The $780m target on the backs of embattled consulting giants

When Treasurer Jim Chalmers lifted penalties for advisers and firms who promote tax exploitation schemes from $7.8 million to more than $780 million, he effectively drew a big target on the tax practices of our embattled consulting giants.

To give an idea of the financial chaos this could create for PwC, KPMG, Deloitte and EY, it would have been enough to completely wipe out partner earnings for each firm last year and leave a financial black hole to boot.

KPMG boss Andrew Yates says the firm is not contemplating any drastic moves.Credit: Edwina Pickles

At KPMG, where average partner earnings reached $700,000 last year, each partner would be on the hook for more than $1.1 million to cover a fine of that size. But KPMG boss Andrew Yates says the firm is not contemplating any drastic moves despite the risk profile for its lucrative tax practice soaring into the stratosphere.

“We are very careful with the risk profile of our tax practice … we are not contemplating spinning off our tax practice,” he says.

The proposed fine, which would severely curtail any appetite for advising multinationals such as Google and Facebook on any tax dodges, is just the latest curveball in what has been a tough year for KPMG, and almost certainly for the rest of the industry.

Yates says KPMG’s challenges pre-date the inferno that the entire industry has become engulfed in following the revelations that PwC partners across the globe were implicated using confidential government tax information to hook some of the biggest companies in the world.

“It’s fair to say the last 12 months has been a challenging environment,” he says of a malaise that hit late last year.

“We saw a noticeable change around Christmas time in terms of just how the general sentiment was in our client base.”

KPMG thinks that it may reflect pent-up demand from the end of COVID lockdowns halfway through the previous financial year finally petering out.

Expectations that the momentum would continue were dashed when higher interest rates and inflation started to bite late last year, hitting both corporate deal activity and consulting.

NSW Greens MP Abigail Boyd said her inquiry into the state government’s use of consulting services has been shocked at how the big firms werere effectively policing themselves on conflict of interest issues.Credit: Getty

“It feels like there is still some uncertainty in the environment, not just in our profession, but more broadly,” he says, but stops short of calling a recession.

“It’s definitely a more cautious sentiment than it was a year ago, but it doesn’t feel so dramatic that I think we’re in for a particularly hard landing.”

The consulting industry is facing a different kind of hard landing, with the federal government using the PwC scandal to help wean the public sector off its multibillion-dollar reliance on consultants. It means hypervigilance is the name of the game for any firm looking to retain as much business as it can.

“We’re watching things on a much more frequent basis than we would in a more normal environment. The message that we have put into our teams is we just need to be making sure that work that we are putting ourselves forward for is truly value adding work for the government,” Yates says.

But there is no hiding from the problems facing the whole sector, particularly around conflicts of interest – an issue that is offering other reasons for these big firms to split their business.

EY global has just rejected a proposal from US private equity group TPG to break it up and take a stake in its consulting business, according to a statement reportedly sent to its partners last week.

TPG tabled an offer in July, just months after the collapse of EY’s own attempt to spin off the consulting business with a $US100 billion enterprise valuation.

It’s not the only big four firm that was facing break-up questions this week.

In Australia, where PwC was forced to spin off its government business for $1 to save it after PwC was effectively banned from government work, Deloitte was asked in a NSW parliamentary inquiry this week whether it should also consider such a move.

“From our perspective, we believe that the value that we can provide government is to have the capacity to bring global expertise and private sector expertise as, and when, required,” Deloitte chairman Tom Imbesi said.

It may not have a choice, though, if big firms like Deloitte fail to convince the state and federal governments that it is not “walking both sides of the street” by using information picked up from its government work to push business with its private sector clients.

Greens Senator Abigail Boyd brought up an example last week concerning EY’s audit work for Santos at a time when it was advising the government on a report that would substantially affect the industry.

Deloitte said it did not see this as a conflict, but Boyd queried whether this was an issue that should have been determined by the government.

“I think, what we are increasingly shocked by is that this is not a decision that gets made by the people actually hiring consultants, but actually by the consulting firms,” Boyd said.

“And there’s that lack of transparency then, where you’re not held accountable for – if, in fact there is some mismanagement of that potential conflict of interest.”

Imbesi acknowledged that Deloitte might need to change this approach where it effectively polices itself.

“If there was a recommendation to provide more information at that (government) engagement stage, I think we would be open to that,” he said.

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