Senate debates
Tuesday, 19 November 2024
Committees
Corporations and Financial Services Joint Committee; Report
5:53 pm
Deborah O'Neill (NSW, Australian Labor Party) Share this | Link to this | Hansard source
by leave—I rise to speak to the Corporations and Financial Services Joint Statutory Committee report: Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry, which was presented out of sitting on 7 November this year.
Illuminated on the skyline of major cities across the globe are the alphabet logos of the so-called 'Big Four' accounting and consulting firms, KPMG, Deloitte, EY and PwC. Their colourful banners might catch the eye but most Australians know little of these massively influential entities that are so important to the proper functioning of our financial markets. For those of us who use their services, and that in fact is every working Australian, it is almost impossible to think there was a time when they did not exist. These entities have entrenched themselves as the trusted and independent ethical providers of audit and assurance services who purport to verify the truth and accuracy of financial statements of companies of all sizes. Therefore, it's of paramount importance that there is trust in the auditing services provided by these firms and that their function of providing independent truth is not marred by their own opaqueness.
Given every working Australian has superannuation, we each have a stake in the investment decisions being made on our behalf based on the audited financial statements that inform the decision-making of the superannuation trustees, superannuation holders through SMSFs and in any form of superannuation. The investment is determined on the basis of what these companies say. What EY, Deloitte, PwC and KPMG do has real impact on our lives, particularly for our retirement, and I remind Australians that we have $4 trillion under management. This is no small thing.
The big four are all partnerships. Together they audit 193 of the top 200 companies in Australia. What they do matters. It matters to all of us. In the course of this inquiry, we heard from many former senior members of this profession who understood their centrality to the financial ecosystem. They were deeply proud of that work in previous times, but many of them bemoaned the current state of their profession and speak of an ethical decline and an increase in risk to everyone who relies on the integrity of audit.
Colleagues, the reality we faced when we commenced this inquiry was to have a look at the challenging behaviours that manifested themselves through evidence that we received in the Senate. The final report that we adopted without dissent did have additional comments on a couple of matters that will be probably spoken to by my colleague Senator Barbara Pocock, with regard to the Greens, and Senator Scarr from the Liberal National Party. But the inquiry delivered an essentially unanimous report with 40 recommendations. We held 12 public hearings. We received 83 submissions and we published 196 responses to questions on notice. Those 40 recommendations directly respond to regulatory, cultural and legislative issues raised throughout the course of the inquiry.
On the evening of 15 February 2023, in response to my question to the CEO of the Tax Practitioner Board, Michael O'Neill, it was revealed at the Senate economics committee in estimates that Peter-John Collins, as a partner at PwC, conspired, along with 20 or 30 people—that was the evidence on the night—to monetise confidential Australian government information for the benefit of PwC and its clients. Following this revelation, questions on notice to the Tax Practitioner Board led to the release of 144 pages of internal emails detailing the depths of that deceit and a disturbing cultural failure within the major international accounting and consulting firm. The emails revealed the hidden inner workings, the cultural realities of one of the most important entities in the architecture of the Australian financial sector. The resulting scandal shook corporate Australia to its core as PwC, those three letters, became synonymous with a profoundly disturbing breach of trust.
The public outrage that has ensued has ensured the strength of this largely non-partisan and deeply comprehensive parliamentary response, of which this report is a central component. So egregious and shocking were the PwC revelations that the Albanese government implemented significant legislative change as the Treasurer, the finance minister, the Attorney-General and the Assistant Treasurer introduced immediate reform. But still, as this report indicates, there is much yet to be done.
Concerningly, the committee documented a broad and relentless pursuit of profit at any price with the revelation of practices that jettisoned even the most basic principles of ethics and professional accountability by far too many in this sector. That sort of culture thrives on conflicts of interest, which are frequently ignored, ill-managed or even exploited.
With regard to the structure of these firms, the committee has recommended that the proliferation of partners be recalibrated to match the number of the legal industry and to realign it to a more operable form of joint and severable liability. Further, the make-up of multidisciplinary professional services firms should also be altered with the operational separation of the audit component of the firm to be utilised at the exclusion of other services to the client. These recommendations will change the shape of the industry and implement evidence based solutions that have proven successful in other sectors and jurisdictions. Such changes, as recommended by the committee, will return the focus of these very important entities back to providing objective and independent services and eliminate many of the current and prevailing inherent conflicts of interest. On the regulatory side of the equation, mechanisms to strengthen the standards, liabilities and independence of boards that actively monitor and enforce compliance should be considered by the Australian government. It is also essential to promote healthy competition within audit and consulting sectors. The recommendations of the report have been framed by an explicit intention to protect the viability of smaller entities as we move to an increasingly robust regulatory framework. The committee also recommends increasing the small and medium sized consultancies, particularly those that solely undertake government work as a means of uplifting these businesses and reducing potential conflicts of interest among consultants undertaking government work.
