How PwC is fighting to contain tax leak fallout in Australia

Sydney — PwC Australia has moved to contain the fallout from a scandal over the misuse of confidential government tax plans by selling its government consulting unit to Allegro Funds and flying in an executive from Singapore to lead the local firm.

Here is what you need to know about what the “big four” professional services firm is facing.

What did PwC do wrong?

The scandal centres on a former tax partner who signed confidentiality agreements with the Australian treasury between 2013 and 2018 to advise it on policy to crack down on tax avoidance by multinational firms.

Australian tax authorities revealed in January that these agreements were breached, and a cache of partially redacted internal emails released in May in parliament showed the confidential information was shared with PwC staff to drum up business.

In one email dated 2016, a PwC staff member celebrates winning work with “brand defining” clients, including US technology companies, thanks to the information that had been provided by the tax partner.

Australia’s tax office told parliament last month it foiled several attempts by companies to subvert the 2016 Multinational Anti-Avoidance Law, saving taxpayers about A$180m annually.

What has been the response?

The Australian treasury last month referred the matter to the police, while the Reserve Bank of Australia, several government departments and the country’s three largest pension funds have frozen or reviewed ties with PwC.

PwC apologised for “sharing confidential government tax policy information”, placed nine partners on leave and named four former partners directly involved in the breach. All four had already left the firm and two have since publicly denied any wrongdoing.

To rebuild trust with its public sector clients, PwC in May agreed to ring-fence its government consulting business and appoint a separate board.

On Monday, acting head Kristin Stubbins said that decision “didn’t go far enough”, leading the firm to spin off its government consulting business to private equity group Allegro Funds for A$1.

How will the split work?

Founded in 2004, Allegro Funds is a corporate turnaround expert in the Australian market with A$4bn worth of assets under management.

It carried out its first Australian public market deal in May when it bought law firm Slater & Gordon for A$150m including debt. In June, Allegro Funds sold its stake in Pizza Hut Australia that it had owned since 2016.

Sydney-based Allegro’s decision to purchase PwC Australia’s business will see the unit go from a partnership-owned division of a global operation to a stand-alone local corporation.

Allegro will provide funds to launch the new business and ownership will be split between the firm and the former PwC partners.

What risks does PwC face?

The firm must now do without a practice that accounts for about 20% of its fiscal 2023 revenue. Assuming this year’s revenues are similar to fiscal 2022’s A$3bn, the hole could be as much as A$600m.

The remaining audit, tax and private sector consulting practices will need to rebuild trust with clients. However, the Labor senator heading the federal inquiry said on Sunday PwC could not “phoenix their way out” from the scandal.

There is also the risk that more staff could leave. Prof Rahat Munir, head of the department of accounting and corporate governance at Macquarie University said staff would be “taking the first opportunity to find something else and rebrand themselves”.

PwC declined to comment for this story.

Reuters