I had blogged here about PwC Australia leaking confidential information about the Australian government's tax policy changes to benefit the consultant's private sector clients in other countries. The private clients, multinationals like Google and Apple, were able to pre-emptively tweak their accounts to avoid paying taxes, thereby costing the Australian government an estimated $120 million in annual taxes.
An independent report has now confirmed the allegations.
PwC’s Australian partners overlooked rule-breaking by “rainmaker” colleagues in the pursuit of revenue growth, according to a damning report on a scandal involving the misuse of government tax secrets... (it) assailed an “overly collegial” culture in which too much power was concentrated in the Australian firm’s chief executive and loyalty was rewarded above challenging more senior partners... The scandal was triggered by revelations that a PwC partner who acted as an adviser to the government had passed information about upcoming tax changes to colleagues, who used it to tout for business among US tech companies including Google and Uber.
The Australian government has responded by cracking down on PwC
The affair has provided ammunition for the Labor government as it looks to wind back the influence and cost of consultants in favour of a stronger public service... Government departments have now enacted a shadow ban on awarding new work to PwC. Some companies and a growing number of pension funds have followed suit... The effects are also being felt by the wider consulting industry as the Labor government starts to rebuild public sector expertise after decades of... “the slow-motion privatisation of the civil service by the big consultants”. Figures from the National Audit Office show federal government spending on consultants reached A$888mn in the 2022 financial year, up from A$352mn in 2013. The Big Four consultants won the lion’s share of contracts over the nine-year period, raking in an aggregate A$1.3bn, according to the NAO. But the tide has started to turn as Labor has cut back, with government spending on major consultants and auditors reported to have more than halved year-on-year so far in 2023. There have also been moves at state level, with New South Wales, Australia’s largest by population, on Thursday imposing a three-month ban on PwC working on any tax-related contracts.
But these temporary suspensions and fines are a mere slap on the wrist, and are internalised as a cost of doing business by PwC and other consultants. They do not create sufficient incentives or deterrence to repeat such actions.
This post will highlight a feature of the consulting business that is an important contributor to such perverse incentives - the confidentiality of its clients. The FT article writes
Deborah O’Neill, the former school teacher-turned-senator who released the emails, said that the PwC scandal was only “the tip of the iceberg”. She highlighted issues such as a “revolving door” between government departments like the Australian Taxation Office and Big Four consultants, along with the use of legal professional privilege by consultants to not disclose information such as client lists, which she compared to the “cloak of invisibility in Harry Potter”... Andy Schmulow, an associate professor at the University of Wollongong’s school of law, said there was a strong temptation by profit-driven partnerships to misuse information when they were brought into the “inner sanctum” on issues like tax law. He said he experienced pressure in his previous career as a consultant to show his colleagues drafts of confidential work he was doing.
In a recent viral article exposing corrosive work culture and business practices within McKinsey, Garrison Lovely wrote,
McKinsey made the prescient decision to avoid credit for its work, keeping its client and project lists secret. In practice, this has insulated the company from the disasters it was party to, such as the collapse of Enron.
This is a much-overlooked and very important issue. At a time when transparency and information disclosure are de riguer everywhere, consulting firms remain conspicuously immune to being allowed to retain the confidentiality of their clients on deeply questionable grounds. Consulting firms invoke the cover of confidentiality to not only rightly avoid disclosing information about the work done with their clients but disturbingly also deny even disclosing their client and project lists. In this age of a deeply interconnected and globalised economy, there cannot be any justification for continuing the latter confidentiality.
In the instant case, the Australian Treasury was unaware that while PwC was advising it on its cross-border tax avoidance reform policy aimed at multinational corporations, it was also advising the same companies in other jurisdictions on their global tax optimisation strategies (which also included Australia). Even accounting for the independent and separate nature of the operations of different country units of PwC, if the client and project lists were disclosed, the Australian tax authorities would have been aware of possible conflicts of interest when they made the decision to procure PwC (and would have taken sufficient safeguards to mitigate).
The consultants defend such confidentiality on grounds of protecting the interests of their clients and the presence of internal Chinese walls to prevent conflicts of interest. Both are questionable arguments.
For one, as aforementioned, while the argument about protecting details of the work done with their clients is unexceptionable, the same cannot be said about sharing client and project lists. It's also only fair that consulting firms protect the interests of not only their current clients but also their prospective clients. Further, if the consultants are concerned about protecting the private interests of their clients, the governments should be more concerned about protecting the public interest.
Transparency is fundamental to activities involving public resources and public interest. And the globalised nature and partnership model of such businesses cannot be an excuse for not sharing information. There are examples of cross-country regulatory oversight. In the US, the Public Company Accounting Oversight Board (PCAOB) has the responsibility of inspecting all accounting firms that audit US companies, regardless of where they are based. In any case, it'a a sovereign responsibility and right to regulate all economic activities happening in its jurisdiction, especially when it comes to notice of negative externalities and distortions.
The point about Chinese Walls is interesting and needs more discussion. Service providers particularly in consulting, finance, and law regularly invoke the presence of internal Chinese Walls to justify working with clients on all sides and avoid having to take stronger and stricter internal safeguards to prevent conflicts of interest and transfer of information. In all these industries, the financial stakes associated with client assignments are often very high and the potential for internal sharing and misuse of information sis higher still.