Throughout the course of the inquiry, the committee contended with varying levels of transparency and willingness—or unwillingness, I should say—among large firms with respect to their engagement with the committee. In particular, engagement from PwC's past and present leadership proved to be extremely challenging and highlighted an absence of meaningful commitment to reform. Evidence given verbally or in documents was far too often constructed in compromising half-truths and obfuscation. Far too often, evidence was provided only after protracted delays and resistance to requests from the committee. This behaviour failed to meet the standards required by the parliament and also fell short of public expectation. The inability of the PwC firm's former CEOs, Mr Luke Sayers and Mr Tom Seymour, to robustly describe, evaluate and take sincere accountability for the culture they created is a failure of leadership by any measure. Further, Mr Sayers's and Mr Seymour's relationship with the treatment of the Commonwealth officials of our regulatory bodies, especially the ATO and the Tax Practitioners Board, revealed that same practice of ignoring, avoiding and delaying proper scrutiny that this committee has had to confront and manage. It has to stop. It has to change.
I also hold grave concerns about the leadership of the current PwC Australia CEO, Mr Kevin Burrowes. PwC's international secret side payment to Mr Burrowes of $1.2 million and the firm's continued refusal to hand over a report, known to us as the Linklaters report, and related documents about the foreign PwC partners involved in the Peter-John Collins scandal that emanated from Australia demonstrate a depressive attitude towards the Australian parliament and a failure to identify clear conflicts of interest. It's for these reasons the committee has taken the view that PwC and related entities should be excluded from tendering for government work until the completion of ongoing investigations and resolution of outstanding matters still at large in the public sphere. We've also recommended that government consulting firms should be required to publicly declare if and when they are subject to international remediation and reveal the terms involved. Australia's sovereignty should never be compromised by an international franchise's need, actions or contracts.
I'm very proud to have chaired this report. I want to thank and acknowledge the work of my colleagues, the deputy chair, the Hon. Alex Hawke MP, Senator Paul Scarr, Senator Barbara Pocock, Senator Louise Pratt, Dr Daniel Mulino MP, the Hon. Luke Howarth, Ms Zaneta Mascarenhas and Mr Steve Georganas, along with their staff and former member of the committee the Hon. Keith Pitt for their very close attention to this inquiry and their regular attendance. This is a body of work that needs sincere and prompt implementation. I also want to thank the Fourth Estate for their continued focus on this matter of national importance.
6:03 pm
Barbara Pocock (SA, Australian Greens) Share this | Link to this | Hansard source
BARBARA POCOCK () (): I take note of committee report No. 12 of the Parliamentary Joint Committee on Corporations and Financial Services inquiry into ethics and professional accountability: structural challenges in the audit, assurance and consultancy industry. This is an important report that responds to a public scandal in PwC and the consulting industry more broadly, including all of the big four—PwC, KPMG, EY and Deloitte. I thank our chair, Senator Deborah O'Neill, and my parliamentary colleagues for their cross-party collaboration. And I thank the committee secretariat and my own staff for their very hard work.
This scandal has shocked Australians and many beyond our shores. For far too long, reprehensible behaviour has thrived in gaps in our regulatory framework. This evidence is of international significance. It reveals global challenges that beset effective governance behaviour and structures in some of the world's largest entities, which too often put their own interests before those of the public. Meaningful reform cannot wait. The evidence is in.
The PwC tax scandal first came to light in January last year, when the Financial Review posted its bombshell report into Peter-John Collins and his use of confidential government information. While PwC was advising the Australian government on new tax laws for multinationals, some of its senior partners were using the intel to court clients seeking to sidestep those same laws.
PwC initially tried to shrug off the story as an isolated incident affecting only a few bad apples. It's far from that. Eighteen months and two parliamentary inquiries later, this parliament has uncovered rot after rot within PwC.
PwC are yet to engage with this parliament in a truly transparent, open and honest way. They have yet to provide this parliament with the Linklaters report. We still don't have the full story on the extent to which international partners were involved. Just the other week, the Australian Federal Police raided PwC's Sydney headquarters for a week. Some of the former partners at the centre of this misuse of confidential government information could face up to 10 years in jail for breaches of sections 70 and 90 of the Crimes Act, if they were convicted. This whole scandal is outrageous, and it is far from over.
However, this is about far more than just PwC's misdemeanours, as concerning as they are. While these inquiries may have started with PwC, they have uncovered mountains of evidence demonstrating an unethical, shadow, privatised public service with no accountability. The extraordinary expansion of consultants into our public sector over recent years has had dire consequences. It has gifted billions to the big four while cannibalising funding for essential public services. It has given too much power to small numbers of influential people who have deliberately farmed a tight network of close relationships for personal benefit, across the big end of town and into government and regulatory bodies.
