Senate Committee Report on the Consulting Industry

17 June

- The Australian senate committee inquiry into Management and Assurance of Integrity by Consulting Services, which began in March 2023, has finally completed and delivered its report (June, 2024).

- “The inquiry was launched in the wake of the PwC tax leaks scandal in early 2023, where it was discovered the firm leaked sensitive Australian government information to large corporations, including Google.” “The tax leaks matter involved a former partner sharing confidential tax information with PwC personnel who then used it to win new clients. The firm then developed schemes to help clients sidestep the tax laws the former partner was helping Treasury develop.”[1]

- Greens senator Barbara Pocock successfully pushed for the inquiry in March 2023.

- The committee’s remit was focused on how the government buys consulting services, how the firms are governed and how they interact with the broader Australian public service.[2]

- The publication of this report highlights the broader problem with what journalist Laura Tingle of ABC’s 7.30 called “a hollowed-out public service”. (7.30, ABC, Wed., 12 June, 2024). At the NMS, we teach that the decline and corruption of the public service and its relationality to society as a whole (and vice versa) are serious issues that must be publicly understood and responded to. We offer public education in the humanities and social sciences that relates directly to the quality, transparency, functionality and integrity of the public service and the cultivation of a renewed public ethos of public service. The Modernity & Mandarinism lecture booklet explains that the true value of the public service/mandarin class lies in meaningfully embodying and practising values of “social responsibility, meritocracy, public service and public education, providing a crucial connective tissue to society, with the education system and governmental administrative structures being key to this.”[3] (Purchase the Modernity & Mandarinism digital lecture booklet in the Store section of this website at: www.cmc3industries.com/store)

- As one of the co-leaders of the Senate committee Labor Senator Deborah O’Neill put it: “I would like to see, as time passes, a recovery of incredible pride in doing the work of being a public servant and doing the work that serves your fellow Australians. Not entirely motivated for profit, but motivated for the common good.”[4]

- The inquiry focused initially on claims PwC was party to internal government discussions and used this confidential information to help its clients devise tax minimisation strategies. The shocking revelations, published by the Australian Financial Review in May, 2023, led to the resignation of then-CEO Tom Seymour.

- STEPHEN BARTOS, ECONOMICS PROFESSOR: “This issue affects every Australian. Corporate tax avoidance hurts the budget bottom line. It means less money for schools, hospitals, pensioners or cost-of-living relief. PwC’s actions potentially allowed private businesses to pay less tax.”[5]

- The “Big Four” accounting firms, Deloitte, PwC, EY, and KPMG, audited 37.9 per cent of ASX-listed companies and 96.5 per cent of the top 200 ASX-listed companies (by assets) in 2022, according to the paper. In the same year, they charged 83.1 per cent of audit fees paid by all ASX-listed companies and received 99.2 per cent of fees paid by the top 200.

- The “Big Four” have increased their federal business by 400 per cent over a decade while donating steadily to the major political parties that shape big decisions on government projects. The Centre for Public Integrity’s May, 2023 study[6] found that total contract value has swollen from $282 million a decade ago to $1.4 billion last financial year. A separate analysis by the Parliamentary Library, requested by the Greens, found the current contracts held by PwC with federal departments and agencies are now worth $453.7 million, with the Department of Defence making up almost half the total.

- The Centre for Public Integrity analysis checked political donations from 1998 onward and found the big four firms supported Labor and the Coalition according to which side held office. The donations we 52:48 per cent in favour of the Coalition. “The big four’s persistent donations to both major parties show that their donations are unrelated to any ideological goal or end sought, but are rather focused on currying favour with whoever may be in power,” it says in the report. “This trend in bipartisan donations has been observed among other large industries in Australia and is characterised by some as a form of ‘state capture’. In this sense, such donations are not bona fide attempts to genuinely support a cause, but to create a sense of interdependency.” PwC is now the biggest donor of the group, giving $2.1 million to federal political parties from July 2012 to June 2022, and when KPMG ($1.1 million), EY ($565,000) and Deloitte ($572,000) are added to the tally, their combined donations have reached $4.3 million over a decade.[7]

