Why does the PWC scandal matter?

Sascha: [00:00:04] I'm Sascha Kelly and welcome to the Dive, the podcast that asks, Who said that business news needs to be all business? One of the blissful things about going on holidays is that you get to completely tap out of work. And for me that means the news cycle. I delete all my apps. Tons of all the notifications, don't open my emails and just make peace with the fact that when I return, there's going to be a tsunami of information to catch up on and a whole lot of headlines that don't make a lot of sense. One of those stories was the scandal surrounding PWC and that's PriceWaterhouseCoopers. 

Audio Clip: [00:00:39] Crisis Action, a consulting company paid consulting firm PWC, is named for former partners Spalding Giant. PricewaterhouseCoopers Australia is facing one of the biggest crises in its history. 

Sascha: [00:00:51] The consulting firms have found themselves under fire over revelations that some senior partners misused confidential information provided to them to assist other clients avoid paying more tax. In the wake, the company's Australian CEO has quit. Nine senior partners have been stood down and as more is revealed, they seem to be even more questions that surface. So it seems like the perfect story to get up to speed with the dive. It's Monday, the 12th of June, and today I want to know what exactly is the PWC tax scandal and why does it matter? To talk about this today, I'm joined by Tom Crowley from the Daily Aus.

Tom: [00:01:31] Hello. It's lovely to be here.

Sascha: [00:01:33] So before we jump into the details of this scandal and find out exactly what's happened, can you give me a quick one on one on it, on who Peter Collins is, and then also who PricewaterhouseCoopers are probably seen the name paid obviously around heaps. But exactly what do they do? 

Tom: [00:01:49] Yeah. So maybe I, maybe I will start with PWC so the official name is accounting firm and then one of the big four global accounting firms. But accounting really only gives you a small part of what they do. They sometimes call themselves professional services firms to kind of cover that. I mean, know, essentially that they do all sorts of things. I think the best way to talk about them really is as professional advice givers and help givers. So they take on clients who might be businesses or governments, and they can provide, you know, professional support and advice on, I guess, basically any topic. And I think maybe the important thing to emphasise for this story is how much that business model really, you know, their business model really relies on trust. You've got to be able to trust that they know what they're doing and you've got to be able to trust that when you become their client that they're going to be acting in your best interests. And so, for example, you're not going to want to hire PWC if, you know, they're also talking to your competitor. And so that is really, you know, they're in the business of trust. That's how they would often describe it themselves. But as they're going to say, Peter Collins, who for a long time was PWC, Australia's international tax expert, he was the head of international tax. He stands accused of breaching that trust. And that's kind of where the scandal that we're going to get into comes from. 

Sascha: [00:03:07] Yeah, I really like that idea of professional advice givers because then it does really give you an indication of how big that scope can be. That could be anything from strategy to the nitty gritty of how to make legislation or it really leaves a huge grey area for them to play in, doesn't it? 

Tom: [00:03:25] Yeah, absolutely. I guess, you know, broadly speaking, I mean, the kind of allegations of wrongdoing that we're going to get into seem to be fairly rare. But broadly speaking, managing these conflicts is super common, You know, to make sure from the perspective of PWC that you're able to serve your client's best interests at all times when your clients can be just about anyone you know who will pay you money. It's a difficult balance for them to strike at the best of times. 

Sascha: [00:03:52] Yeah. Let's put a pin in that and revisit that later in our conversation and go to the timeline of events. How did this all unravel? 

Tom: [00:04:00] So we go back to 2014 and Peter Collins is the head of international tax at PWC Australia and Tony Abbott is the prime minister. So a bit of a throwback there and the Abbott Government is looking to come up with some new rules to crack down on big multinationals avoiding tax. So big multinationals like Google, Microsoft, you to be the big guys. And in the process of designing this rule, you know, this is a notoriously complicated space. These are very complex companies and all across the world they have really difficult arrangements. Designing rules to make them pay the tax you would like them to pay is a really difficult exercise. So the government calls on Peter Collins because he's known as a bit of an expert, really a bit of an expert at getting around these rules. They call him in to give them advice on what the rules should look like. He signs confidentiality agreements and he gives the government advice. But what we now know from emails that have since been made public is that Peter Collins took the confidential information that he got from the government and he passed it on to upwards of 50 of his PWC colleagues with a view to designing a way to get around these rules. And so I paid, I would say took the privileged information that they got from the government and they used it to basically prepare to get around it. So on budget night when the Abbott Government announces its new rules. There are emails straight away from PWC to some of these multinationals saying, Hey, we've got a way to help you get around these new rules. And that is essentially, you know, there's going to be a federal police investigation to determine legality. But certainly it's already kind of clear from what we know that there has been an ethical breach here in the way that PWC gone about that process. 