Consultants often end up advising both the contracting governments and some constituents of the bidders. We have seen several examples in recent times of financial institutions playing on both the sell and buy sides of an instrument or transaction. Similarly law firms often advise both their clients and unconnected (to the case) but interested (to the outcome of the case) parties on the other side. What makes these problems likely and very difficult to manage is the globalised nature of these firms and their internal structures.
The fundamental requirement for the success of Chinese Walls is strong corporate governance and ethical grounding within the organisation. As several scandals from across service industries in recent times have shown, both these are deeply questionable.
In 2021, it was revealed that KPMG consultants and auditors across its practices globally cheated on their professional exams for atleast five years until 2020. Several other ethics violations were exposed in the investigations done by the US PCAOB.
Hundreds of KPMG employees in the UK and Colombia cheated on professional exams, a US regulator alleged on Tuesday, and the conduct continued even after the accounting group was fined for a similar scandal in the US. The cheating was one of several infractions uncovered across KPMG’s global network by inspectors from the US Public Company Accounting Oversight Board, for which KPMG has agreed to pay a total of $7.7mn. The oversight board also discovered KPMG staff in the UK outsourced work to an unregulated affiliate in Romania, while staff in Colombia altered documents in order to deceive audit inspectors and a partner in India signed dozens of blank audit papers rather than waiting to see that they were filled in accurately... In a wide-ranging $50mn enforcement action by the Securities and Exchange Commission in 2019, KPMG was charged with using data stolen from the PCAOB to discover which audits would be inspected, backdating audit work, and allowing US employees to share answers to internal training exams.... the oversight board alleges that cheating at the UK arm went on from between at least 2018 and March 2021. It involved direct employees and staff at an Indian joint venture that does audit work for the UK firm. Hundreds of personnel “shared answers primarily through emails attaching documents that contained answers to training test questions”, the board said. In Colombia, cheating on compliance tests went on from 2016 to 2020, it said. KPMG’s UK arm will pay fines of $2.6mn to settle the allegations. KPMG Colombia is paying $4mn and three individuals there will be barred from working with an audit firm for between one and three years. KPMG India was fined $1mn. Smaller fines on individuals take the total to $7.7mn. KPMG’s Colombia, UK and India offices said they had taken action to strengthen compliance, training and quality control... Disciplinary actions ranged from official warnings to dismissals, a KPMG UK spokesman added.
See also this and this about cheating in Australian KPMG practice.
On the issue of ethics and corporate governance, it's also an open secret that consulting firms hired as bid process or project management consultants collude with Original Equipment Manufacturers (OEMs) and/or their consortium partners in public procurements. Such collusion comes in the form of preferential leaking of confidential information about the bids, incorporating provisions/specifications favourable to an OEM in the bid document, favouring an OEM in the bid scoring, tweaking the bid process to favour an OEM etc. Given the weak state capabilities and state capture by private interests, governance of the bid process is often poor allowing the consultants the space to undertake such practices.
These practices are commonplace, with only the extent varying across state and procuring entities. They happen both at the firm and individual consultants' level. The former helps the firm increase its business, while the latter aggrandise the individual consultants involved. Both are clear corrupt practices that should attract immediate action to address them, besides criminal liabilities.
In these circumstances, the Chinese Walls are a mere figment of imagination. They have become a convenient and dignified cover to continue deeply unhealthy and corrupt business practices that impose large public costs while boosting firm revenues.
Strengthening public oversight and enhancing transparency is therefore critical. Especially given the poor corporate governance and ethical practices within the industry, the removal of the confidentiality cloak on client and project lists is an important first step.
Procurement guidelines currently only require in general terms that consultants and service providers "do not have any conflicts of interest", "adhere to highest standards of ethics", "safeguard the agency's legitimate interest", "shall not engage in any corrupt practice", and so on, while contracting with governments. Self-declarations to this effect by the consulting firms and their officials are taken at face value. There's no requirement for proactive disclosure about consulting assignments done by the firm.
But these general principles have become so routine as to be given lip-service by all concerned, including the government officials. These declarations have come to be regarded as perfunctory homilies that consultants provide in their contracts. I'm not aware of a single instance of these provisions having been invoked in India to penalise or punish consultants, despite the common violation of these principles.
It's therefore required to at least mandate proactive disclosures in this regard. Accordingly, consultancy firms should disclose all their relationships with private and public sector clients in the same or related broadly defined sectors at the time of contracting, and any new relationships entered during the duration of the contract and within two years of the end of the contract. In case of a procurement process involving multinational companies or a global competitive tender, the disclosure should include the client and project lists of the consultant’s foreign practices. This would enable the government agency to be aware of any potential conflicts of interest and take necessary action to mitigate likely adverse events.
On the government side, the officials engaged with a project should disclose any relationship they or their immediate family members have or have had with the Consultancy firm in the last five years from the date of contracting or from the date of their engagement with the project, whichever is later.
Calling for transparency and good governance, the famous US Supreme Court Justice Louis Brandeis said that "sunlight is the best disinfectant". This sunlight is now critically important to disinfect and restore confidence in the consulting industry.
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