Powerful firms that put the 'con' into consulting

Daily revelations in the media surrounding the performance and bad behaviour of the consulting industry highlights a growing scandal that threatens more than just the firms involved.

Attention so far has focused chiefly on PricewaterhouseCoopers (PwC), which is not only embroiled in an ugly tax scandal, revealing serious conflicts of interest, but has been linked to the notorious Robodebt scheme.

PwC failed to provide a 70-page report to the government on a scheme that was later ruled to be illegal, despite being paid nearly AUD$1 million. Instead, it compiled an eight-page PowerPoint presentation.

Emerging evidence suggests  these transparency failures and issues of conflict of interest at PwC are just the tip of the iceberg for the consulting industry.

KPMG has been accused of submitting inflated invoices and billing the Australia’s Department of Defence for hours never worked and Ernst & Young (EY) was working for gas giant Santos while advising the New South Wales state government on new gas developments.

Pressure is mounting, particularly due to a Senate inquiry shining a light on a system in which consulting firms are allowed to police their own behaviour.

Such is the apparent disdain some of the international firms hold for transparency and accountability in the Australian arms of their businesses, Boston Consulting Group, commissioned for more than AUD$64 million since 2021, have denied the opportunity to appear at the Senate inquiry.

In a similar move McKinsey and Company which has 650 employees in Australia and currently signed up to an estimated AUD$56.4 million worth of government work over the past two years, will follow the same tactic.

This repeats a 2021 inquiry into Australia Post where the pair refused to front the politicians.

Key to this issue is that governments worldwide, including Australia’s, rely heavily on consultants.

In 2021, the global consulting services market was valued between $USD700 billion) and $USD900 billion.  

This universal reliance on consulting firms illustrates the Big Con.

Mazzucato and Collington’s book, The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilises our Governments and Warps our Economies, highlights how consulting firms are structured to maximise returns to partners.

It means the firms regularly engage in unethical behaviour, which continues to go unchecked in the absence of regulation.

In our submission to the Senate inquiry into consulting, we mentioned the case of Bain & Co, a Boston-based global management consulting firm, which illustrates state capture by the consulting industry.

The British Government banned Bain & Co from tendering for government contracts for three years because of “grave professional misconduct” in South Africa.

Subsequently, during Jacob Zuma’s two-term presidency, the South African Treasury imposed a 10-year ban on Bain from tendering for government contracts for its role in state capture.

State capture refers to cases where private interests influence a state to seek private advantage. As a result, there is growing pressure for private sector companies to remove Bain from their database of suppliers.

Similarly, consulting firm McKinsey and Co. agreed to pay $USD573 million to US authorities as part of a settlement for its role in the opioid crisis, which has killed hundreds of thousands of Americans.

The action was taken against McKinsey because of its conflict of interest in failing to disclose to the US government’s medicine regulatory body, the Food and Drug Administration (FDA), its work with Purdue Pharma the manufacturer of the synthetic opioid Oxycontin.

McKinsey continued to advise Purdue after it pleaded guilty to charges in 2007 that it misled regulators over the risks of the drug leading to the company’s bankruptcy.

These examples indicate the potential for action against consulting firms if the appropriate mechanisms exist.

Various Australian governments spend billions of dollars of taxpayers’ money yearly on external contractors and consultants.

The NSW state government spent AUD$1 billion on consultants between 2017 and 2022. Australia’s top consulting firms secured a record AUD$2 billion worth of Commonwealth taxpayer-funded work in 2021–22, with Accenture taking top billing for the second consecutive year.

Australia’s leading players offering consulting services include the ‘Big Three’  consultants Accenture (formerly Arthur Andersen), McKinsey, Boston Consulting Group and the ‘Big Four’ accounting firms (PwC, Deloitte, KPMG and EY).

Currently, in Australia, there are three Parliamentary inquiries into the consulting industry and its relationship with the Commonwealth government.

The first, a Parliamentary Joint Committee on Corporations and Financial Services Inquiry, has heard recent allegations of, and responses to, misconduct in the Australian operations of the significant accounting, audit and consultancy firms (including but not exclusive to the Big Four) via a detailed investigation and analysis of regulatory, technical and legal settings, and broader cultural factors.

The second is a Senate Economics References Committee Inquiry into Australian Securities and Investments Commission investigation and enforcement.

