“Trust has become a key lever for value creation but trust is fragile. A perceived or real misstep in transparency can wreak havoc on brand reputation and underlying trust.”
So Pricewaterhouse Coopers (PwC) warned in its Global Economic and Fraud Survey 2022. Now, following the breach of confidential information that the Australian government trusted PwC to respect, it seems that the gamekeeper turned poacher.
PwC, along with Deloitte, Ernst and Young and KPMG, is one of the world’s four biggest accountancy and auditing corporations. Once there was a big eight, reduced through mergers and the collapse of one, Arthur Anderson, to a big five and then (if not ‘finally’) to the current big four. Combined, they do the audits for 99 per cent of companies in the FTSE (Financial Times Stock Exchange) top 100 index.
Worldwide, PwC employs 328,000 people. In 2022 it announced a record annual revenue of $US50.294 billion ($A76.8 billion), up 13.4 per cent from the previous year. PwC Australia’s share of the take was $3 billion ($A7.5 billion). There is no indication in the figures of how much profit this record revenue flow made for PwC shareholders, who include many of the planet’s biggest banking and investment corporations.
Recently PwC in Australia has seen itself enveloped in a scandal that arose initially from the sharp practice of one of its partners, tax specialist Peter Collins, who was working with Treasury on the structure of new multinational taxation laws and had signed three confidentiality agreements with the government. Instead of keeping the information secret, however, in 2015 Collins passed it on to 14 corporations and companies in North America and elsewhere in an email headed “for your eyes only,” thus giving them a head start on what was coming in Australia. PwC charged millions of dollars for this advice.
The material included meeting agendas and a draft OECD paper listing measures that could be taken to reduce global tax avoidance. Dozens of PwC Australia partners were also sent the emails. One expressed misgivings but the information was still shared widely, with a global team being assembled to see how the information could be used for commercial gain.
Collins had been under investigation by federal authorities since 2020. In November 2022, he was deregistered for two years by the Tax Practitioners Board. The AFP has since begun a criminal investigation into his activities that could eventually be extended to other PwC employees. In early May this year PwC CEO Tom Seymour ‘stepped down’ after admitting that he was involved in the tax fallout. Nine partners have been sent on leave. The rest of the fallout included two partners who ‘stepped down’ from the executive board, nine who were sent on leave and three senior executives who ‘stood aside’ from their positions on the governance board, the risk committee and as the head of PwC’s reputation office. Were executives actually sacked, as other people are when they break the rules, other executives might be more careful in future.
Australian Super – the largest superannuation company in the country – has suspended all dealings with PwC and other corporations are likely to follow suit. The Reserve Bank of Australia (RBA), which has been paying PwC 500,000-$800,000 every year for its services, most recently on the underpayment of staff, has also suspended all dealings with PwC until the current situation is resolved. Its governor, Philip Lowe, said he was “appalled” by the situation. Well, of course, what else would he say?
The scandal also raises the ‘outsourcing’ of services, for which the government pays hundreds of millions of dollars to the private sector each year. As PwC repeatedly says, the key ingredient in such arrangements is the trust that it now has been shown to have betrayed.
‘Protecting the perimeter’
In its 2022 global survey, PwC described platforms as the “new fraud frontier” and rising platform fraud as a “perfect storm”. 51 per cent of businesses surveyed said they had experienced fraud in the past two years, the highest number in more than 20 years of research.
With the development of myriad new technologies, the report asked whether sufficient controls were being put in place. It warned, “dangerous new predators – external entities – that can’t be controlled or easily influenced are quickly growing in strength and effectiveness.” This new generation of predators is dominated by hackers and organised crime rings, with other dangers including internal fraud and/or collaboration between internal and external with “bad actors.” In short, in such a volatile environment, “protecting the perimeter is essential.”
The problem for PwC here is that its current embarrassment arose not from the perimeter but from within the gates. The advance notification of privileged information from inside was the equivalent of stock market insider trading, for which those caught out can be fined and imprisoned for years.
It is not as if the scandal is an aberration within PwC’s global network. The breach of trust is one thing but there have been numerous ‘failed’ audits – as they are described in PwC’s corporate language – involving such an inability to actually audit that ‘failed’ seems entirely the wrong word. These audits have involved the ‘failure’ to see massive holes in company books involving millions of dollars. Incompetence at least would seem a more appropriate word.
In 2016, PwC in the UK was fined a total of three million pounds ($5.65 million) over its 2007 audit of the subprime loans and other financial services provider Cattles Plc. A senior partner was fined 76,000 pounds ($143,000). Cattles had announced a pretax profit of 65.2 million pounds ($122.9 million) when it had a pretax loss of 96.5 million ($182 million). Even though it was accepted that the auditors had been misled, this hardly explained how they could have missed such a big hole in the company’s books.