- BARBARA POCOCK, GREENS SENATOR: “But we also have very large organisations, these big four, up to 1,000 partners. That defies a true partnership relationship. We need to pull back the cap on the size of those partnerships. We think 100 is about right. You can't be a big partnership if you're a GP or an architect. There's no rational reason for that very large size allowed for accounting firms. So we need to cap that.”[8]

- BARBARA POCOCK: “These firms make very sizeable political donations to the major parties. In the last 10 years, $6.6 million to the major parties as political donations. Now that's something that doesn't pass the pub test, and surveys of Australian community members say that they have no time for that. It's time to end political donations from people who are, at the same time, contracting for government work. It doesn't work. It's both, you know, potentially an actual conflict of interest, but certainly a perceived conflict of interest. So that question of political donations and of the manipulation of the revolving door - people who move out of the public sector into consulting, and have their knowledge, their intelligence about the public sector actively, aggressively farmed for future commercial opportunities.”[9]

- The final recommendations of the report[10] were:

1. PwC should publish details about all partners and personnel involved in the breach of confidential government information.

2. Service providers should be obliged to act in the public interest when working for the Commonwealth.

3. The Finance Department to improve the training of officials undertaking procurement.

4. Contracts should factor in knowledge transfer from consultants to the Australian Public Service.

5. Service providers should be required to (a) act in the public interest and (b) incorporate elements from the accountants’ ethics code that align with public sector values.

6. Finance should provide guidance on managing conflicts of interest.

7. Finance should develop a register of conflict-of-interest breaches by service providers.

8. Finance should enhance transparency and details on AusTender.

9. The Australian Law Reform Commission should undertake a review of partnership law and recommend reforms.

10. The Commonwealth should force professional bodies to report annually to a parliamentary committee.

11. Parliament should legislate to establish a committee to review and approve consultancy and services worth $15 million or more.

12. The finance minister should report to parliament twice a year on Commonwealth consulting contracts worth $2 million or more.

(Read the full report at: www.aph.gov.au/Parliamentary_Business/Committees/Senate/Finance_and_Public_Administration/Consultingservices)

- The problems that can arise from government outsourcing of work that has traditionally been done by public servants to big accounting/consulting firms has been expertly analysed by Marianna Mazzucato (Professor in the Economics of Innovation and Public Value at University College London and founding director of the UCL Institute for Innovation and Public Purpose). In The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments, and Warps Our Economies (2023)[11] Mazzucato and co-author Rosie Collington examine the consulting industry's impact on businesses and governments. Some of their main points include:

- The consulting industry has grown significantly since the 1980s and 1990s, driven by neoliberal and Third Way reforms.

- Powerful consulting firms, such as McKinsey & Company and Boston Consulting Group, have undue influence over government operations and business practices.

- The industry's influence hinders innovation, obscures accountability, and impedes efforts to address pressing issues like the climate crisis.

- The book presents case studies highlighting the negative consequences of consulting interventions, including the inadequate responses to the COVID-19 pandemic.

- Mazzucato and Collington argue for a more collaborative approach between the public and private sectors, emphasizing transparency, accountability, and long-term value creation.

- They suggest enhancing conflict of interest disclosure requirements and empowering public sector organizations to take risks as potential solutions.

Mazzucato has shown that government over-reliance on external consulting firms has led to a range of problems, including a loss of institutional memory and a “brain drain” from the public service:

- Homogenization: Consulting firms impose generic, one-size-fits-all solutions, erasing unique cultural identities and institutional knowledge within public organizations.

- Short-termism: Consultants focus on quick fixes and efficiency gains, neglecting long-term thinking and strategic planning, which undermines the development of a strong public service culture.

- Externalization of expertise: Over-reliance on consultants leads to a “brain drain” in the public sector, as internal expertise and capacity are neglected or dismissed.

- Loss of institutional memory: The constant influx of consultants and short-term contracts results in a loss of historical knowledge and continuity within public organizations.

- Deprofessionalization: Consultants often lack a deep understanding of the public sector's unique challenges and values, leading to a deprofessionalization of public service work.

- Cultural assimilation: Public servants are pressured to adopt a corporate culture, prioritizing efficiency and profit over public service values and ethical considerations.

