KPMG whistleblower Brendan Lyon’s lawsuit to try end big four capped liability protections

Brendan Lyon is lawyered up. The KPMG partner turned whistleblower has just launched legal action to try to scrap liability protections enjoyed by big four schemes under laws he describes as outdated.

PwC Australia’s Sydney headquarters at Barangaroo. Picture: NCA NewsWire / Damian Shaw

Former KMPG partner turned whistleblower Brendan Lyon has launched legal action in the Supreme Court that could force partners at big four professional services firms to be personally liable for the estimated $8bn of consulting work they do each year.

Mr Lyon on Tuesday filed his case against the Professional Standards Council and Chartered Accountants Australia.

If he is successful, KPMG, EY, Deloitte and PwC have the most to lose as the main consulting revenue earners.

The big four have been in the political spotlight since a partner at PwC shared confidential information provided by the federal government about laws designed to reduce corporate tax evasion.

“The last five years have seen the exposure of fundamental breaches of professional ethics and standards by some CEOs and partners across the big four, but no consequences for anyone,” Mr Lyon told The Australian.

Brendan Lyon is now a professor at the University of Wollongong. Picture: John Feder/The Australian

“If a lawyer breaches legal ethics they are struck off and can no longer practice, in the big four profitable misconduct sees no external disciplinary action by Chartered Accountants Australia & New Zealand and instead often sees the guilty promoted because they’ve delivered huge fees.”

Mr Lyon was a whistleblower on a different case involving KPMG.

He was caught between two warring government departments and what he saw as an attempt by some partners to rubberstamp a flawed NSW Treasury model about the state’s rail operations, known as TAHE. The Auditor-General backed up Mr Lyons’ opinion on the financial burden to the state.

Today, he is a Professor of Practice in the Faculty of Business and Law at the University of Wollongong.

“Big four consultants are not providing a public interest service like audit, indeed the PwC and the TAHE matter in NSW showed big four consulting advice often acts directly against the public interest by reducing multinational tax or hiding costs from the budget,” said Mr Lyon.

He believes Australia’s unique laws that cap professional indemnity payouts, via statutory liability limits, has led consultants to “operate with impunity”.

Legal professional schemes cap damages and limit the number of claims that can be made against a scheme member for professional negligence.

Mr Lyon describes the case as a “public interest” action that he will receive no monetary benefit from, if successful.

He will be asking the NSW Supreme Court to examine the legitimacy and coverage of laws protecting the big four.

Australia’s capping scheme sprung from the $5.3bn collapse of insurer HIH in 2001. The HIH collapse led to a short-term insurance crisis in Australia. Treasury estimated $2bn of construction was placed on hold when builders lost their insurance, Australian Rugby Union cancelled games, and many professionals, including accountants, temporarily lost their insurance cover.

Professional standards legislation was enacted which allowed approved schemes to cap damages in negligence claims.

But what it’s meant in practice is that customers – be they corporations, small businesses or government – are bound by the limitation that a successful claimant can only recover up to the statutory cap of $20m per engagement, leaving large losses uncompensated.

Realistically, $19m would be covered by the insurer and $1m by the firm. For a firm with 1000 partners that would mean just $1000 of liability each.

“The laws were intended to cover only Chartered Accountants with practising certificates performing public interest audit and accounting services, but were quietly widened in 2007 to also cover consultants and consulting services in big four firms,” said Mr Lyon.

The special “Australia only” deal is for firms that have either an auditing practice, such as the big four, or a receivership division.

Brendan Lyon. Picture: John Feder/The Australian

It means firms like McKinsey, which only offers consulting, are not covered.

“The consequence of the widened protection is that the big four firms operate as unincorporated companies, free of corporations law, are exempt from corporate income and state payroll taxes and do not have to provide audited financial statements of their own,” said Mr Lyon.

His legal action would not impact Chartered Accountants or audit, but would remove the protection of consultants and consulting services.

Before launching his Supreme Court bid, Mr Lyon made a submission to the Professional Standards Council, where he outlined many of the same concerns now put forward. The PSC is responsible for monitoring and enforcing Professional Standards Schemes. Mr Lyon believes these firms should be forced to become companies, which would take away their tax advantages and special regulations.

McKinsey is structured as a company, as is Scyne Advisory, which was formed from the former consulting arm of PwC.

Chartered Accountants Australia & New Zealand and CPA Australia, whose members are covered by the PSA, require strict risk-management, education and conduct requirements in exchange for limited liability.

At a senate inquiry in 2023, KPMG acknowledged its mistakes and backed calls for greater regulatory oversight.

“There have been cases in the past where we have made mistakes,” KPMG chief executive Andrew Yates told a Senate inquiry two years ago. “However, we used what were difficult experiences for our firm as ­opportunities to improve the way we work.”

Deloitte has been fined in other jurisdictions.

Former head of Australia’s PSC, Deen Sanders, admits it might be time for a revision of the rules.

Speaking without knowledge of Mr Lyon’s plans, Mr Sanders, who is a partner at Deloitte, had endorsed the present system when he ran the PSC.

“There is room to be thinking about better regulation, of how we expect professionals behave, and how we can sharpen that,” said Mr Sanders.

In the last calendar year, the big four took in about $8bn in consultants fees, calculated assuming a base case of 80 per cent of their total fees being from consulting and 20 per cent from audit.