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This week’s spinoff of PwC’s government services to private equity buyers leaves doubts about the effectiveness of the consultancy’s purge, and how the industry might be reshaped. By Mike Seccombe.

PwC’s ‘phoenix operation’ draws criticism

Senators Deborah O’Neill and Barbara Pocock.
Senators Deborah O’Neill and Barbara Pocock.
Credit: AAP Image / Mick Tsikas

This week, the Big Four consultancy PwC “exited” another eight senior partners from the firm, as a result of the ongoing tax leaks scandal. Was that enough to satisfy Senator Deborah O’Neill?

Even before I had finished asking the question, she shot back: “No.”

Next question: Did she have any confidence that some of those bad apples would not bob up again in Scyne Advisory – the new entity onto which PwC is offloading its government work, along with an estimated 130 partners and 1750 other staff, for the bargain-basement price of $1?

Same answer: No.

The Greens senator Barbara Pocock has an equally firm view. Asked if she is confident that all those culpable in the PwC scandal have been identified and removed, Pocock says “absolutely not”. And for that reason, she says, “we just don’t know” if any are among the people transitioning from PwC to Scyne.

Both O’Neill and Pocock have been the key inquisitors during the senate finance and public administration references committee’s investigations of PwC, which resulted in a report late last month titled “PwC: A calculated breach of trust”. It was utterly damning.

It traced the behaviour by the firm stretching for almost a decade, beginning in December 2013, when one of PwC’s senior partners, Peter-John Collins, signed a confidentiality agreement with the federal Treasury, and became part of an advisory group mapping out Australia’s response to international efforts to prevent multinational tax avoidance.

Collins was effectively a double agent: having been brought in to help government develop new anti-avoidance laws and attended multiple confidential briefings, he passed on his privileged knowledge to others at PwC. And when the new laws were announced in 2016, PwC was already marketing strategies to clients.

Within a few months of the new laws coming into force, the Australian Taxation Office realised something was amiss, but its attempts to investigate were “stonewalled” by PwC’s “incorrect application of legal professional privilege to tens of thousands of potentially incriminating documents”.

That, along with the firm’s “conspicuous failure to report a serious breach of confidentiality when PwC had a legal obligation to do so”, led the committee to conclude “that PwC engaged in a deliberate strategy over many years to cover up the breach of confidentiality and the plan by PwC personnel to monetise it”.

“It stretches credulity that the senior leadership of PwC were ignorant of all this,” the report said.

The fact PwC got away with it for so long raises questions relating to regulatory failure, in particular around the view taken by the Tax Office and Australian Federal Police (AFP) in 2019, after 12 months’ consideration, that despite suspicion of a breach of confidentiality by Collins, there was not sufficient evidence to pursue a formal investigation. Questions have also been raised about the Tax Practitioners Board, which took belated action against Collins last December, but did not further investigate the improper use of the information he provided to others at PwC.

The big lingering question, of course, is: How many people within PwC were engaged in this corrupt conduct or knew what was going on?

Both O’Neill and Pocock believe, on the basis of information coming to them from people within the firm, that the full list is a whole lot bigger than those who have been “exited”.

Pocock accords “no real credibility” to PwC’s internal investigations.

“Eight years this matter’s been unfolding, and we’re still waiting for a comprehensive response. Twelve partners gone, but still no comprehensive picture of what happened,” she says.

“I’ve seen two lists – a list of 36 names and a list of 63.”

The 36 appeared in a document – apparently the early product of the PwC internal investigation – that found its way to the senate committee in early May. She says “less than half” the names on this first list appeared on a second, of 63 current and former partners who received internal emails relating to the tax avoidance scheme.

“Others are not on any list, quite possibly, including people who have left the firm like Luke Sayers, who was the CEO through this whole period, and vigorously protests that he knew nothing about anything.”

Pocock also has her doubts about the AFP, which, having decided five years ago against an investigation of PwC, finally launched one in late May.

She and fellow Greens senator David Shoebridge have raised concerns summarised in a media release last week, which noted “PwC provides audit services to the AFP and … currently has nine contracts worth approximately $7 million with PwC”.

“On top of this, half of the members of the AFP’s internal audit and risk committee are former PwC partners with over 20 years of service with the firm and the AFP’s chief operating officer, Charlotte Tressler, is a former PwC partner with 13 years of service.”

There is also the matter of the relationship between AFP commissioner Reece Kershaw and former New South Wales police commissioner Mick Fuller.