Sascha: [00:05:42] I mean, so many questions come up from you just describing what's happened there. But the one that's coming top of mind is if this all happened in 2014, why are we only talking about it now?

Tom: [00:05:55] Yes, that is one of the mysterious questions that is kind of why this took so long. So the first thing that kind of happened was that the Australian Tax Office started to cotton on and it was kind of around 2018 that the ATO had concerns because they would be speaking to multinational clients who were signing on. And we, you know, we figured out how to get around these rules and they cottoned on pretty quickly and they kind of identified their belief that something could happen, it pay off. Now they told the AFP about it at that time and there was no investigation and I think it's going to be there's a lot of water to go under the bridge before we figure out exactly why it took so long. But as it is sort of at the end of last year, beginning of this year, Peter Collins got his license to, you know, be a tax practitioner stripped. You know, he left PWC, and journalists at the Australian Financial Review noticed all of this, pursued the case and in basically in cahoots with some senators have brought this story to light over the last few months and it's kind of exploded into public, particularly, I think, in the last few weeks. And it began by saying, you know, it was an isolated problem, a bit of a bad apple, but certainly now it's sort of 50, 60, 70 people that kind of implicated in this and are believed to have had access to this information and abuse. Australia's CEO stepped down as a result. So the fallout has kind of exploded from that. And the AFP, as I say, is now beginning an investigation to determine whether there was any criminal behaviour. 

Sascha: [00:07:27] So just to check that I've got the timeline right. In 2014 the Australian Government asked Peter Collins, who worked at P.W see for his help to design legislation with the intent of getting more tax out of these multinationals. And then at the beginning of this year, end of last year, the ATO had kind of pulled the threads apart and realised that there was a connection between these multinationals avoiding the tax paid PWC and Peter Collins. Peter obviously takes action and Peter Collins leaves, but then in the subsequent months we find out it's not just Peter Collins, it's actually that that information was shared. I don't want to say widely because 50 out of a company that hires thousands of people, that might not necessarily be true, but more than just one bad apple. 

Tom: [00:08:18] That is right. Yeah. And it's kind of been this you know, I think that the way that PWC has been speaking is that the term that they like to use is ring fencing, that they're kind of identifying all the people who are associated with the problem and trying to kind of, you know, put up a little bit of a fence around them and say, here we've isolated the problem. And certainly there is no suggestion, as you say, is an enormous firm. But there's no doubt that this has, I suppose, harmed PWC's reputation more broadly, potentially affecting their ability to take on new contracts with the government because of that kind of breach of trust. And PWC acting CEO, has kind of acknowledged a culture in the organisation at the time that that might have contributed to this happening. And so the fallout is certainly spreading for you to say and I think there's a long way to go in terms of understanding the broader impact on its reputation.

Sascha: [00:09:10] Let's take a break, but when we get back, I'd like to talk to Tom about the numbers at the centre of this controversy. What was the bottom line to the Australian economy and what's going to change, if anything, going forward? Let's talk numbers, though, because you know the Diver Business podcast, we want to find out what the economic implications are of this. How much money did they make from having this privileged information? Because, as you said, they're in the business of trust and having this kind of information which allows you to front foot changes in legislation must have been an enormous benefit to them. 

Tom: [00:09:48] Well, yes, this is one of the things that it's again, I mean, and there are a lot of these things because the investigation's happening where we have to keep saying, well, we don't know. And it's a bit of a murky area. Certainly, we know that PWC reached out to a lot of prospective clients seeking to get their business as a result of this. And there are suggestions that in at least a couple of cases that it was successful. So exactly quantifying what the impact of that might be is a slightly difficult exercise, but there's certainly some reason to believe that it was in part successful. But then on the other side, they stand to lose potentially a lot of money from the government. I mean, the government pays, you know, billions of dollars a year to consultants like PWC the federal government is PWC biggest Australian client. And so, you know, they may perhaps I mean, you know, they may perhaps have got a little bit out of this. But in this case, I suppose, you know, crime hasn't paid. They've been caught and the financial consequences for the firm are likely to be really significant. 

Sascha: [00:10:52] I know that I'm asking these questions. You say it's still ongoing, so we don't really know the scale. But I do want to know, do we have an idea of what the bottom line was to the Australian economy in terms of lost tax that could have been collected? Or is that again, something that's a bit up in the air? We don't really know what that loss is, but just that there was one. 