The third is a Senate, Finance and Public Administration References Committee inquiry into the management and assurance of integrity by consulting services (Consulting services).

In our submission to the Senate inquiry (Consulting services), we raised concerns about conflicts of interest, the culture of consulting services firms and the apparent lack of transparency and accountability for consulting arrangements. We highlighted that the consulting industry in Australia is an unregulated activity.

This is because the unique structure of these consulting firms as partnerships means that regulation is focused on the individual via their membership in a professional accountant body or as a registered auditor or tax agent. This form of regulation is self-regulation in terms of codes and ethical practices.

There are few enforcement measures for integrity breaches and unethical behaviour by consultants and firms.

Professional bodies, such as the accounting professional associations, take limited action about the misdemeanours of their members who are partners at Big Four consulting firms.

Instead, information about the failures of transparency, conflicts of interest and unethical behaviour at these firms has resulted from the actions of various whistle-blowers and investigative journalists.

Most of their income growth comes from governments and large multinationals in work that does not even attempt to avoid conflicts of interest.

Besides consulting, the Big Four also help multinationals minimise tax while simultaneously acting as ‘gatekeepers’ in auditing the same big companies.

The dominant role played by the Big Four accounting and consultancy partnerships in transnational corporations’ accounting and auditing practices is a global issue of concern, not just a problem for Australia.

PwC’s Australian tax scandal was initially limited to one partner until PwC was forced to admit that multiple senior partners were involved after a cache of internal emails was released by a parliamentary committee at the start of May.

The emails showed that PwC’s embattled Australian affiliate misused confidential government tax information for commercial gain, creating a crisis that threatens to extend beyond national borders.

This behaviour by individuals is consistent with a broad culture of conflict of interest, given that PwC provided advice to Treasury about international tax shifting while at the same time advising clients how to sidestep these laws.

When the OECD’s 2015 Final Report on the Base Erosion and Profit Shifting (BEPS) Action Plan to tax transnationals was adopted in Australia in 2016, PwC was already devising tax practices to sidestep the new law.

The Treasurer at the time, Joe Hockey, was concerned about the rise of opaque structures such as the “double Irish, Dutch sandwich” that involved sending profits through one Irish company, then to a Dutch company and back to another Irish company in a tax haven.

Such schemes were particularly popular with US tech firms, including Google (which has said it no longer uses the loophole).

PwC tax partner Collins signed confidentiality agreements with the Australian government and fed intelligence on the government plans to PwC personnel in Australia and abroad.

The firm used that information to give more than a dozen US companies an early warning of the changes, netting additional fees and potentially depriving Australia of tax revenue.

It has since been revealed in Senate estimates that the Australian Tax Office became aware in 2016 that a handful of multinationals “suspiciously and quickly” sought to restructure operations in response to new tax avoidance rules.

Specifically, the Australian Tax Office was concerned by tax schemes marketed by PwC that threatened the country’s tax take and suspected confidentiality breaches.

Information was passed to the police, but it did not initially result in a full investigation. Treasury has since referred the matter to the Australian Federal Police, citing new evidence.

The tax office also formally referred the issue to the Tax Practitioners Board in 2020, which led to Collins being deregistered for two years. The tax board passed on 144 pages of internal PwC emails to the Senate.

The question of which colleagues received Collins’ communications and what they did with the information has become a central part of future inquiries.

Its admitted failings are now subject to a police investigation, and governments worldwide will be taking note amid a growing reliance on private consultants to formulate public policy and public services.

There are now multiple investigations into the leak, including by the Australian Federal Police, and PwC has been banned from winning further work from the federal and several state governments.

Given that for decades, PwC has provided tax advice to transnational companies, including miner Rio Tinto, meat giant JBS, energy company Chevron and explosives maker Orica, the current investigations could extend into the US, UK and Europe, partly because the emails show PwC’s Australian partners have shared the secret government information with PwC partners globally.

Consider a report published in 2020 by the Global Alliance for Tax Justice, which outlines how corporate’ profit shifting’, otherwise known as ‘tax avoidance’, cost countries $USD427 billion in lost tax revenue in that year alone.

Nowhere is this kind of behaviour more evident than in the global fossil fuel industry.

