When there are major business scandals in the media, it is always worthwhile to ask what are the general lessons to be learnt. This article1 reflects much of the public information from the media reports and the Commonwealth Parliament enquires discussing the PriceWaterhouseCoopers (PwC) saga.
The focus is primarily on the legal aspects and consequences when something goes wrong with the governance of an organisation. However, the critical focus is on the issues that can be learnt by all organisations and the impact on the legal profession.
Background
The PwC scandal unravelled publicly during May 2023, but the authorities formally knew for years. Its historical roots lie in decisions made by the Federal Government which wanted to stop tax avoidance by international companies in 2016.
At a Parliamentary Committee on 2 August 2024, facts were put on the public record and additionally PwC published its Transparency Report 2024. In December 2013, international tax PwC partner, Peter Collins, joined a confidential panel for the Commonwealth Government to advise on new anti-avoidance tax laws. This panel of experts was not a paid consultancy, rather it used industry expertise.
In September 2014, PwC emails were sent between PwC partners (reportedly 143 names) as to how they could take advantage of the proposed Multinational Anti-Avoidance Law (MAAL or the “Google tax law”). This law was announced in May 2015 and PwC Australia contacted 23 US technology companies on how to circumvent the provisions.
In September 2015 the legislation was released and PwC advised Uber and Adobe to restructure their tax affairs. By January 2016 the laws had come into force and by April 2016 the ATO was concerned that there were schemes to avoid the new laws. By December 2016 the ATO had identified 44 such schemes and a third of those were connected to PwC Australia.
By October 2017, the ATO had identified that Collins was the mostly likely common factor to the leaks and referred him to the Australian Federal Police (AFP), to investigate. By May 2019, the AFP had concluded there was not sufficient evidence to pursue Collins. In July 2020, the ATO decided to refer Collins to the Tax Practitioners Board (TPB). By November 2022, the TPB has found enough evidence against PwC and Collins, imposing sanctions by December 2022. Collins was deregistered for two years and PwC ordered to train staff on conflicts of interest.
Between February and May 2023, the Australian Financial Review published a report, and a Senate Committee started its enquiries. On 24 May 2023, the Federal Treasurer referred Collins/PwC to the AFP for investigation and ordered all future contracts for government work to be cancelled.2
A joint parliamentary inquiry into the structure of the Big Four accounting/audit/consulting firms commenced. By August 2023, the government announced many reviews and sweeping changes to the way government would use consultants. PwC decided to sell its lucrative government consulting business to Allegro Funds for $1 (but it was valued at over $100 million) on 25 June 2023 with a new entity, Scyne Consulting.
What happens next, is not clear yet as the AFP investigation of Collins and PwC is assumed to be ongoing, but the more formal public hearings of PwC by the Commonwealth Parliament into how the former and current CEOs, general counsel, chief risk officers and chair, handled such the matters, is public.
The Parliamentary Joint Committee on Corporations and Financial Services required an in-person presentation (with questions on notice) from the former chief executive officer (CEO) of PwC Australia (Tom Seymour) to the former PwC general counsel, Meredith Beattie (who resigned in July 2023).
Beattie accused the CEO of concocting the firm’s response to the tax scandal. In return, she was blamed for the disastrous approach taken. The complex area of legal professional privilege (LPP) was examined in detail. It appears many documents that were claimed to be covered by LPP and thus not available to the ATO or AFP investigation, were actually not covered by the evidential rules of LPP. This is a contested area of investigation.
PwC did finally settle with the ATO and the firm accepted a fine of $642,000 for 170 “false” legal professional privilege claims. Additionally, the current CEO of PwC Australia (Kevin Burrows) had stated his salary last year as $2.8 million, but only disclosed in June 2024, that he received an additional $1.2 million from his international PwC board role. This risked a perceived conflict of interest and was kept secret from most partners in the Australian firm.
The PwC Australia Transparency Report 2024 provides data on the impact of the tax scandal on PwC, as a firm and for its partners and staff. In the financial year 2023-2024 the profits for PwC fell by 24 per cent, with a reported loss of $820 million on revenues of $2.35 billion. This moved PwC behind Deloitte and EY in the consulting professional services industry. Staff turnover in the industry on average is 15% but PwC had over 32 per cent. PwC lost 250 partners and 3300 net staff during this period. The ATO is on record as saying that it is sceptical the PwC culture of “values before growth and profit” can be achieved.
The Legal issues
International taxation is a complex area of law and policy. Many countries around the world express concerns that global entities use their powers and finances to avoid paying local taxes in specific countries. Global companies pay tax, where they must do so, but will do everything legally possible to reduce the tax they pay so as to benefit their shareholders. The classic balancing act of tax minimisation and tax avoidance is critical. PwC tax partners had a reputation for innovation and aggressive international tax minimisation.