Not only was Fuller a PwC partner in its government consulting practice but, it emerged in estimates, he met repeatedly with Kershaw to discuss a contract for PwC to review the AFP’s operations in the ACT.

“This saga,” said Pocock, “smacks of jobs for mates, with a contract worth $750,000 to review the AFP’s operations in the ACT being awarded to PwC after an undocumented meeting between friends and with no competitive tender.”

There are other questions too, relating to the movement of personnel back and forth between government and PwC, sharpened by the fact the consultancy continues to pay partners after they leave the firm. And then there is the suggestion of political involvement.

“I’ve had many people contact me from within PwC who suggest that – they use the language of a Melbourne mafia – that there was a very tight-knit, reasonably sized group of people who shared social connection, and business relationships, and certainly political associations,” she says.

There is much that remains unclear, yet to be revealed by PwC itself and through the continuing investigations by the AFP, various parliamentary committees and, potentially, the new National Anti-Corruption Commission, which began operation on July 1, and to which Pocock has formally referred the matter.

The investigations may range more widely, too, given calls for a royal commission into the entire consulting industry, including from Brendan Lyon, a former partner turned whistleblower at another of the Big Four consulting firms, KPMG.

 

One thing already is very clear: PwC’s betrayal of trust has rendered it toxic. The federal government has effectively shut the firm out of consideration for new contracts – a huge blow given government work has been worth some $250 million a year to PwC. NSW also announced a partial ban. A recent poll commissioned by The Australia Institute found 79 per cent public support for banning PwC from new government work.

All the above considered, this would not seem a propitious time to establish a new professional services company, particularly one to be staffed by former PwC partners and employees.

But that is exactly what was formally announced this week. The private equity outfit Allegro Funds bought PwC’s government consulting arm for $1, rebadged it as Scyne Advisory (scyne is an Old English word meaning beautiful or fair), and announced it would invest $100 million in making it work.

O’Neill and Pocock, among others, are cynical about PwC’s reason for selling and dubious about how much will actually change as a result of the change in ownership. “Is this a phoenix operation to elude [PwC’s] obligations to staff?” asks Pocock.

“They’re hiving off 1750 people, and a bunch of partners, but a number of things remain unclear. It’s very unclear to me what worker entitlements are going across,” she says. “They will have redundancy entitlements, sick leave, all the usual things that you accumulate as employees. Now, if the river of gold does not return to Scyne in the way they are hoping, they will have changed employer … what’s happened to their entitlements?”

Also unclear, she says, is what happens to the trailing payments PwC makes to retiring partners. Reporting by The Australian Financial Review’s Neil Chenoweth has put that figure at $200 million, and suggests those transferring to Scyne would give them up. If so, however, it’s still unknown how they might be made good for that loss.

“So back of house, you know, there are some real benefits for PwC not having to actually shepherd out of the organisation 1750 workers, not having to look after the trailing income or entitlements or otherwise manage 130 stroppy partners.”

O’Neill contrasts the “unseemly haste to a profit-driven response” of PwC in dumping its government division with its “tardy and highly resistant response to any scrutiny by the media, or by the Australian parliament”.

When the birth of Scyne was announced on Tuesday, she told The Saturday Paper the only thing that had changed was “they figured out that they need to put a judge at the helm of it”. She was referring to the news that the well-regarded former Federal Court judge Andrew Greenwood will chair a “probity conflict and ethics committee” within the new entity.

In fairness, though, Scyne will be different from PwC in a number of important ways. Instead of an opaque partnership such as PwC, Greenwood said, the new outfit will be structured as a company. And instead of servicing both private and public clients, the plan is that it will work only with government.

There was “really too much complexity and opportunity for conflict” in the model under which the big consulting firms have operated – that is, providing multiple services to both the public and private sectors – Allegro co-founder Adrian Loader said in an ABC Radio interview on Tuesday.

Loader promised Scyne’s structure would have “ASX-levels of governance and public sector codes of conduct” and would engage with regulators, report any instances of wrongdoing and provide whistleblower protections.

Although it would inherit former PwC staff, they would not be those who had done “tax work” for the old firm. Scyne would be “100 per cent separated from PwC”, he said, adding that Greenwood and his committee would vet all hires to ensure they are “clean”.

“And if they don’t hit the standards, they won’t be coming over.”

Assuming they want to come, of course. It remains to be seen how many former PwC staff and partners make the transition. At this stage, sources tell The Saturday Paper, the only certainty is that Mick Fuller will not be joining Scyne.