Australian Tax Office data for the eight years from 2013 to 2021 shows nine companies, including ExxonMobil Australia, Chevron, Santos, Peabody Coal, Yancoal Australia and QGC Upstream (a subsidiary of Shell), paid zero corporate income tax over that period.

Those nine along with 16 other energy and resource companies with significant financial interests in fossil fuels disclosed revenue of about AUD$1,425 billion. They paid an average of less than 1 percent income tax on that revenue.

A host of offshore tax havens also enable manipulations of the Australian tax system.

Contrary to popular opinion, four wealthy countries the US, Netherlands, Luxembourg and the UK and their ‘independent’ territory of the Cayman Islands are responsible for 47 percent of global tax losses.

These firms are housed outside of Australia, where tax on earnings from Australian government receipts does not feed back into the Australian economy.

For example, Accenture plc is an Irish-American professional services company based in Dublin, specialising in information technology services and consulting. A Fortune Global 500 company, it reported revenues of USD$61.6 billion in 2022.

With this behaviour, management consultants are enablers of the new public management movement in which governments adopt structures, techniques and processes from the private sector to deliver public services.

Consultants translate what they consider to be appropriate practices to novel public sector settings. The significance of the consulting industry as the shaper of a new public sector is widely acknowledged.

Given the positioning of new public management as a movement with private-sector management practices and the use of the private sector to deliver public services as its fundamental reference point, the arrival of management consultants in public services is not surprising.

Mazzucato and Collington outline how the consulting industry reached the core of global economies and governments. The ‘Big Con’ is possible in today’s economies because of the unique power that consultancies wield through extensive contracts and networks and the illusion that they are objective sources of expertise and capacity.

Mazzucato and Collington demonstrate that our economies’ reliance on companies such as McKinsey, Boston Consulting Group, Bain & Company, PwC, Deloitte, KPMG and EY stunts innovation, obfuscates corporate and political accountability and impedes our collective mission of halting climate breakdown.

In Australia, at the Commonwealth government level, there has been a failure to account for how the performance of consultants is measured publicly. As outlined in our evidence to the Senate Inquiry, the Treasury considers all consultants responsible for their performance management.

A change in June 2023 means that suppliers must notify federal public servants if their personnel have had adverse findings against them as part of a new “notification of significant event clauses”, including an update to procurement rules introduced by the Department of Finance.

The revised regulations emphasise that public servants “must consider … a potential supplier’s relevant experience and performance history when assessing value for money”.

Still, this approach relies on consultants self-reporting their performance and is profoundly inadequate, especially given the track record of these firms.

Nevertheless, what is the alternative? Mazzucato and Collington highlight that the Big Con has not only made millions for consulting firms but has hollowed out the public service

They propose a new vision, for the civil service to rebuild capability in public sector organisations.

It is essential to recognise the government as creating rather than wasting value. This requires implementing learning and adaptive processes, empowering risk-taking within public sector organisations and evolving the narratives around the government’s role in the economy.

Busting them up is the only solution to these issues (for financial markets, the conflicts of interest are just as untenable between the tax and audit divisions as the auditors are there to sign off the accounts as “true and fair” while the tax advisers are there to advise corporations on how to most aggressively aviod paying tax in Australia).

Policymakers and the media will play a crucial role in this transformation. With a combined effort, we can end the Big Con once and for all and restore an independent public service to its rightful place at the centre of government.

Originally published under Creative Commons by 360info™.

James Guthrie is an Emeritus Professor in the Accounting and Corporate Governance Department at Macquarie University. James has held positions at various Australian and Italian universities in a career in accounting education that spans more than 40 years. He is the joint editor of the highly regarded interdisciplinary accounting journal, Accounting, Auditing and Accountability.

Professor Jane Andrew, CPA, is a professor of accounting and head of school at the University of Sydney Business School and co-editor-in-chief of Critical Perspectives on Accounting. Jane’s research focuses on environmental accounting and accountability in public policy.

Dr Erin Twyford, CA, is a Senior  Lecturer at the University of Wollongong. Before that, she had worked for organisations such as Deloitte Touche Tohmatsu and IMB Bank before joining UOW in 2014. Erin’s research interests lie in examining the interrelationships between the state, business and accounting practices as they impact the lives of the citizenry. She is particularly interested in accounting history and critical accounting theory.