Australia rolls back consultants’ influence after PwC tax leaks scandal

The consultancy industry’s grip on Australia’s public sector is set to be loosened substantially, as a tax leaks scandal involving PwC prompts the government to reverse a trend that has been condemned as ‘privatisation by stealth’.

With the Big Four players PwC, Deloitte, EY and KPMG dominating, Australia’s consultancy sector has grown to become the fourth largest in the world by revenues, behind only the US, UK and Germany, according to The Australia Institute think-tank.

Its influence on government policy has been thrown into stark relief by the PwC scandal, involving one of its partners Peter-John Collins. He had leaked to colleagues confidential information gleaned during Treasury discussions in 2016 over the development of laws to stop multinational companies avoiding tax, an act that PwC has admitted was a betrayal of the trust placed in it.

“Having the right consultancies on tax law can be very useful,” said Max Bruce, an accounting lecturer at the Australian National University, on the decision to bring in PwC for its expertise. “But judges and academics may be more appropriate in the development of tax laws rather than firms with a clear vested interest.”

Collins was banned from acting as a tax agent for two years in February and the scandal erupted in May when the senate published internal emails that showed multiple PwC employees across the world discussing new business that had been won on the back of the guidance he had provided, with plans to win more as part of project ‘North America’.

The ruse was spotted and stopped by Australia’s tax authorities. They have argued that subverting the tax avoidance laws would have cost the taxpayer A$180mn ($120mn) a year.

The affair has provided ammunition for the Labor government as it looks to wind back the influence and cost of consultants in favour of a stronger public service. “They can now go to the binary option — a larger public service versus these consultancy issues,” said Bruce. 

Government departments have now enacted a shadow ban on awarding new work to PwC. Some companies and a growing number of pension funds have followed suit. Pressure has continued to build after a new senate inquiry into the entire consulting industry took place last week. 

Deborah O’Neill, the former school teacher-turned-senator who released the emails, said that the PwC scandal was only “the tip of the iceberg”. She highlighted issues such as a “revolving door” between government departments like the Australian Taxation Office and Big Four consultants, along with the use of legal professional privilege by consultants to not disclose information such as client lists, which she compared to the “cloak of invisibility in Harry Potter”.

“It’s the contagion effect. It’s like a disease and it will spread,” the senator said. 

Andy Schmulow, an associate professor at the University of Wollongong’s school of law, said there was a strong temptation by profit-driven partnerships to misuse information when they were brought into the “inner sanctum” on issues like tax law. He said he experienced pressure in his previous career as a consultant to show his colleagues drafts of confidential work he was doing. “It was like the Wild West,” he said.

The mood at PwC is grim, according to a partner working at the firm who did not wish to be named, with dozens of colleagues looking to leave in the wake of the scandal. Anger has built in recent weeks over how the affair has been handled, with much of it directed at the former management team of PwC. Tom Seymour, who was chief executive of PwC Australia, stepped down in May after admitting that he had received emails regarding confidential government information.

The effects are also being felt by the wider consulting industry as the Labor government starts to rebuild public sector expertise after decades of what Schmulow called “the slow-motion privatisation of the civil service by the big consultants”. 

Figures from the National Audit Office show federal government spending on consultants reached A$888mn in the 2022 financial year, up from A$352mn in 2013. The Big Four consultants won the lion’s share of contracts over the nine-year period, raking in an aggregate A$1.3bn, according to the NAO. 

But the tide has started to turn as Labor has cut back, with government spending on major consultants and auditors reported to have more than halved year-on-year so far in 2023.

There have also been moves at state level, with New South Wales, Australia’s largest by population, on Thursday imposing a three-month ban on PwC working on any tax-related contracts. Finance minister Courtney Houssos said the move was a “proportionate response” given the investigations surrounding PwC. 

Houssos is a member of the state’s Labor government, which was elected in March and pledged to cut back on spending and use of external consultants to free up funds for essential services.

PwC’s rivals also flinched when the federal police were asked to investigate. Deloitte’s Australian leaders sent an internal email regarding the scandal saying it was “deeply troubling and disappointing and is justifiably attracting significant scrutiny and reaction”.

Andrew Yates, chief executive of KPMG in Australia, appeared before the senate last week and described the actions of his rival as “clearly unethical and unacceptable” and “disturbing”. Yates defended his industry, which he said employed tens of thousands of people in Australia who had done nothing wrong. 

The CEO said he was open to stronger regulatory oversight of the consulting industry and detailed his own firm’s recent scandals. They include a contract with the state of New South Wales where its consultants were working with two separate departments competing for the same tender, creating a conflict of interest. KPMG was also at the centre of a storm in 2021 when it was revealed that 1,100 of its staff had cheated on exams designed to ensure that its consultants acted with integrity. 

The government has moved to strengthen the powers of the Tax Practitioners Board — the body that banned Collins in February — with measures such as a dedicated budget for the watchdog and the closure of loopholes that have been exploited by the consulting industry. It has since said that it is open to further action, as the fallout from the PwC scandal continues.

For some, it has provided an opportunity to highlight the “cross-contamination” between the auditing and consulting functions of the industry and to question the incentives for those that have been driven by financial gain at the expense of public interest.

“Those that put the love of money above integrity have had a field day,” said O’Neil. “PwC traded off its core values.”