Secrets and lies: The undoing of global giant PwC

The four global PwC partners who flew into Australia to limit the fallout from the unfolding tax scandal hurting its global business have failed miserably.

Instead, the trip has given them a front-row seat to a show that has escalated from an obscure leak of sensitive government plans to combat corporate tax avoidance to a multibillion-dollar threat for the entire industry.

Former Telstra boss Ziggy Switkowski (left) is reviewing PwC’s troubled Australian operations, while global executives Coenraad Richardson, Diana Weiss and Carol Stubbings deal with the fallout.Credit: SMH

The clear message served up to millions of taxpayers this week is that the respected ‘brahmins’ of the corporate and public sector can no longer be trusted. None put it more succinctly than former prime minister and retired corporate brahmin Malcolm Turnbull.

“[The] breach of confidential information, which I say is mind-boggling, could have absolutely existential consequences for PwC,” he told ABC Radio on Thursday.

As Turnbull points out, the value of a professional services firm like PwC lies in its reputation, and “it’s a problem in professional services firms because you can get one or two partners who do the wrong thing and then that impacts on the reputation of the whole business, with hundreds, if not thousands, of partners”.

“There is nobody in a more trusted relationship ... It’s been a shattering blow to that firm,” he says.

PwC acting chief executive Kristin Stubbins says investigations are under way.Credit: Ryan Stuart & supplied

The blows are starting to add up. PwC and its partners face a criminal investigation by the Australian Federal Police (AFP), and a fresh investigation by the Tax Practitioners Board (TPB) that could see more partners, or even the entire firm, banned from tax advice. TPB kicked off the current scandal by banning former PwC partner Peter Collins for the confidentiality breach, made public in January.

The Department of Finance has effectively banned PwC from any further government work. This removes PwC’s single biggest customer. Meanwhile, corporate giant Lend Lease has “paused” plans to appoint PwC as its new auditor, and on Friday Australia’s largest super fund, AustralianSuper, froze all future contracts with the firm and will review its auditing work with PwC at the end of the year.

Even the RBA boss Philip Lowe said the central bank would no longer use the firm – having embarrassingly used the firm to get to the bottom of its underpayments issue.

The only uncertainty that remains is whether PwC will also be referred to the National Anti-Corruption Commission, which opens its doors for business on July 1.

Then-treasurer Joe Hockey and then-finance minister Mathias Cormann during the 2015 budget. PwC was waiting for Hockey’s corporate tax announcement. Credit: Andrew Meares

With PwC’s interrogation making front-page news, it is hard to believe that the scandal started with the breach of a confidentiality agreement with Treasury way back in 2014.

What has brought it into the living rooms of millions of Australians is not just the shocking nature of the breach but PwC’s behaviour, the web of secrecy, lies and legal deception that kept the scandal hidden until last month.

Ground zero for the scandal was May 11, 2015. It was Joe Hockey’s night of nights as Australia’s treasurer. One of the major plans he unveiled was new legislation to tackle tax avoidance. Hockey specifically mentioned 30 global companies that paid no tax in Australia.

“This is about the integrity of the Australian tax system,” he said.

‘It’s not a healthy culture. I’ve worked for many other companies and firms and there is something deeply wrong with PwC. It’s very dog-eat-dog and that approach is encouraged by management.’

Former PwC staffer

PwC’s tax partners pounced within minutes of Hockey’s announcement with aggressive plans that circumvented the proposed tax. Emails detailing their workarounds were sent to PwC customers and potential customers before Hockey had finished his speech.

To understand how PwC managed to mobilise its highly profitable tax advisory machine so quickly, we need to go back to 2013, soon after Tony Abbott became prime minister and Hockey was installed as treasurer.

Collins, a high-profile corporate tax expert, was invited by Treasury to advise on plans to combat tax avoidance by global corporations like Google, and it included proposed legislation. He signed the first of three confidentiality agreements in December that year.

By October 2014, the tranche of emails released by the Tax Practitioners Board shows that this confidential information was seeping through PwC.

