The reliance that governments place on external consultants has been highlighted in two prominent cases very recently. Both involved professional firms needing to reflect on, better manage, and demonstrate they manage conflicts of interest.
Terminating the tax agent registration of former PricewaterhouseCoopers tax partner Peter Collins for failure to maintain confidence associated with his role in government consultative forums has been spoken about in professional circles.
Collins had told some folks in the PwC tax division about things the government was doing but that — as everybody has subsequently found out via the media — was a tad naughty. The confidentiality agreement does not provide for sharing of material obtained to provide government feedback on tax matters.
The Tax Practitioners Board struck him off the tax agent’s register and Collins cannot reapply for registration for a couple of years.
His former firm also copped a penalty. Some poor sod within that practice is going to have to monitor and write reports to the TPB for the next couple of years about how the firm is fulfilling its undertaking to ensure that everybody understands the obligations they take on when they sign agreements with a government.
There will, no doubt, be people in the accounting world who have been flinching a tad this week because the TPB’s actions are high profile and are a reminder that your presence in a consultative process run by a government is not something to be taken lightly.
Anybody reading the decisions concerning the breach of confidentiality matter from the TPB closely will note that the TPB’s Code of Professional Conduct mirrors the requirements in the Code of Ethics of the accounting profession.
A breach of the TPB’s professional code of conduct means a violation of the accounting profession’s Code of Ethics that is known as APES 110, and other related guidance. That gets dealt with by internal firm discipline as well as the relevant professional accounting body.
What few people outside the profession will know is that the ethical code emphasises the public interest as paramount to the activities of accounting professionals.
“A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest,” the first paragraph of the ethical code says.
“Confidence in the accountancy profession is a reason why businesses, governments and other organisations involve members in a broad range of areas, including financial and corporate reporting, assurance and other professional activities.”
One of the fundamental principles the code mandates is, of course, confidentiality.
PwC has put in place systems to ensure it tracks the individuals that have agreements, manages conflicts of interest as well as establishes a process of ensuring people are properly trained so they do not use government information to which they have privileged access in client work.
This was one example where an external firm has had to put some processes and procedures n place to deal with real or perceived conflicts of interest arising from the involvement of senior partners in government committees.
An Audit Office of New South Wales report gifts us with another example of consulting firms engaging with government departments but on this occasion, it lays the blame squarely at the feet of government departments for failing to manage potential or real conflicts when dealing with a range of players in the consulting space.
The audit office found that boffins in Treasury wanted an entity responsible for having rolling stock for the transport system classified as being outside the general government sector (GGS) so the ‘bottom line’ was shielded from a bunch of nasties that make government financial performance look somewhat lacklustre.
An entity would have to be classified as either a Public Finance Corporation (PFC) or (Public Non-Finance Corporation) to keep it outside the GGS.
A small going concern was set up, called the Transport Asset Holding Entity. Think of that entity as the box that has the state’s transport assets other than roads in it.
What did the audit office find?
“The process was not cohesive or transparent. It delivered an outcome that is unnecessarily complex in order to support an accounting treatment to meet the NSW Government’s short-term Budget objectives, while creating an obligation for future governments,” the audit office report summary says.
So, this little racket was set up to window dress the Budget by creating an entity that would meet the Treasury’s wish for something that would avoid things being classified as Budget expenses? Tell me more…
“The benefits of TAHE were claimed in the 2015-16 NSW Budget before the enabling legislation was passed by Parliament in 2017,” the audit office says.
“This committed the agencies to implement a solution that justified the 2015-16 Budget impacts, regardless of any challenges that arose.”
Hold on! The entity did not start operations until 2020 but the benefits were claimed in a Budget earlier that the legislation passed? I wonder what would happen if a listed company pulled a similar stunt.
One of the showstopping revelations in the audit office report is the number of consultants that were brought in from stage right and stage left in order to create this asset-holding entity.
“Agencies relied heavily on consultants on matters related to the creation of TAHE, but failed to effectively manage these engagements. Agencies failed to ensure that consultancies delivered independent advice as an input to decision-making,” the audit office findings say.
“A small number of firms were used repeatedly to provide advice on the same topic. The final cost of TAHE-related consultancies was $22.6 million compared to the initial estimated cost of $12.9 million.”
This starts to get mindboggling when you look at the further detail on the engagement of consultants in the report. Three agencies — NSW Treasury, the Transport department, and the box with rolling stock in it — used 16 separate consulting firms between 2014 and 2021 to deal with the task of creating and implementing the structure.
The audit office report points to the risk of using the same consulting firms multiple times, and among those risks is the danger that the agencies involved would not receive different opinions.
“Three consulting firms (Boston Consulting Group, Ernst and Young and KPMG) were employed multiple times over the period 2014 to 2021. Boston Consulting Group was employed five times (three times by TfNSW and twice by TAHE), Ernst and Young was employed eight times (seven times by TfNSW and once by TAHE) and KPMG was employed seven times (five times by TfNSW and once each by TAHE and Treasury),” the list in the audit office report reads.
“When a small number of firms are used repeatedly to provide advice on one topic, the risk is created that there will not be any diversity of views or different opinions.”
Consider the situation when one firm, KPMG, was used to provide advice to both the treasury and the transport departments of the NSW state government.
“Treasury engaged the firm to provide a fiscal risk management strategy and advice on the impact of changes to accounting standards. TfNSW engaged the same firm to develop operating and financial models for TAHE, which raised concerns regarding the viability of TAHE,” the report says.
“Disputes arose around the findings of these reports. Treasury disagreed with some of the outcomes of the work commissioned by TfNSW, relating to accounting treatment and fiscal advice.”
The audit office report says that the disputes between the two departments on the advice offered by the firm could have been avoided had the agencies actually communicated and outlined precisely what they were using the same firm.
Another risk was highlighted by the audit office that is worth noting.
“The risk that the role of consultants could have been blurred between providing independent advice to government on options and facilitating a pre-determined outcome was not effectively treated or mitigated,” the audit office report says.
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