The Big Four Global Accounting Firms and Corporate Tax Evasion
Editors’ Note: Earning profits in one country but reporting them into another to reduce or even wipe out taxes is a huge and worsening global problem. Below experts in critical accounting discuss an Australian tax scandal’s worldwide significance. This article, lightly edited for an American audience, first appeared at Michael West Media, an independent investigative news organization focused on financial misdeeds Down Under.
SYDNEY, Australia — The scandalous behavior and lack of accountability of the Big Four accountancy firms – Deloitte, KPMG, PwC, and EY – remains a regular feature of the news cycle as the Australian Senate Inquiry into consultants draws to a close.
While government consulting has been the fast-growth business for the Big Four, their bread and butter remains the other two divisions: audit and tax (avoidance) advice.
So it is that, despite Senate demands for releasing the Linklaters report into the PwC scandal in Australia – PwC Global had commissioned the report – the law firm has refused to provide it.
[Linklaters is a British law firm that operates in 25 countries. PriceWaterhouseCoopers (PwC) hired Linklaters in May 2023 to investigate whether PwC shared confidential data from its Australian clients with non-Australians. In an artfully worded statement, Linklaters concluded that no such impropriety occurred, but Australian lawmakers have said they want to see the actual report, not the publicity statement.]
Although the Big Four have repeatedly been accused of engaging in conflicts of interest while assuring the public and regulators that there is “nothing to see here,” the empirical evidence suggests that there is, to the contrary, plenty to see here.
As David Cay Johnston, U.S. journalist and tax expert, told his readers recently, “PwC is doing everything possible to make sure that big U.S. and U.K. names – of partners and client companies – won’t hit the headlines outside of Australia.”
An email cache uncovered by AFR [the Australian Financial Review] showed that PwC had quickly put together an international swat team, “Project North America,” to market the intel to multinationals interested in avoiding new Australian taxes … PwC Australia had charged $2.5 million in fees in 2016 to advise 14 clients how to sidestep new multinational tax avoidance laws based on the intelligence shared by tax partner [Peter] Collins”.
Time for Reform
Together with several critical accounting colleagues from Macquarie University, Sydney University, the University of Wollongong, and the Open University (U.K.), we have been making a series of parliamentary submissions, as well as writing popular and journal articles documenting these issues and recommending to the government a series of substantive reforms to the way auditing, accounting, and consultancies are performed and operate in Australia.
Michael West Media, an independent investigative reporting organization in Australia that focuses on financial matters, has been instrumental in drawing attention to the many questionable, unethical, and even illegal practices in which the Big Four accounting firms have allegedly engaged over many years. With this in mind, Michael West Media invited us to draw readers’ attention to some of this work, hoping it might provide some more impetus for reform. Here are two key areas:
The Audit Oligopoly
A major reason for shining a light on the activities of the Big Four is that they audit 98% of global corporations with a turnover (revenues) of $1 billion or more measured in U.S. dollars. They audit all the FTSE 100 Index firms in the United Kingdom and all the Fortune 500 companies in the U.S.
They also audit 97% of Australia’s ASX 300 companies. Many of these companies are known to be involved in profit shifting, transfer pricing, and the use of complex corporate structures involving tax havens.
In July 2023, the Tax Justice Network reported that US$480 billion a year is lost to global tax abuse, or $4.8 trillion over the next ten years.
Of that sum, US$311 billion is the result of cross-border corporate tax abuse by transnational corporations, while US$169 billion is the result of offshore tax abuse by wealthy individuals.
[Cross-border tax abuse refers to booking profits in a country with low tax rates and lax rules to avoid taxes in another country with higher tax rates and robust rules.]
Although the Big Four have repeatedly been accused of engaging in conflicts of interest while assuring the public and regulators that there is “nothing to see here,” the empirical evidence suggests that there is, to the contrary, plenty to see here.
Audit Quality and Consultancy Capture
Despite their dominance of global audit processes, the Big Four have repeatedly failed to identify fraudulent accounting practices in significant client firms that have subsequently collapsed, including WorldCom, Thomas Cook, Lehmann Brothers, Carillion, BHS, IMDB, and WireCard, to name just a few.
The evidence we have compiled and provided in submissions to the Australian Parliament and our articles for popular publications and business journals we have hyperlinked below demonstrates how global consultancy firms – and most prominently, the Big Four, have captured regulatory agencies, government service providers, senior bureaucrats, and members of ruling political parties.
This has enabled them to shape the legal, regulatory, and policy processes to favor themselves and their corporate clients to the detriment of the public interest in every nation in which they operate.
We wholeheartedly support calls by Michael West, Jeff Knapp, and other contributors to Michael West Media for appropriate regulation of audit, tax advisory, and consultancy firms, which is essential to shift the balance from profit-making to protecting the public interest.
Our analysis supports previous calls by tax experts and industry insiders to break up these firms and force a structural separation between their strategic advisory, taxation, and auditing functions. We have also argued there are substantial grounds for abolishing the opaque structures of limited liability partnerships (LLPs), which effectively enable these partnerships to internalize the extent of their accountability for wrongdoing.