“Because it was provided to us on a confidential basis I ask that you don’t circulate it beyond us or discuss it outside PwC – it would really put PwC Australia and me in a real bind,” one PwC executive said, with name redacted.

A frenzy of activity on both sides of the 2015 budget worked out avoidance plans and which companies to target with what the government had dubbed the “Google tax” - reflecting the role the tech sector giants had among the so-called “dirty thirty”, the worst transgressors on tax avoidance.

“Controversy treasure trove if we can land a few of these,” Collins noted in August 2015.

The new laws came into effect in December that year, applying to tax schemes as of 2016.

An email from January 6, 2016 reported just how successful PwC’s tax partners had been in attracting 14 clients with the firm’s plans to combat the new tax laws, including customers who had not previously worked with the firm. Millions in revenue had already been generated from the work, “heavily helped by the accuracy of the intelligence that Peter Collins was able to supply”, the redacted email said.

Collins was named Tax Institute’s corporate adviser of the year just months later, but his work had been too successful. The ATO had become alarmed at just how quickly these companies managed to come up with structures expertly designed to evade the new laws.

In April 2016, barely a month after Collins won his award, the ATO sent out the first of three alerts. More importantly, it put its formidable powers to use, demanding information such as emails sent between advisers within the firm and also to their external clients.

It took the rest of the year for the ATO to address the new schemes and rescue the $180 million a year in taxes that were at risk.

Tax commissioner Chris Jordan and Finance Minister Katy Gallagher during a Senate estimates hearing.Credit: Alex Ellinghausen

By the start of 2017, the tax office was ready to turn its attention to the peddlers of these schemes: The big four consulting firms, PwC, KPMG, EY and Deloitte. Most of the big firms complied as expected. One did not – as the ATO told Senate estimates this week.

“It appeared our investigation was being frustrated through false Legal Professional Privilege (LPP) claims. We had to issue further notices to obtain information that was clearly not subject to LPP, such as internal PwC emails,” tax commissioner Chris Jordan told estimates this week.

Due to these obstacles, it took the tax office far longer than expected to get the information it needed, but it was worth the wait.

“The content received from late 2017 raised a range of significant concerns about artificial schemes being marketed by PwC. A significant concern also uncovered was the Collins matter: a potential breach of confidentiality in a Treasury consultation process,” Jordan said.

By late 2017, the tax office had emails that indicated Collins had shared confidential Treasury information with PwC partners, and they had hatched plans to profit from it. PwC even went so far as to ask Treasury for one of its generic confidentiality agreements in October 2017.

“We were horrified when we came across it,” ATO deputy commissioner Jeremy Hirschhorn told Senate estimates this week.

But there was precious little the ATO could do – it did not have powers to investigate something that clearly was not a tax offence. More importantly, secrecy obligations prevented the department from sharing any of this information with Treasury, the treasurer, or any other department.

Senator Deborah O’Neill during a Senate estimates hearing at Parliament House in Canberra. Credit: Alex Ellinghausen

Meanwhile, Collins was still attending Treasury briefings, signing another confidentiality agreement in February 2018.

“It’s just embarrassing. It’s implausible. It is absurd for you to know that a breach of confidentiality was underway by the individual involved and [the ATO] cannot make any comment to anyone in Treasury about this,” an exasperated Greens senator Barbara Pocock said in estimates where the explanation unfolded.

The following month, the ATO asked Treasury for Collins’ confidentiality agreement. It was the first time Treasury became aware of “a possible breach of confidentiality”, as its deputy secretary Diane Brown confirmed this week.

“We could not get further details of their concerns because the ATO is subject to strict secrecy provisions,” she said.

The tax office soon contacted the AFP, but fresh problems cropped up. The feds had the criminal investigative powers but the ATO had the information and, once again, couldn’t share much of it.

The AFP has said there was insufficient information in the material provided by the ATO at the time to support a formal referral.

Former PwC partner Peter Collins now faces a criminal investigation into the leak of confidential government plans to combat corporate tax evasion.

