.
The conflicts were first exposed by former KPMG partner Brendan Lyon, who joined KPMG in 2018 and advised on the state rail entity known as the Transport Asset Holding Entity (TAHE), which owns significant assets in NSW, including railway tracks, trains, stations, and extensive land holdings including retail spaces.
Things unravelled when Lyon’s report concluded that TAHE didn’t work, exposed the system to safety issues, and would leave the state budget $10 billion worse off than Treasury had claimed.
After Treasury officials failed to get him to change his report, which was highly critical of TAHE, a second report was commissioned, this time with another KPMG partner, who argued the opposite, that TAHE would have no impact on the budget.
The scandal spilled into the public arena on June 2, 2021, and triggered a series of inquiries.
Lyon was constructively dismissed.
But his report would later be vindicated by NSW auditor-general Margaret Crawford who refused to sign off the state’s accounts until they were amended.
Indeed, the former auditor-general, Tony Harris, described TAHE as a vehicle of deception and a sham.
“It’s a financial mirage because you are seeing something that isn’t there,” Harris said at the time. “It was designed to avert the prospect of the state losing its AAA credit rating by creating an apparent surplus through an accounting gimmick.”
More recently the Minns government introduced legislation to shut down the sham and bring it back as a non-profit public asset.
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Strength of the public sector at risk
Abigail Boyd’s inquiry and the May 29 report say the TAHE case study illustrates the damage that can be done when conflicts of interest are not appropriately managed and integrity walls collapse.
“KPMG has since accepted that it made a number of mistakes by failing to appropriately manage the conflicts of interest that existed in relation to TAHE,” the report says.
KPMG said it learned from the mistakes and now used “rigorous” engagement assessment and client assessment processes to manage conflicts of interest.
But the report says the consequences for KPMG have been rather limited other than reputational damage.
“KPMG was not required to pay back the amount it received for the work on TAHE,” the report says.
KPMG has continued to be engaged for government work.
But whistleblower Brendan Lyon paid a high price for exposing the flaws in TAHE’s operating model.
He was bullied, humiliated and eventually lost his job. According to the parliamentary report, he spent at least $2 million in costs adnd earnings trying to defend his position.
An email sent by Lyon to KPMG partners on October 10, 2020, describes the extent of the bullying: “I have been bullied and discredited by certain partners of the firm for almost a year now – without anyone doing anything much about it … while [working on TAHE] … [my team] has been charging the trenches, but we are still full of KPMG-shaped bullet holes in our backs – and it needs to be stopped once and for all …”
The parliamentary report cites other examples of conflicts, and questionable ethical and corporate practices. And in her introduction to the report, Boyd describes the big four’s “insidious and creeping expansion” into the public service had not only drained it of agency motivation and experience but it had threatened the integrity of government decision-making.
“This creeping influence has resulted in a weakened public sector” and it would take time to rectify the degradation of public sector capacity. “This work must begin now,” Boyd says in the report.
The inquiry’s recommendations, if implemented, would have a profound impact on the way the big four do business.
For instance, one of the recommendations is that the NSW Procurement Board (which sets procurement policies and has the statutory power to issue board directions to government agencies on procuring goods and services) ban consulting firms from providing consulting work to government in areas where it also acts as an auditor, has an ongoing client in that area or has worked in the previous 12 months in any capacity for a private sector client that could be affected by the results of the work being undertaken for the government.
Given the extent of its audit clients in the ASX Top 200, along with superannuation clients, if this recommendation was accepted it would effectively stop the big four from doing consulting work for the NSW government. (PwC no longer does work for the NSW government following the tax leaks scandal.)
For people like Lyon, the fear is the end of the inquiries will mean the end of public visibility of the problem.
“The recommendations of the inquiry are sound, but there has been little palpable appetite by the NSW or federal governments to change laws and regulations and enforce penalties for existing wrongs,” Lyon told the ABC after reading the report.
He hopes that changes. If not, it will be business as usual.
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