- STEPHEN BARTOS, ECONOMICS PROFESSOR: “Overall, the systemic problem remains. Consulting firms have come to take such a prominent part in public life, and government departments have come to rely on them excessively because the public service has lost crucial skills. Australia is much worse off as a result, because we don’t have the capacity to do things the public service used to be able to do. Part of this was due to cuts to the public service. But there was also an ideological belief from some governments that giving work to private sector consultants was a good thing to do, without proper recognition of the risks. Restrictions on public servants taking up positions in private consulting firms after they quit the public service would go a long way toward solving the problem. As it is, there is massive incentive for those public servants to give very costly contracts to the consulting firms and then go and work for those same consulting firms for their next job. There’s a real conflict of interest there, and taxpayer money is at stake.”[12]

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References:

[1] Inquiry calls for strict new rules for big four consulting firms, Edmund Tadros and Maxim Shanahan, AFR, Jun 12, 2024, https://www.afr.com/companies/professional-services/inquiry-calls-for-strict-new-rules-for-big-four-consulting-firms

[2] ‘We remain concerned’: Senate inquiry into PwC tax scandal calls for reform, but overuse of consultants will likely continue, Stephen Bartos, Professor of Economics, University of Canberra, The Conversation, June 12, 2024, https://theconversation.com/we-remain-concerned-senate-inquiry-into-pwc-tax-scandal-calls-for-reform-but-overuse-of-consultants-will-likely-continue-232251

[3] Modernity & Mandarinism, digital lecture booklet, Christopher Carlisle (New Mandarinate School), page 14, 2024, (www.cmc3industries.com/store)

[4] Long-awaited report from federal inquiry into consultancy firms released | 7.30, ABC, Wed., 12 June, 2024, https://www.youtube.com/watch?v=QQsstRk57N8&ab_channel=ABCNewsIn-depth

[5] ‘We remain concerned’: Senate inquiry into PwC tax scandal calls for reform, but overuse of consultants will likely continue, Stephen Bartos, Professor of Economics, University of Canberra, The Conversation, June 12, 2024, https://theconversation.com/we-remain-concerned-senate-inquiry-into-pwc-tax-scandal-calls-for-reform-but-overuse-of-consultants-will-likely-continue-232251

[6] Booming business for Big Four comes at a high cost, The Centre for Public Integrity, May, 2023, https://publicintegrity.org.au/research_papers/booming-business-for-big-four-comes-at-a-high-cost/

[7] Big four consultancies win $1.4 billion a year in taxpayer-funded contracts, David Crowe and Matthew Knott, SMH, May 22, 2023, https://www.smh.com.au/politics/federal/big-four-consultancies-win-1-4-billion-a-year-in-taxpayer-funded-contracts-20230521-p5d9za.html

[8] Long-awaited report from federal inquiry into consultancy firms released | 7.30, ABC, Wed., 12 June, 2024, https://www.youtube.com/watch?v=QQsstRk57N8&ab_channel=ABCNewsIn-depth

[9] Long-awaited report from federal inquiry into consultancy firms released | 7.30, ABC, Wed., 12 June, 2024, https://www.youtube.com/watch?v=QQsstRk57N8&ab_channel=ABCNewsIn-depth

[10] Inquiry calls for strict new rules for big four consulting firms, Edmund Tadros and Maxim Shanahan, AFR, Jun 12, 2024, https://www.afr.com/companies/professional-services/inquiry-calls-for-strict-new-rules-for-big-four-consulting-firms

[11] The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments, and Warps Our Economies Mariana Mazzucato and Rosie Collington, 2023, https://marianamazzucato.com/books/the-big-con/

[12] ‘We remain concerned’: Senate inquiry into PwC tax scandal calls for reform, but overuse of consultants will likely continue, Stephen Bartos, Professor of Economics, University of Canberra, The Conversation, June 12, 2024, https://theconversation.com/we-remain-concerned-senate-inquiry-into-pwc-tax-scandal-calls-for-reform-but-overuse-of-consultants-will-likely-continue-232251

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Senate Committee Report on the Consulting Industry

Foucault on Parrhesia