PwC scandal: The structural problem inside ...

But speaking to Chanticleer from Boston, Gow says the episode highlights the danger accounting firms expose themselves to when they move beyond pro-social tax work – helping clients comply with their obligations – and into the murky waters of tax minimisation.

“Having these tax services in-house seems inherently problematic for the businesses from a reputation, cultural, and other points of view,” he says.

While he and Kells’ book traces the way the accounting firms modelled their growth on Italy’s famous Medici family – the focus on risk management, the tentacles in a range of parts of the economy, the strong ties to government, the creation of a partner track to ensure loyalty – the Medici’s strategy of staying in the shadows simply doesn’t work in a world where transparency is prized.

Tax advice, Gow says, is a perfect example of an area where an accounting firm can no longer “assume that things will remain secret forever”.

While the focus remains on the bollocking PwC is receiving, and will continue to receive, at the hands of politicians, Gow and Kells’ work also raises the question of what, if anything, regulators should do in response to the PwC scandal.

At present, regulatory responses are still emerging, albeit in a haphazard way.

Treasurer Jim Chalmers has promised to further strengthen the Tax Practitioners Board that uncovered the malfeasance, and is suggesting as-yet-unspecified action could follow.

Most in the sector suggest PwC is likely to find its government work dry up almost immediately, although whether the firm faces formal sanction or a shadow ban remains to be seen; Home Affairs secretary Mike Pezzullo noted on Monday there is no “lawful basis” to ban PwC from winning further contracts from his department.

Gow and Kells wrote in 2018 there was a view among global regulators that the big four should not be allowed to become a big three, creating what the pair saw as a classic too-big-to-fail moral hazard.

Gow suggests the PwC scandal should be grounds for a rethink, particularly given that PwC and its three rivals have a bigger influence in Australia than in other developed countries due to the size of the local market.

“There’s definitely been regulatory forbearance in terms of not going after these firms because of that perception that they’re too important thanks to their role in auditing 99 per cent of the market capitalisation in the world, or whatever the number is.

“But the reality is, in a lot of ways, there’s no reason why they couldn’t fail, especially as they become more and more about things that have nothing to do with auditing and accounting.”

One much-discussed option would be to split the audit and non-audit functions in these firms as a way to reduce conflicts of interest and, in the view of several regulatory reviews around the world, improve deteriorating audit quality.

The British government declared in 2021 that it would move to force such splits as part of a suite of audit reforms, with the big four told to prepare to split by 2024.

EY went the furthest, exploring a split under its infamous Project Everest initiative. But the move was abandoned after a revolt by partners, and the UK government’s draft audit reform legislation is now in limbo. British parliament was told this month that the government “is committed to legislating when parliamentary time allows”.

Chanticleer has doubts whether the split of the big four in Australia would have prevented PwC’s behaviour – this is surely simply profit-driven industrial malfeasance that should never have been allowed to happen.

But Gow makes a good point when he says this episode does show there would be some benefit in “siloing the risk” between different parts of an accounting firm’s operations, such that the auditing work that markets need to function isn’t threatened by issues on the advisory side of the business. Regulators could even make firms pick which side of the fence they want to provide services from for a client.

The scandal may also be a reminder to regulators that, as Gow and Kells warned five years ago, the risks in these firms are not diminishing.

“This seems to be something that demands a regulatory response to get ahead of that curve,” Gow says.