PwC scandal shines light on clout of professional services

Labor Senator Deborah O'Neill has led the charge: Picture: Martin Ollman

The politicians have had a field day with PwC these past few weeks, calling out the firm’s behaviour with the kind of adjectives really only possible under parliamentary privilege.

Our elected representatives clearly recognise that the professional service firms, including the big four, have no real public constituency no matter how many jobs they create, or causes they support. Calling PwC “voracious, greedy, lying scoundrels” upsets no one other than those leaders left with the unenviable task of rescuing its shattered reputation.

The bigger question these past few weeks has been just how interested our politicians are in any structural change to the sector – not just splitting audit and consulting to avoid conflicts of interest, but perhaps in looking at the size of these behemoths; and the levels of liability and transparency possible in partnerships. An answer came early on Friday morning with news that the federal parliament’s Joint Standing Committee on Corporations and ­Financial Services will hold an inquiry into the regulatory and legal settings and culture of the “audit, assurance and consulting sectors”.

The press release from chair, Senator Deborah O’Neill, specified this was not just about the so-called “big four”, but they will surely be in the committee’s sights, given their size and power.

O’Neill pointed to both the “expansion of consultancies” and their conflicts of interest and released terms of reference for an ­investigation into the structures of the global and national firms, ­including the legal basis for partnerships, hybrids and other ­structures.

It will also look at reporting and transparency obligations, remuneration, cultural practices and at the mechanisms available to governments and others to monitor and sanction misconduct.

Talk about applying a sledge hammer to the “black box” that has allowed the big firms to operate under the radar, their audit functions regulated by ASIC but their consulting work attracting little scrutiny.

The committee’s hearings are likely to be colourful, but these are hard issues – for governments committed to capitalism and free markets. Much harder to deal with than the headlines generated by uncovering the truly egregious and unethical behaviour of PwC, harder too for a government than applying a ban on outside contractors. But a detailed look at structures and scale is long overdue and it’s a fair bet that the big four at least have seen it coming.

In the short term, cutting back on external advisers and avoiding firms that don’t measure up will have a cascading effect on the size of individual shops and, one hopes, on their commitment to managing their ethics. But these firms – with audit functions crucial to good business governance – have been allowed to grow big, powerful and largely unregulated.

It’s heady stuff for those inside the room: the big four in Australia last financial year reported revenues of almost $10bn. Making partner means not just cash, but clout in the big end of town with a clear run after early retirement to the top board seats in the country.

Audit and tax work gives these firms leverage, but the lucrative “side hustle” of consulting means significant influence over the ­direction of business and in turn the Australian economy.

It’s taken a local crisis (there have been arguably worse scandals in some of the firms’ overseas arms) for their behaviour to gain any attention: the pub may be engaged in this scandal now, but interest in the big four has been low to non-existent in recent times.

The firms haven’t minded that in the slightest: what transparency exists is largely voluntary, and too often looks like a public relations exercise. In recent years, under pressure from their young, educated and “purpose-driven” employees, they have become more open about salary and reward structures, and have reported on internal processes around gender, diversity and safe work.

All of this effort to build values and manage reputation makes the failure on tax even more difficult to comprehend. Not to mention the failure of PwC to move into damage control and bury the story. As this week’s Senate report makes clear – it is the firm’s mishandling of the fallout as much as the original sin that is gob smacking. Where are all those HR scripts about openness and damage control when you really need them?

The damage is not confined to PwC, with firms more generally feeling the backlash of lack of trust from clients and, potentially, lack of interest from job talent. Some PwC staff are reportedly already in flight, figuring the firm’s reputation is going to take time to recover. For now, those refugees will be more than enough for the other firms (presuming the newbies pass some sort of ethics exam). But graduates who flock to the big four each year may prove harder to attract in FY24.

There are indications the remaining Big Three are already finding more work coming their way and this is likely to make up for a predicted softening of activity in the public and private sectors in the next financial year. In an industry where winning the big tenders can take money, time and a degree of schmoozing, there are reports that work is coming far more easily. If, as some suggest, PwC decides it makes sense to walk away from government business for a few years, the rest of the sector will benefit greatly.

Unless of course, pressure builds (and not just from O’Neill’s committee) for a repeat of the restructuring that went on 20 years ago after the Enron scandal when many global professional services firms jettisoned their consulting divisions. But the firms steadily rebuilt, with a sort of “consultancy creep”, so the old arguments about conflicts of interest continue to run.

For many, separating audit and consulting is a no-brainer, but there’s also an argument that in a modern economy, auditors operating in intellectual isolation will produce a poorer outcome.

Could structural separation lead to a deterioration in audit quality and standards? The talent, technology and broader view of business generated in consulting divisions is useful, according to some insiders who argue that if the firms split, the audit operations would still need to become multidisciplinary firms, the argument being that you can’t do this work well without expertise in tax, technology, actuarial matters and risk. Stand by for that argument to be pushed by the industry when O’Neill takes submissions.

The sector is preparing for a debate on scale and regulation as the political focus moves from ethics to legals and the professionals could be well ahead of the pollies on this one. After all, the firms have long attracted the best and the brightest: these guys are smart with some well-honed arguments.

This story, arguably the biggest business story of the year, has a long way to run as the NSW parliament’s upper house also pursues government contracts with external operators. If other states follow, the force of public scrutiny is likely to have its own effect on the behaviour of professional service firms, irrespective of any regulatory changes.