The ATO then took the only option left. The matter was referred to the TPB in July 2020, and the tax body commenced investigations into Collins and PwC in 2021. The TPB’s board would finally determine there were breaches in October 2022 – four years after evidence of wrongdoing was discovered by the tax office and eight years after PwC’s first known transgression.

Amazingly, no one outside the ATO, TPB or PwC was aware of the scandal at this stage. Collins was allowed to quietly leave PwC that month. The firm has not said if he is receiving the customary pension of as much as $140,000 a year.

Things took a turn, however, in January this year, when Collins was finally named. But the only penalty imposed was PwC being ordered to carry out additional training on conflict of interest and Collins being banned as a tax practitioner for two years.

But as the details of the offence started filtering out more broadly, PwC, while apologetic, played down the seriousness of the offence.

“We acknowledge the TPB found that a partner of the firm did not comply with confidentiality agreements in relation to a consultation process with Treasury, which occurred in 2014,” a PwC spokesman said at the time.

Privately, PwC told journalists – but more importantly, Finance – that the information was shared with a small group of people within the firm and the investigation did not find that any client arrangements or structures were impacted in connection with this matter.

Technically, this was true, but the most charitable interpretation is that it was incredibly misleading.

Finance Department secretary Jenny Wilkinson cited this exchange when justifying what is effectively a ban on PwC from future government work.

“This additional information raised serious concerns about the broader culture within PwC and undermined our confidence in their earlier engagements with Finance around this matter,” she said.

When PwC Australia boss Tom Seymour described the issue as a “perception problem”, politicians went ballistic.

“What kind of leader would deny those facts and try to construct a story that says this is a single person operating, knowing that 143 pages of emails were likely to be provided into the public place within a couple of weeks?” Labor senator Deborah O’Neill said.

It was O’Neill, through dogged questioning in Senate estimates in March, who yielded the 143-page document which finally laid bare just how brazenly PwC partners had leveraged the confidential information for commercial gain.

Former competition tsar Allan Fels doubts whether PwC’s current plans will be enough to save the business.Credit: Alex Ellinghausen

Seymour later confirmed he was a recipient of the damning emails. He stepped down as CEO and is leaving the firm in September.

But despite standing down a total of 10 partners as of this week, and promising to release the full report of an investigation by former Telstra boss Ziggy Switkowski, there is still no sign that PwC is effectively dealing with the issue that now threatens the future of the firm and its 8000-strong workforce in Australia.

This masthead spoke to dozens of current and former PwC employees about how they viewed the scandal. All spoke on the condition of anonymity due to employment conflicts.

One former staffer described PwC as the worst place they had ever worked.

“It’s not a healthy culture. I’ve worked for many other companies and firms and there is something deeply wrong with PwC,” they said. “It’s very dog-eat-dog and that approach is encouraged by management.”

Another current worker said the firm was being “consumed” by its own spin: “I don’t know what is true anymore.”

But some remain intensely loyal to a firm that has built and fostered the careers of so many board directors, politicians and business executives.

“This will all be shown to have been entirely blown out of proportion next week [during Senate inquiry],” a current senior partner said.

Another former senior partner warned the Senate’s approach appeared to be overly severe given the current lack of evidence of wide-scale misuse of government information: “There were only four key people involved, and they have all gone, is it worth destroying the firm for that?”

It is this attitude expressed by some partners that may be the biggest problem for PwC as its interim chief executive, Kristin Stubbins, tries to find a way to appease its external critics and save PwC’s future pipeline of work. She can’t do much if some partners continue to think it’s just a perception problem.

Observers with expertise in the sector have said the structure of these firms means they lack the governance and central control to be managed properly. To adapt a phrase from the banking crisis, not only are they too big to fail, but they’re too big to control.

Australia’s former competition tsar, Allan Fels, agrees. He doubted whether PwC’s current plans will be enough to save the business and said the impact was likely to spill over to the other big four firms.

“PwC are badly on the back foot and they’ll continue to be with their present attempt to characterise it as just a few people acting wrongly,” he says.

“PwC locally and globally will only get out of this and survive if they take a few more bold steps, including [to] separate consulting and advice, hive them off into separate businesses.”

With Clancy Yeates

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