In August 2022, PwC in the UK was fined nearly 1.8 million pounds ($A3.38 million) for a ‘failed’ audit of BT Telecom in 2017 even after a 500 million pound ($941.5) fraud had been exposed in the company’s Italian subsidiary. It was “severely reprimanded” by the financial regulator and told it had not applied the “requisite professional scepticism” to its audit. BT had paid PwC 4.3 million pounds ($8.09 million) for its services. PwC in the UK has been fined 17 million pounds ($A32 million) since 2018 for ‘failed’ audits of five companies.
In January this year, the Brazilian high street retailer Americanas, founded in 1929, revealed it had debts of $US8 billion ($A12.1 billion) and filed for bankruptcy. It blamed PwC Brazil for failing to expose a $US4 billion ($A6 billion) accounting shortfall in its auditing of the company’s books. Alleging negligence, the Brazilian Association for Consumers and Worker Defence (Abradecont) subsequently filed a petition in the federal court to freeze PwC’s assets and prohibit PwC from releasing any reports “aimed at the stock market.” PwC, which had audited the company’s books for the past four years, denies any liability.
In another case in Brazil, PwC was investigated in 2021 for irregular practices in its audit of the books of Petroleo Brasileiro between 2012-14. It was acquitted but was told it had “ignored red flags” about the company’s finances.
In engaging in sharp practices, PwC is not in what might be called ‘good’ company- whether in Australia or not – but it is certainly in numerous corporate companies. Arthur Andersen, like PwC, one of the world’s biggest accountancy firms, collapsed in 2002 after the exposure of its complicity in the false claim made by the US energy giant Enron of a $US 100 billion ($A151.2 billion) revenue flow in 2001. Anderson shredded documents to hide its fraudulent accounting and was convicted of obstruction of justice. The conviction was later reversed, by which time, however, Andersen’s reputation had been ruined beyond repair.
As revealed by Australia’s Royal Commission into Banking Misconduct (2017-2019), Australia’s biggest banks, the Commonwealth, NAB, Westpac and ANZ, ripped off customers in their greed for profit, already hovering around $A30 billion annually between the four of them. The details revealed by the commission’s inquiries revealed behaviour by banks more akin to a highwayman robbing a coach, except billions of dollars were involved, not watches, rings and wallets.
Accounting firms have not been the only ones to breach the corporate perimeter of trust. Westpac was found to have breached money laundering and terrorism financing laws more than 23 million times, involving a total of $A11 billion. ASIC (the Australian Securities and Investments Commission) also found that over eleven years, Westpac had charged more than 11,000 customers $17 million in fees “for financial services that were not provided due to their death.”
The bank also issued duplicate insurance policies to more than 7000 customers, obliging them to pay for two or more policies instead of one. About 25,000 customers were charged more than $A5 million in fees that had not been adequately explained.
CBA was found guilty of misconduct by receiving $22 million in prohibited payments to promote a particular retirement fund to 390,000 customers over five years. Westpac was accused of breaching anti-money laundering laws on millions of occasions and failing to detect thousands of transfers financing child exploitation in the Philippines.
NAB was held responsible for breaking the law more than 10,000 times by charging customers for services they never received, at a time rogue traders on hefty bonuses had hidden losses of millions of dollars. ANZ was accused of irresponsible lending and money market manipulation.
Like PwC, profuse were the apologies coming from the banks, after they were caught, with all of them only too ready to fork out the hundreds of millions of dollars they were fined– a fraction, it has to be said, of their annual profits.
Apologies after being caught out
The list of corporate ripoffs in Australia is a long one, dating back almost to the beginning of the white settlement. There are genuine errors and there is negligence but there are also numerous deliberate attempts to cheat and defraud, involving just in recent decades entrepreneurs whose names older Australians will remember (Alan Bond) but far more they won’t know unless their names hit the headlines.
Some will remember that last year Crown Casino was fined $A88 million for facilitating the illegal transfer into Australia of about $A1 billion to meet the gambling needs of clients regarded as high risk because of connections with criminals. Then there was the Big Un online video marketing company which collapsed in 2018 with debts of $A50 million after listing borrowed money as money earned. The current whereabouts of its chief executive, Richard Evertz, who in 1994 was arrested for impersonating a police officer so he could blackmail men at public toilets in a Melbourne park, is unknown.
PwC has apologised and promised to do better in future. Its reputation has been dented but the 24-hour news cycle is already driving the PwC scandal out of the small space it takes up in the collective public mind.
Soon it will again be business as usual. PwC will be brought back into the fold of the corporate world, all will be forgiven, new contracts will be signed and the accountants and auditors will resume what they were doing before they were caught out taking advantage of an opportunity too tempting to resist.