Tom: [00:11:13] Yeah, well, I mean, I can give you a number this time so I don't have to just completely not answer the question. But we're talking in this multinational space. We are talking about billions of dollars a year that, you know, is effectively taxed that these businesses should be paying in Australia or at least, you know, tax on money they've made in Australia that doesn't get paid in Australia. So it is a multi multi-billion dollar issue. Now, you know, with I mean PWC in this case might have got a bit of a head start in getting around that rule, but you could say, well you know, someone would have figured a way around this rule anyway. And I think the broader economic context for the multinational issue is that it continues to be really, really hard for countries to get the amount of money they feel they should get from these multinationals. And that may not be a problem. Kind of can be solved. I mean, when you think about it in a worldwide context, a company like Apple is operating everywhere. There are always going to be countries. Ireland is a particularly notable one. But, you know, there are other kind of tax havens that we might think of in the Caribbean. There will always be countries that say, well, hey, you know, base your operations out of here. We'll give you a really generous tax treatment. And as long as that is the case, there is an incentive for these multinationals, obviously, to pay as little tax as they can and to hire firms like PWC to tell them how to do that. And so the international efforts on multinational tax to try and crack down in particular on what they call profit shifting base erosion and profit shifting are the kind of tech terms that they use for this process of moving your books around to make it look like money you made in Australia was made in the Bahamas or wherever. There are international efforts to crack down on that sort of thing. But I think you know what this PWC saga shows. It's just sort of one chapter in many about how difficult this is for governments. And, you know, that shows the broader picture of this multi-billion dollar issue. 

Sascha: [00:13:12] Hmm. It certainly does feel like an issue that it's always in the headlines and that the more that you dig into it, the more complex it is and how there isn't just a one size fits all solution to it. I do want to pick up on something that I put a pin in on, pin it, so to speak, and bring it as a close for our conversation today. And that is just like the spider web of influence or where PWC sits as a company that deals in kind of advice and deals in finding solutions for all sorts of clients. You did mention that the Australian Government is their biggest client in Australia, and the Greens have repeatedly called for a crackdown on governments use of consulting firms. Just the size of it seems to bring this conversation to the front of mind. They're demanding that PWC be banned from all future government contracts. I guess firstly, how likely is that to be a consequence of this scandal? And then also what does it say about our federal government? And are all our governments really and their use on consultants and external parties rather than public service jobs? 

Tom: [00:14:24] Yeah, it's a fascinating question. I think in the short term it's going to be really tough for PWC. So the government has resisted cancelling its existing contracts with PWC, sort of illegal breach of contract reasons, but they have suggested that at least in the short term, it's going to be really difficult for PWC, to ever win a contract in the short term. Why would the government at the moment feel that it could trust the firm? And I guess, at least for the time being, for anyone who's considering taking on PWC there's a bit of a public PR optics issue. And so that might help. PWC, in the short term. Over the long term, I wouldn't have suggested that, you know, PWC, will be on the blacklist from the federal government forever. But it's not just the Greens, it is the Labour government that does suggest it is keen to reduce its reliance on consultants, and that goes well beyond this issue. It's something that they took to the last election and they've complained about the fact that the Federal Government spent I think the figure is $21 billion on consultants in the last financial year that they were in government. That's a huge amount of money. And over time, a lot of the functions and advice and expertise that would ordinarily have been provided by the public service has been effectively outsourced to consulting firms. And there's a really interesting debate there about, you know, consulting firms often, you know, the global firms that generally have a very high reputation. Are they providing a level of advice, you know, particularly maybe an understanding of business that you wouldn't get from the public service? But on the other hand, you know, they are a lot more expensive. Is this expertise that the government should have in-house? That's a lot of debate, and the government has certainly suggested that it thinks the balance is tipped too far in the direction of consultants. In this case, Peter Collins was being asked to just give advice in a more formal sense rather than kind of his informal client relationship, but broadly for the consulting, saying there is no doubt that this will put a little bit extra scrutiny, put scrutiny on the consulting firm is really, I think, to to demonstrate that they're value added. You know, what is the value that governments get from these consultants? Can it be justified if the public mood towards them starts to shift in relation to stories like this? I think that'll be a really interesting question to watch. 

Sascha: [00:16:41] Super interesting question to watch, Tom, But unfortunately, we're going to be out of time today. So that sounds like something we're going to have to pick up at a later date. Thank you so much for joining us today on the Dive. If people are interested in hearing more from you, where can they find you? 

Tom: [00:16:56] You can go and find me and the rest of our team on the Daily Aus. Follow us on Instagram if you haven't already. And from Instagram you'll be able to find both our podcasts, which comes out every weekday with a bit of a deep dive into one of the big news stories. And our newsletter, which also comes out on weekdays and I have the occasional weekend column in that as well about PWC, a couple of weeks ago. So you get to hear more from me and the team, our newsletter, our podcast, and our Instagram, the best place to find us. 

Sascha: [00:17:24] A huge thank you to Tom from the Daily Aus for joining us today. Get in touch and let us know what you want us to talk about next. Remember, email is contact at equity rates dot com or jump on the equity rates website and click the contact button. Lastly, please send this to a friend who you think would enjoy this, who wants to get up to speed with this story. It is no joke the best way for our podcast to grow. Until then, I'll talk to you on Wednesday.