Big Four consulting firms ‘operating in the shadows for too long’ as Senate committee demands new rules for government contracts

by Admin
June 12, 2024

A Senate committee is calling on PwC to disclose the “names and positions” of the staff involved in its controversial tax leaks scandal.

It also said new clauses were needed in government contracts that explicitly require consulting firms to act in the public interest when they provide services to government.

The requests form part of 12 recommendations from a final report by a federal parliamentary committee that has investigated the federal government’s use of private consulting services.

The inquiry was launched in the wake of the PwC tax leaks scandal in early 2023, where it was discovered the firm leaked sensitive Australian government information to large corporations, including Google.

“Australia’s spending on consultancy services is proportionally greater than any other country,” the final report said.

“In the past two decades the Australian government has relied increasingly on consultants to undertake work for the Australian Public Service (APS), with the bulk of work performed by the Big Four consulting firms (Deloitte, EY, KPMG, and PwC).

“Increased use of consultants has limited the capability growth of the APS, given rise to occasions of serious conflict of interest, and been accompanied by questions about transparency.

“It has also resulted in enormous costs to the APS for work that is often opaque and, in some instances, raised genuine questions regarding value for money.”

Other recommendations in the report include that a formal review be undertaken into the “legislative frameworks” and “structures of partnerships” in Australia, with a particular focus on partnerships in excess of 100 partners.

“The consulting sector has been operating in the shadows way too long,” Labor Senator Deborah O’Neill told the ABC.

“Since this inquiry has commenced … on 15 February 2023, we found out so much more about the way these shadowy conglomerates are working in our Australian Public Service,” she said.

However, in additional comments appended to the report, Greens senator Barbara Pocock was critical of the way in which the public service has been eroded in recent decades as Australian governments have become over-reliant on consultants, and said the recommendations in the report don’t go far enough.

“They do not address the magnitude and scope of the problems this inquiry has uncovered,” she argued.

“Specifically they do not address the issue of political donations by big consultants, the revolving door in and out of government, the inadequacy of penalties for PwC, the pressing need for structural reform to cap big partnerships’ size, and to address conflicts of interest and the opaque nature of big partnerships.”

Australian public service ‘infiltrated’ by consultants

In the report, Labor Senator Louise Pratt and her colleague Senator O’Neill said the committee documented the “wide range of ethical failures” in Australia’s consulting sector.

They said the PwC tax leaks scandal, and the wave of ethical failures later exposed at other large consulting and audit firms, had “struck at the very core” of Australians’ faith in the integrity of corporate Australia, and of the way in which such entities engage with government.

They said the scandals were a long time coming.

“The conditions for consultant infiltration of the Australian Public Service (APS) did not occur spontaneously, as the Abbott, Turnbull and Morrison Coalition governments instituted policies that directly undermined the APS, and by extension, the integrity and security of our government departments and information,” they said in the report.

“The Coalition instituted an APS average staffing-level cap, which undermined the capacity of the APS to undertake even key government functions, and saw a dramatic increase of the use of consultants under Coalition governments.

“Australian government spending on consultants tripled between 2010 and 2020 to over $1 billion, and under the Morrison government in 2021-2022 the five largest consultancies amassed $2 billion in contracts,” they said.

The report said the growth in expenditure on consultants had approximately trebled every decade for the past 30 years.

What recommendations does the report make?

The report makes 12 recommendations.

It recommends that PwC publish accurate and detailed information about the involvement of PwC partners and personnel (including names and positions) in breach of confidential government information.
It recommends that the minister for finance be required to publish biannual statements on the government’s expenditure on all consultancy contracts, worth $2 million or more, by APS departments and agencies.

It says those biannual statements should include details including their dollar value, duration, firm or entity providing the work, what the work is supposed to deliver, and any matters of probity or conflicts of interest that have arisen in the conduct of the work.

The report recommends that the department of finance develop a central register for conflicts of interest breaches by contracted parties.
It recommends that the department of finance should update the “contract management guide,” and its “supplier code of conduct,” to require that government contracts include a clause that requires service providers to act in the public interest when they deliver work for the government.

On that point, the committee heard evidence from stakeholders that private consulting firms were motivated by profit, and that their values were not always aligned with the public service, which needed correcting.

