Craig Reucassel:
Well in the wake of misconduct scandals at PricewaterhouseCoopers, PwC, and KPMG, the government’s setting its sights on regulatory crackdown on accounting, auditing and consulting firms.
The Assistant Treasurer and Minister for Financial Services is Daniel Mulino and he’s behind this. He joins us now. Morning, Assistant Treasurer.
Daniel Mulino:
Oh, thanks for having me on, Craig.
Reucassel:
What’s your plan to tackle the current problems that we’ve seen in these consulting firms?
Mulino:
Well look, can I just start by saying that we’ve seen a pattern of opportunistic and unethical and unfair behaviour in recent years from some of our largest accounting, auditing and consulting firms.
That includes the allegation that PwC used information that they received on a confidential basis in helping to design certain tax laws to help certain clients avoid tax. KPMG partners allegedly used confidential information from long‑term clients to help win other work. And look, if even half of what we’ve seen flushed out in the public realm is true, that is just not good enough.
And so what the government is doing is putting out a discussion paper today which looks at serious regulatory options to strengthen arrangements to stamp out this kind of behaviour. It would include things like operational separation, structural separation and limiting the number of partners in audit functions to –
Reucassel:
What does operational, what does that what does operational separation mean, Daniel? I apologise, but what does that mean?
Mulino:
No, so look, operational separation would, for example, could take the form of saying that if you have an audit firm, it can’t provide non‑audit services, like consulting services or broader accounting services to its audit clients.
Reucassel:
Yeah, so this is ‑
Mulino:
That would reduce the likelihood of conflicts.
Reucassel:
Part of the problem, is that different parts of the organisation essentially are doing different things and that information is then being used by other parts. So if I do an audit on a company, it’s then being used by my consulting arm to find out something to get business as well. So that’s what you’re going to try and get get rid of this kind of internal conflict of interest that’s caused by having different parts of the organisations?
Mulino:
Yeah, so operational separation is basically saying a firm which undertakes both audit and non‑audit functions can’t offer those to the same client. A stronger form of that would be structural separation, which would say the same firm can’t offer both audit and non‑audit functions. So if you’re going to be an audit firm, that’s all you do. So that would be a stronger kind of regulatory intervention.
So we’re going to look at both of those options and receive submissions from experts on those. Another would be to say that some of these firms have just become too big. At the moment the partnership limit is a thousand. The partnership limit on law firms, for example, is 400 and the Parliamentary Joint Committee on Financial Services Corporations recommended that we look at that same limit of 400. So that’s one of the options that we have included in the paper.
And then there’s a range of other options around stronger powers for ASIC and enhanced penalties and so forth.
Reucassel:
Yeah. So at the moment is there any kind of built‑in restriction that makes sure these you know, that the audit part of the firm doesn’t communicate with the other part of the firm? Is that meant to be there and is just being breached?
Mulino:
Look, I think there are a range of provisions there at the moment. ASIC has some level of oversight of lead audit partners. There are a range of measures, a range of arrangements where professional bodies, for example, have some level of day‑to‑day oversight of operations, ethics, management of conflict.
But I think what’s clear is that there are gaps in current regulatory arrangements and we need to look at some strong options to fill those gaps, to make sure that we can prevent the kinds of things we’ve seen flushed out in public hearings, PwC and KPMG in particular, from happening again.
Reucassel:
Yeah. I mean is it a big change to these organisations if they have to split up into their different parts? Like if you’ve got the accounting separate to the consulting and also then the audit separate, you know, if they end up being 3 firms is that going to ruin these firms?
Mulino:
Well look, I don’t want to pre‑judge all the submissions that we’re going on to receive on this. But look, I don’t think it would ruin them. A lot of firms operate in a specialised way in all sorts of professional services, so I don’t think it’s something that, you know, we should see as the end of the world.
We do need to work through all the details with options like this. You don’t want to regulate in a way that creates unintended consequences. So we want to be careful and look at the options.
But I might say that prominent policy experts like Allan Fels and Graeme Samuel have asked government to look at these structural separation options in the past. Structural separation is clearly a cleaner and neater way to deal with some of these conflict issues than saying that firms should manage them more clearly within the firm.
Reucassel:
And now are governments currently is the federal government currently taking contracts from PwC and KPMG or not at the moment?
Mulino:
So, yeah, my understanding is that at the moment we’ve put a hold on and that there’s an audit being undertaken of current contractual arrangements. So this is separate to that process which is being managed by the Minister for Finance.
Reucassel:
Just out of interest, a few years ago when I was looking at this these big consulting were kind of taking over from the banks as being the, well, big donors to the political parties, like Labor and, you know, the Liberal Party. Is that still the case, are you still getting donations from these big firms?
Mulino:
Look, I must confess I don’t have any kind of information to hand on that but, look, it’s clearly not going to affect what we’re doing here. We’re putting some very strong options on the table here and this is something I’m taking very seriously.
Reucassel:
Yeah.
Mulino:
I might say also that there’s been other actions taken in recent times. We’ve recently passed laws establishing a body called External Reporting Australia which brings together the accounting and auditing standard settings into one body and also puts in place stronger settings in terms of establishing the governing council of that body.
We’re also soon to be strengthening the sanctions powers of the Tax Practitioners Board. So there’s important action being undertaken there partly in response to what was brought to light in relation to PwC. And there’s also a discussion paper that I recently issued in relation to whistle blowing in the taxation and corporations field. Now that is very –
Reucassel:
Daniel, I read it nightly, it’s how I get to sleep. Thanks for speaking to us this morning, Daniel, appreciate it.
Mulino:
Thanks very much, Craig.