Like many Australians, the Australian Greens have long been aware of the ethical failures, unchecked conflicts of interest and lack of regulation in the consulting and audit sectors. The scandals in these sectors are frequent. They're global in nature. And many never see the light of day. However, this parliament has seen enough to know that serious change is needed. These inquiries exposed numerous conflicts of interest, poor governance, ethical failures, state capture and regulatory weaknesses across the larger consulting sector and parts of the public institutions that deal with it. We now undeniably have the evidence base we need to enact vital structural reform.
That brings us now to this report and its 40 recommendations. There was unanimous agreement for many important recommendations in this report, and that should give momentum to their realisation and enactment. It's not often in this chamber that you have Labor, the coalition and the Greens united on a vital issue, but we have all witnessed the big four's repeated resistance to the accountability and transparency that parliamentary inquiries bring, and we have shared the outrage. The committee unanimously recommended that the Australian government not permit PwC or any of its related entities from tendering for government work until the completion of all ongoing investigations and their recommendations.
The Greens also achieved some important wins in this committee work, as we have pushed for certain outcomes. We have pushed for recommendations that any government regulatory bodies or related standards boards are independent, including by ensuring that the bodies do not include individuals with a current financial interest in entities under the direct governance of the body. This mirrors our change to the Tax Practitioners Board which made sure that the foxes were kicked out of the henhouse and fixed the loophole that allowed big consultants to regulate themselves. We pushed to recommend a review into improving the ATO's tax settlement procedures, with a view to making their details more transparent. We pushed to recommend a whistleblower protection authority, covering both the public and private sectors, to provide practical support for our whistleblowers, without whom a great deal of the information in this report and through our inquiries would never have come to light. We thank them most sincerely. The 40 recommendations of this inquiry are a vital step towards change, and they deserve strong support.
The Australian Greens would have liked a number of areas in the report to have gone further. Our additional comments make five supplementary recommendations that also deserve attention. First is the issue of partnership reform. While the committee's recommendations to cap partnership size at 400, a very good starting point, there's considerable evidence in favour of it being lower. I, alongside others who gave evidence to the inquiry, think it should be around 100. Even Adam Powick, the CEO of Deloitte, told our inquiry that, once you get over 100 partners, it becomes impossible to effectively manage the partnership.
Second, we think separation between audit and non-audit functions should be clear and structural. We need to eliminate that built-in conflict of interest. We'd also like to enforce that structural separation so that audit divisions of consulting firms are forced to incorporate as a separate entity, eliminating, as former ACCC chair Allan Fels put it, 'that built-in conflict'.
Third, we'd also really strongly recommend the need for an independent regulator for the consulting industry. The report calls for a code of conduct for consultants and a register, but we really need an enforcement mechanism for that code and for national standards.
Fourth is the issue of political donations. Over the past decade the big four have donated over $6 million to the ALP and coalition and received a staggering $8.5 billion in contracts. There's widespread support for banning these donations—except within the major political parties—and that includes amongst 80 per cent of coalition voters and 70 per cent of Labor voters.
Lastly, the inquiry found considerable evidence within the big four of poor organisational cultures. We really need to take action to support the wellbeing, physical and mental, of staff within these big companies. We need devices like non-disclosure agreements to not be used to disguise poor behaviour. In this light we recommend a review of those non-disclosure agreements and the ways in which they're used in these firms to conceal or hide repetitive patterns of poor behaviour.
So we need systemic change to ensure that the PwC tax leak scandal can never happen again. This report, as well as the Senate Finance and Public Administration References Committee report into consulting services, provides the government with a very clear roadmap for reform. If the Albanese government adopts the 40 recommendations of this report, which were made without dissent, it will lead to a comprehensive overhaul of the regulatory framework that defines how auditing and consulting firms are allowed to operate. We need comprehensive legislative, cultural and structural change to fix these organisational failures. Let's honour the evidence that has been put before us and convinced us all of the need for strong change now. There is a very powerful case for change. Shared outrage is not enough. The time for action is now, and we must take it.
6:13 pm
Paul Scarr (Queensland, Liberal Party, Shadow Assistant Minister for Multicultural Engagement) Share this | Link to this | Hansard source
I rise to take note of the Parliamentary Joint Committee on Corporations and Financial Services report Ethics and professional accountability: structural changes in the audit, assurance and consultancy industry.
Hollie Hughes (NSW, Liberal Party, Shadow Assistant Minister for Mental Health and Suicide Prevention) Share this | Link to this | Hansard source
Or No. 12!