The rationale for corporations to minimise rather than avoid taxation, is based upon the legal principle of ‘shareholder primacy’. This principle was established in the Australian High Court in Ngurli v McCann (1953) 90 CLR 425. The HCA endorsed the earlier UK position from one of the most cited cases, Greenhalgh v Ardene Cinemas [1951] Ch 286.3
Application to PwC alleged breaches
The issue of a potential breach of confidential information from the government department to clients who would wish to avoid taxation, ended up on the radar of the ATO. The ATO naturally would have wished to discuss the matter in detail with Treasury officials but was essentially prevented from doing so by the secrecy provisions of the Taxation Administration Act (ss 355-25). The law has a penalty of two years’ jail for the taxation officer disclosing protected information to other parties. The ATO was unable to commence a prosecution against PwC and its partners, as s 8ZJ of the Taxation Administration Act 19534 only enables prosecution for a taxation offence.
Another Commonwealth crime may have been committed under the Criminal Code Act 19955 by the partners of PwC or the clients or the firm itself or other employees. This can then be prosecuted through action by the Australian Federal Police (AFP). Through the media, it has been announced that the AFP is actively investigating the potential criminal activity. The question that has not yet been answered is what crimes have been committed. Chapter 2 of the Criminal Code codifies the general principles of criminal responsibility and such principles apply to all Commonwealth offences.
Thus, the obvious suggestion would be a section within the Tax Act, but there is no such offence. The ATO is limited to legal actions within the tax legislation, due to the secrecy provisions to protect citizens, whether humans or corporates. There is an exception to the secrecy provisions for the ATO to refer matters to the AFP (which in fact it did in 2018). This was eventually dismissed due to a lack of actual evidence. The ATO then referred the matter to the Tax Practitioners Board, which it is legally able to do so, under the Taxation Administration Act. The TPB actually did take action, which resulted in the banning of Collins.
The matter of the confidential leak of information was referred back to the AFP for further investigation in May 2023.6 Section 122.4 of the Commonwealth Criminal Code7 states ‘that a person, including someone who is a contracted service provider, is under a duty not to disclose the information it has obtained while being employed by a Commonwealth entity’.
In June 2023, the Federal Attorney-General8 announced a review of the secrecy laws within Commonwealth legislation, which will try to resolve this matter and add clarity to future similar issues. There has been previous law reform reports9 on this issue, but little action has been taken. The National Anti-Corruption Commission10 should aid these types of matters in the future.11
Conclusion: Lessons to be learnt
The actual outcomes of the PwC scandal are a live matter, as matters are on foot. Thus, one cannot make too many specific conclusions. What is known is that the TPB is banning people and has other people under investigation. The AFP is conducting a criminal investigation.
The scandal is also an ethical dilemma for the consulting and accounting firms that make up PwC. Other major consulting firms and accounting or audit firms have come under close scrutiny. This has damaged professional reputations across PwC Australia. Many areas, completely isolated from the international tax advisory area, have had contracts cancelled or have been prohibited from tendering for government and some commercial matters.12
Additionally, partners and senior staff have been forced to resign and there is a real possibility of civil actions and even criminal prosecutions. For the lawyers involved, they owe additional duties as Officers of the Court and maybe executive officers (directors) under the Corporations Act 2001.
Boards should now be asking whether the lack of governance structures in place contributed to these issues. There is a need for constant reminders of the importance of ethics in personal and professional services, rather than a reliance on narrow ‘legal ethics’. The old adage of following the spirit of the law rather than the letter of the law, should have been a guiding light. It certainly illustrates that cutting corners and breaching confidentiality (a fundamental tenet of business) has huge consequences and ramifications. One cannot be a servant to two masters.
Professor Michael Adams is the Academic Director at UNE Sydney Campus and presented at the QLS Government Lawyers Conference in Brisbane.
Footnotes
1 An earlier version of this article was published at Adams, M; “Learning lessons from the PwC scandal” (2023) 75(3) Governance Directions pages 299-305.
2 Examples include: AustralianSuper pausing any new contracts with PwC due to the scandal, as reported by Clancy Yeates ‘Super fund titan freezes new contracts with PwC’ Sydney Morning Herald 3rd June 2023 page 22 and Federal government aged care, as reported by Henry Belot, ‘Federal Government suspends major aged care contract with PwC’ The Guardian 29th June 2023.
3 For a detailed explanation of the shareholder primacy rule, see Professor Jason Harris’ article ‘Directors’ duties, Corporate Culture and Corporate Governance’ (2018) NSW Supreme Court Commercial Law conference.
4 www.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/taa1953269/
5 www.austlii.edu.au/au/legis/cth/consol_act/cca1995115/sch1.html
6 Australian Financial Review ‘PwC tax leaks scandal referred to Federal Police’ (25th May 2023)
7 http://www.austlii.edu.au/au/legis/cth/consol_act/cca1995115/sch1.html
8 https://www.ag.gov.au/crime/publications/review-secrecy-provisions
9 Australian Law Reform Commission Report 11 (2010) ‘Secrecy Laws and Open Government’
10 www.ag.gov.au/integrity/national-anti-corruption-commission
11 Michelle Grattan, ‘Grattan on Friday: the PwC scandal should be ripe for the National Anti-Corruption Commission’s attention’ The Conversation (1st June 2023).
12 Examples of the negative publicity include David Crowe ‘Costly culture of taxing neglect’ Sydney Morning Herald 2nd June 2023 page 26 and Colin Kruger & Sarah Danckert ‘Global giant faces loss of confidence’ Sydney Morning Herald 3rd June 2023 page 26
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