Big four firms should be banned from providing a client both audit and consultancy services at the same time, and have their number of partners slashed by up to 600, a parliamentary inquiry has recommended.
But it stopped short of calling for a ban on political donations or for the structural separation of consultancy firms to reduce conflicts of interest, as recommended by former competition watchdog chair Allan Fels.
It comes after more than 12 months of investigation into the damaging tax leaks scandal at PwC Australia, which triggered an industry-wide examination of professional service firms.
Labor senator Deborah O’Neill, who chairs the joint committee on corporations and financial services, said the inquiry had uncovered “corporate nightmares” that demanded stronger regulation.
“We have 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,” O’Neill said in a forward to the inquiry report.
“This culture thrives on conflicts of interest which are all too frequently ignored, ill managed, or even exploited.”
To reduce conflicts of interest, the committee called for the “operational separation of large multidisciplinary firms”. This change would prevent firms from auditing an organisation’s accounts while providing services such as research, restructuring, project delivery or management.
“This is a crucial recommendation which will ensure that firms aren’t perpetually caught in conflicts of interest and compromised in the provision of audit services by a desire to retain clients in more profitable other sections of their firm,” O’Neill said.
The Greens senator Barbara Pocock, who is a member of the committee, unsuccessfully pushed for the structural separation of audit and consultancy services, which would require firms to register them as different entities.
“Structural separation is an alternative, firmer way to ensure the integrity of the audit system and guarantees that audits are not compromised by non-audit services, creating conflicts of interest,” Pocock said in an additional comments section of the report.
The inquiry has called for the number of partners at firms to be capped at 400, which is the limit for law firms. It said this would also ensure a “more operable form of joint and severable liability”.
PwC Australia partners peaked at 930 in 2023 but has now fallen to around 650, while KPMG Australia has more than 680. Deloitte has more than 1000 and EY Oceania has around 700.
“The government should establish a suitable transition period of up to five years for this change to enable the implementation of this recommendation whilst minimising disruption to the sector,” the report said.
Pocock said she supported the reduction in partners but called for a cap of 100, rather than 400.
The Greens unsuccessfully pushed for a ban on political donations. The government has opposed this change, arguing donations to political parties do not influence outsourcing decisions made by apolitical public servants.
“Over the past decade the big four consulting firms have donated over $6m to the ALP and Coalition and received a staggering $8.5bn in government contracts,” Pocock said in a statement. “There is widespread support for banning these donations, except within the major political parties”.
PwC Australia announced it would no longer make political donations in July 2023 in response to the tax leaks scandal.
The inquiry called tougher penalties for misconduct and urged the financial watchdog, Asic, to resume random audit inspections conducted by the big four firms. It also called for a new government body to register consultants and a new code to govern their conduct.
Since coming to office, the federal government has reduced spending on consultants by almost $900m.
On Monday, the finance minister, Katy Gallagher, announced another $527m of “core work” that is usually outsourced to consultants would be brought back into the public service this financial year.
“Core work includes developing cabinet submissions, drafting legislation and regulation, and leading policy formulation,” Gallagher said in a statement.
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