Will PwC split its business to cool the wrath?

Kristin Stubbins . Illustration: Sturt Krygsman.

PwC Australia lost its social licence to operate last year when it failed to blow the whistle when knowing its tax partner Peter Collins faced losing his licence over repeated breaches of confidentiality, and the question now is what changes will be inflicted across the industry.

Questions are already being asked about hiring politicians and every other obvious conflict but the big one remains, being audit independence and whether like EY it will see the commercial merit in a split before Canberra forces its hand.

Acting PwC chief Kristin Stubbins comes to the job after the obvious mishandling of the issue by her predecessor Tom Seymour, who remained mute even when Collins formally lost his registration.

Seymour, like his predecessor Luke Sayers, came from the infamous tax division. Sayers was a manager in the tax division for three years.

Arguably, PWC’s social licence was gone a decade earlier when the so-called buffers like whistleblowers in the firm should have been shouting from the roof tops about the confidentiality breaches which were actioned to brief clients.

Treasury was awake to it but also didn’t shout about it and transparency in this process must also be improved.

Just what sort of decrepit culture existed at PwC under Sayers is now sadly plain for all to see.

Stubbins is a rarity, coming to the top from the audit division.

No matter what legal issues confront the firm the market is already dictating events with federal and state governments making clear PwC will not be rehired any time soon and, worse, corporate clients are preparing to walk for fear of being left in limbo.

If PwC audits your books then question whether and in what shape the firm will be this time next year, and the law and shareholders say you need an auditor.

Rivals report fielding calls from corporates to test the market and to seek advice on what to do.

PwC partners and staff in tax and consultancy are also seeking alternative employment.

The market may be working but with the politicians in overdrive milking the crisis for all they can the regulators won’t be far behind.

This is why PwC in New York stepped in to help convince Seymour of the need to step down because it too is worried where this stench will spread as clients are ensnared.

This is an issue of corporate survival.

When rivals front a parliamentary committee in scheduled hearings later this month they will vent their views on PwC but also know the reality is that the stench has spread.

Globally EY attempted a pre-emptory step a year ago when it signalled an intent to split off its consultancy arm.

The move was made for purely commercial reasons and its better to do so first before the regulators move in and tell you how to do it.

This column has long championed audit independence to no real avail. But here was a big four firm acknowledging the commercial sense in making the move before the regulator stepped in, albeit unsuccessfully in part because market conditions were not there to float the consultancy arm.

The reality is that auditors are going in to commercial pitches with one hand tied behind their backs because the prospective client is a tax or consulting client and vice versa.

The accountancy profession has long mastered conflicts but now the regulators seemingly have no choice.

Audit independence may be a different issue to blatant conflict of interest breaches but the profession is now a political scapegoat, which means questions are being asked about every aspect of it and let’s face it the masters of managing conflicts have some obvious soft spots.

Ironically, public servants and politicians may have turned to consultants as a means to avoid taking responsibility for decisions, but now big four accountants are the scapegoats and as representatives of the big end of town they have nowhere to hide.

The same fate rested on the banks in 2016, at the very same time PwC was breaching commercial confidences, when then prime minister Malcolm Turnbull used Westpac’s 199th birthday lunch to lambast the industry’s ethics just weeks before a royal commission under Ken Hayne was launched.

Ironically enough as the focus on audit independence comes to centre stage, the profession in the last few years has quietly bought insolvency practices back under their wings again, with PwC buying PPB in 2018 and KPMG buying Ferrier Hodgson the year later.

Insolvency was split out post-Enron over potential conflicts with bank audit clients, as the banks are the ones who tend to select the corporate undertaker when loans are in trouble.

If the undertaker was the same entity as the external auditor, it was not a good look, so it was decided best to split ranks.

Thinking the coast was clear again PwC jumped back in to snap up leading insolvency firm PPB and KPMG followed snapping up Ferrier Hodgson.

The white flag started flying again after the Federal Court cleared Korda Mentha to be administrators for the Ten Network in 2017 even though it was advising the company before it hit the wall.

Back in 2013, 2016 and 2018 when the conflict breaches were found to have occurred was the most appropriate time for PwC to act, but certainty by last year when the Tax Board was investigating was the final time to act if any credibility was to be saved.

The cover up is always worse than the offence as Arthur Andersen found out when it collapsed in 2001 after being found guilty of shredding documents.

PwC may be the focus today but the industry rightly worries it will also be caught.

Quick fix to land clearing

A coalition including the Australian Carbon Climate and Biodiversity Foundation (ACBF), Green Collar and the ANU team including Professor Andrew Macintosh and Dr Don Butler are working to try to win government approval to get carbon credits for not clearing land.

Since European settlement Australia has lost 104 million hectares of forests, 10 million since 2000 and 2000 hectares a day, placing Australia as the only OECD country to rank in the world’s top 10 land clearing countries.

Land clearing accounts for 37 per cent of global carbon emissions and in Australia it ranks third behind energy and transport.

It needs to be stopped and the trick is to give farmers a commercial alternative to land clearing.

Carbon credits would be granted under three main conditions – the farmer has the right to clear the land, it has been cleared at least once in the last 20 years, and the ground is flat.

The ACBF is run by Lyndon Schneiders and its board is chaired by Ken Henry and includes BCA boss Tim Reed and Macuarie’s Elizabeth O’Leary.

Its aim is an actionable plan to protect and regenerate our forests, working to undo record biodiversity loss caused by clearing and logging for cattle grazing and wood products.

Clock ticks down for Brookfield

Brookfield is in the final stages of clearing its draft submission to the ACCC to seek authorisation for its $18.7bn Origin acquisitions.

There is a pre-submission round to ensure all relevant material is prepared and with a week or two the three-month time clock formally starts.

on them.