Consulting giants face break-up threat to restore trust after scandals

The federal government is proposing massive changes to how global consulting giants such as PwC and KPMG operate in Australia, after a series of scandals that have undermined trust in a sector that plays a critical role in financial markets.

The shake-up could include forcing the consulting giants to spin off the audit services that are the core of their business, capping partner numbers to make the firms more governable, and limiting lucrative the number of years one firm spends checking a client’s numbers.

KPMG is in turmoil after it last month admitted senior staff accessed confidential information from corporate clients to win business, prompting businesses and governments to consider dumping the firm. The saga has echoes of the PwC tax scandal, in which that firm misused confidential information about planned tax changes it had helped to draft.

Assistant Treasurer and Minister for Financial Services Daniel Mulino, who will unveil the proposed changes in an options paper on Wednesday, took aim at the behaviour of consulting giants and said change was needed.

“In recent years, we have seen behaviour from some large accounting, auditing and consulting firms in Australia that is not fair and honest,” he said in a statement.

“This has undermined trust in the firms themselves and raised broader questions about the resilience of the frameworks meant to uphold market integrity,” he said.

“It is time to return trust and integrity so that the government, taxpayers and other businesses can rely on the services of large accounting, auditing and consulting firms.”

Auditors plays a crucial role in the financial markets by signing off on company accounts that are then relied on by investors, including superannuation giants. But there have long been concerns about risks to their independence when they are part of groups that also sell consulting services to corporate clients. PwC spun off its public service consultancy practice, now known as Scyne, in the wake of its tax leaks scandal.

One of the most radical proposals in the paper is to effectively break up the consulting giants, a step known as “structural separation”, forcing them to only offer either business advice or auditing.

Another is the proposal to ban firms from offering non-audit services to audit clients. This would be a massive blow for KPMG, which has just been appointed Macquarie Group’s auditor and stands to receive non-audit fees that are worth around $16 million a year.

The paper also flags proposed changes that would strengthen the corporate watchdog’s role in policing the sector.

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