Paul Scarr (Queensland, Liberal Party, Shadow Assistant Minister for Multicultural Engagement) Share this | Link to this | Hansard source
Or No. 12! In doing so, I would, at the outset, like to give my heartfelt congratulations and acknowledgement to my fellow committee members, including not only Senator Barbara Pocock, who we just heard from in relation to her contribution to the committee, but, in particular, Senator O'Neill and her outstanding leadership, as chair of the committee. I say 'outstanding leadership' in particular because Senator O'Neill was absolutely resolute in her leadership of the committee in requiring PwC, and others, to provide the evidence which the committee needed to do its work for the good of the nation. I think, from my perspective, that represents the very, very best traditions of this institution and I think Senator O'Neill should be deeply congratulated and acknowledged for that contribution.
In relation to the 40 recommendations, I'll make a few comments with respect to the vast majority of the recommendations which the coalition members on the committee strongly agreed with and then I'll provide a small number of reservations for the record.
In relation to the recommendations which we agreed with, the first fundamental recommendation was that PwC should not be given any government consultancy work until all the investigations in relation to PwC's activities in this regard have been satisfactorily completed. PwC has demonstrated that it has undertaken appropriate remedial action to address the concerns that arose during the course of this inquiry and previous inquiries, and I fully support that recommendation.
At one stage during the committee hearing, Mr Burrowes, the current managing director of PwC, opined that he wished the committee were considering other things in relation to the future of the accounting assurance industry. I say to PwC, including its current leadership, that I wish we could too but PwC are the ones who put us in this position—and they shouldn't forget it. It is absolutely outrageous behaviour. From my perspective, having the philosophy I have, it's a great shame that the committee had to inquire to the depth that we had to in relation to the activities of PwC and consider a whole raft of recommendations, which will necessarily mean that there's a regulatory burden imposed upon those who have done the right thing. That is a great shame and something which PwC should reflect on.
The other point I would like to make about PwC is that this will be held up for years to come as an example of how not to respond to a parliamentary inquiry and how not to deal with a crisis of confidence in relation to a major world-leading organisation. I was aghast at some of the failures of PwC in the course of this inquiry—their failure to provide full, complete and accurate information at the earliest opportunity. Even at the end of the inquiry's deliberations, there was still key evidence which had been withheld from the committee on the basis of legal professional privilege asserted overseas in circumstances where that privilege was in favour of PwC. It was within their control to waive that privilege so the committee could have received all the evidence which the committee sought. PwC chose not to provide that information to this committee, and that should be noted and should be a cause for deep reflection for PwC.
With respect to the recommendations more generally, I fully support the recommendation that large multidisciplinary accounting firms should have an increased obligation to provide reports and transparency and report as to how they are meeting governance requirements in relation to the need to have independent directors. The reason for this is the materiality of their role in the functioning of Australian society. PwC audits many public interest entities, the performance of which is of key importance to all Australians. With that, I believe, comes an obligation for open and transparent reporting and also the implementation of appropriate corporate governance procedures.
The other point I want to make—and I would like to echo Senator Barbara Pocock's comments in this regard—is that we should avoid a situation where the members of key regulatory and disciplinary bodies have an ongoing financial interest in the bodies which they regulate. That should be a no-brainer. So I absolutely support the recommendations in that regard, and there are a number of other recommendations, the vast majority of which I do support, that are contained in the report.
I do have a few reservations, and I should say that, under Senator O'Neill's leadership, we did our best to agree to everything we could agree to, we exhausted those avenues in good faith, and differences of opinion were deeply respected throughout the course of the inquiry.
I have reservations about the 400-partnership cap, particularly in the context where the cap had been increased to a level of 1,000 and now this place is recommending bringing it down to 400. I can envisage a quagmire of complications in how you get from, say, 600 or 700 partners down to 400 partners. No doubt there are many junior partners and many staff of the big accounting firms who are on the partnership track, and, if changes like that were imposed upon the industry, it would cause all sorts of disruption and complication with respect to those organisations. Personally, with the transparency provisions and the corporate governance reforms, I would like to see what we can achieve through operational separation of the audit and non-audit functions of the large accounting firms. I would like to see how that plays out first before we look at taking such a drastic regulatory action.
I will end my comments there, but I would like to also put on the record my thanks to the secretariat for their outstanding job. This was very complicated evidence and material that we received, and I think the secretariat did an outstanding job. With that, I commend the report to the Senate.
Deborah O'Neill (NSW, Australian Labor Party) Share this | Link to this | Hansard source
Senator Scarr, as the last contributor, might seek leave to continue his remarks later, because I didn't get quite enough time to thank the secretariat and my remarkable staff.
Paul Scarr (Queensland, Liberal Party, Shadow Assistant Minister for Multicultural Engagement) Share this | Link to this | Hansard source
Thank you, Senator O'Neill. I did wish to seek leave to continue my remarks later.
Leave granted; debate adjourned.