The report also recommends that the government commissions the Australian Law Reform Commission, or other appropriate body, to undertake a review of the legislative frameworks and structures of partnerships in Australia with particular focus on partnerships in excess of 100 partners.
It also recommends that the department of finance needs to improve the training of APS officials who are responsible for procuring the services of private consultants to ensure that officials have to ability to know if the work their are procuring is delivering value for money.

PwC Australia says it will consider what the report has to say.

“We acknowledge the Senate’s final report into the management and assurance of integrity of government consulting services, and will consider the report’s content,” a spokesman said.

“PwC continues to make progress on delivering on our commitments to change. This includes significant steps to enhance our governance, culture and accountability, and we continue to work hard to rebuild trust and confidence with our stakeholders.”

Why Greens say recommendations don’t go far enough

Australian Greens Senator Barbara Pocock, a former Reserve Bank economist, said the Australian government needs to go much further if it’s going to reform the sector properly.

She said PwC should not be allowed to tender for government work until all matters arising from current investigations into the organisation are completed (for example, by the Tax Practitioners Board, the Australian Federal Police, the Tax Office, and the National Anti-Corruption Commission).

She said in view of its misdemeanours in the misuse of confidential information, PwC should be excluded from government contracting for five years, along with its previous CEO, Luke Sayers.

She said the Australian government should also require departments and agencies to reduce spending on external services by 15 per cent each year for five years, and to offset that decline with growth in public sector capacity.

She said employment numbers in the APS should be allowed to grow at least in line with population growth, to rebuild the government’s capacity to deliver the services Australians actually want.

“Beyond the specific instances of bad behaviour, there is this broader systemic issue of the fact that consultancies have become such a huge shadow workforce for government,” she told 7.30.

On the matter of political donations, she said any entities tendering or contracting to the Australian government should be banned from making political donations (direct, indirect, in-kind, pro-bono or otherwise) in the 12 months before they apply for contracts, while an application is being considered, or 12 months after contract obligations have been completed.

“These firms make very sizeable political donations to the major parties over the last 10 years,” she told 7.30.

“$6.6 million to the major parties as political donations, that’s something that doesn’t pass the pub test.”

She said the government also must stop the “revolving door” by enforcing a one-year cooling-off period for senior staff in a minister’s office from starting work with an entity that has contracted to government in the past 12 months, and for APS senior executives from starting work with an entity that has contracted to government in the past 12 months.

She said the Australian Public Service Commission also needed to monitor and regularly publish data on the movement of personnel to and from the Australian Public Service and the largest 20 contractors to government.

And she said there needs to be a review of current arrangements to ensure that consultants with access to government departments, including Defence, have appropriate passes and access that do not compromise security.

Partnerships under scrutiny, auditors need to ‘get out of consulting’

Allan Fels, former Australian Competition and Consumer Commission (ACCC) chair, said the consulting industry in Australia needed serious reform.

“The problems will only be solved if auditors are required to get back to their traditional business just doing audits, and not being compromised by doing consulting, tax advice, and so on, for the people they audit, or their competitors, or their customers or suppliers,” he told the ABC.

“Get out of consulting.

“We want auditing that is uncompromised by the auditor that is looking over their shoulder and worrying that if they do a tough audit they’ll lose a whole lot of consulting business, tax advisory business, and so on.”

The Senate report said it considered evidence that the Big Four were “partnerships” rather than incorporated companies, and the partnership arrangements produced transparency deficiencies, since they weren’t subject to the reporting, compliance, and governance obligations imposed on companies by the Corporations Act 2001 and were largely outside the jurisdiction of the corporate regulator.

“Additionally, while the Corporations Regulations 2001 (Cth) limits partnerships of legal practitioners to up to 400 partners, accounting partnerships can have up to 1,000 partners. It is not clear to the committee what the justification is for this difference,” the report said.

“It has become clear that large partnership structures, which operate effectively as corporations, and often as multi-national corporations, are not subject to the same regulatory oversight and declaration requirements as those constituted under a corporate structure,” it said.

Mr Fells said those partnership arrangements needed further scrutiny.

“Clearly the partnership arrangements have enabled tax avoidance. That should be stopped,” he told the ABC.

“They may need to put the partnerships onto a normal corporations law basis, or some other similar solution. They’d then be taxed on a company basis, it’d be more difficult to avoid tax,” he said.

Posted 5 hours agoWed 12 Jun 2024 at 6:09am, updated 2 hours agoWed 12 Jun 2024 at 9:43am