Though Loader described the Scyne model as a “once-in-a-generation opportunity to transform the industry”, good intentions are no guarantee of success. Scyne faces some big challenges. For one, says O’Neill, the sale is predicated on “an embedded assumption” that PwC’s contracts with government “are theirs to transfer”.

That is not necessarily a safe assumption, says Jack Percy, who, as a former chairman and managing director of Accenture Australia and New Zealand, has long experience in the dealings between consultancy and government.

The first hurdle for Scyne, he says, “is that the clients of the existing contracts need to agree that a transfer of ownership is going to be acceptable to them”.

“Government contracts will have some kind of right to terminate – it says in the event of a transfer of ownership.,” he says.

“The second hurdle is going to be winning in new work, because most government work is won by being on [procurement] panels. So, you get pre-qualified for doing certain kinds of work. And then, if a government buyer wants to procure work of a particular nature, they find the panel that work is covered by … Each panel is different and has different rules. But basically, if you’re not on a panel you’re on the outer from the beginning; you don’t even get invited to bid for things.” Percy adds that those panels usually run from roughly three to five years, and typically don’t have a mechanism for getting new people on midterm.

“A lot of due diligence goes into the process of getting a company on one of these panels,” he says. “And it’s not something that’s done in three weeks.”

Scyne could possibly seek expedited inclusion by arguing it comprises essentially the same people who did the business for PwC, Percy says. The obvious problem there is the whole rationale for hiving off Scyne is to present the new entity as not being the same as PwC.

These are problems for Scyne, and also for the government. In response to The Saturday Paper’s questions, a Finance Department spokesperson would say only: “The Department of Finance is aware of the establishment of Scyne Advisory. As further details become available, the department will be carefully considering the implications of these changes for existing contracts with PricewaterhouseCoopers Australia and future contracting arrangements.”

Working only for government could have a downside, too, says Jack Percy. Part of the reason governments hire consultants is because they bring insights into how the private sector operates.

“It comes back to the point that if the reason that the government is hiring you is because you’ve got this experience in the private sector, then the new entity is not going to be able to fulfil that. An entity like that is going to be fundamentally less competitive.”

Finally, he says, there is a problem of definition. What is private and what is public sector?

What about a big pathology company, that is a private business but gets a vast amount of its revenue from the public sector. “Which side of the line does that fall?” he asks.

Another example is Defence contractors: “If you do work, sub-contracted to Boeing on a Defence contract, is that public sector or private sector? Because your client’s a private sector company, but the money is all coming from Defence.”

Percy foresees “border disputes” involving Scyne, PwC and other consultancies.

Barbara Pocock identifies yet another problem for the new entrant to the consultancy market: the market is shrinking.

“I believe that the federal government wants to reduce the use of consultants and rebuild the public sector. And that means that the business model of aggressive pursuit of expansion that these Big Four have enjoyed over the last decade is going to at least slow down and quite possibly shrink considerably. So that’s a problem for Scyne.”

She worries, too, that now PwC is on the nose with the federal government, it will respond by “forum shopping … and if the feds shut down, they will aggressively head somewhere else”.

“I think that we need a national cabinet committee [consideration] about how they manage these very large consultancies and what kind of national protocol there should be around conflicts of interest and governance and so on,” says Pocock.

While PwC provides a particularly egregious example, she says, the tax leaks scandal has served to shine a light on “the conglomerate nature of these very big consulting firms and their inbuilt conflicts of interest that are problematic”.

Perhaps the worst scenario for the big consulting firms is one in which the Scyne experiment actually works. That would show that conflicts might be addressed in some measure by simply separating the parts of these giant firms.

Deborah O’Neill notes a submission by PwC to a parliamentary inquiry three years ago “in which they declared how impossible it was for their current business structure to be decoupled, or uncoupled”.

“They said the strands – the assurance strand, the audit entity, the tax advisory entity, and then the government services entity and then the private services entity – how all of them [are] irretrievably meshed … And, you know, gloom and doom, the roof will fall down on us, if we pull any of these asunder.”

Now that has happened. And if PwC proves able to “surgically remove and separate” its public sector work from its private sector work, says Barbara Pocock, focus will turn to “conglomerates that remain with the public sector wings, alongside the private client offerings, with very direct conflicts of interests, many of which are now on the public record”.

The committee is due to report in November on the broader issue of consultancies and their conflicts. It could make for frightening reading for the big firms.

This article was first published in the print edition of The Saturday Paper on July 8, 2023 as "PwC’s ‘phoenix operation’ draws criticism".

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