Chapter 7Committee view and Recommendations

Introduction

7.1Australia's spending on consultancy services is proportionally greater than any other country. In the past two decades the Australian Government has relied increasingly on consultants to undertake work for the Australian Public Service (APS), with the bulk of this work performed by the Big 4 consulting firms (Deloitte, EY, KPMG, and PwC).

7.2As indicated in earlier chapters of the report, the growth in expenditure on consultants has approximately trebled every decade for the last 30 years.

7.3The increased use of consultancy services has not been accompanied by an increase in APS capacity to effectively conduct procurement activities and manage contracts. Instead, increased use of consultants has limited the capability growth of the APS, given rise to occasions of serious conflict of interest and been accompanied by questions about transparency. It has also resulted in enormous costs to the APS for work that is often opaque and, in some instances, raised genuine questions regarding value for money.

7.4The first two reports the committee delivered focused on PwC Australia's conduct at the time of a breach of confidentiality, investigation by the Tax Practitioners Board (TPB) and subsequent failure to effectively manage and disclose the breach.

7.5In this third, and final report, the committee has taken a wider view to examine the management and assurance of integrity by consultancy services generally, with a focus on the Big 4. The committee has considered the Australian Government procurement framework, the reliance on consultants by the APS, contract management by the APS, the culture in the Big 4 firms and options to regulate the consulting industry. The evidence provided to the committee in this inquiry has convinced the committee that action is required.

7.6In this chapter the committee provides its views drawn from the evidence collected in submissions to this and other concurrent inquiries, and Senate Estimates hearings, and sets out a course to address the serious issues that have been raised. The committee's recommendations, taken together, are designed to support the achievement of four objectives:

To enhance APS capability to perform its core functions for the Australian people and the government, and its capability to effectively procure consultancy services and manage contracts.

To increase transparency so that the nature, scope, and scale of consultancy services provided across the APS is collected centrally and made available.

To establish appropriateregulation and integrityassurance of the consulting services industry.

To provide oversight by the Australian Parliament of the now significant expenditure on consultancy and services contracts.

PwC Matter

7.7The committee has issued two reports that focus on the events brought about by the breach of a confidentiality agreement by Mr Peter Collins and PwC, PwC: A Calculated Breach of Trust and PwC: The Cover up Worsens the Crime.

7.8While the committee does not feel the need to repeat all that has gone before in those reports, we remain concerned that the committee's core recommendation has not been reflected in the actions of PwC. In particular, the failure to release the now infamous Linklaters advice which relates to the international elements of this matter, leaving the committee little option but to conclude that the failure to release this material is to protect the organisation from further scrutiny and consequences of their actions.

7.9The committee expresses concern at the evidence from the TPB that the confidential information was used more broadly than to promote tax avoidance schemes through Project North America. Rather, it was used to influence the direction of negotiations to reform international tax systems.

7.10The committee notes that there remain nine investigations underway by the TPB, a continuing investigation being conducted by the Australian Federal Police and ongoing Australian Tax Office discussions with the 'large business five' countries plus two others.

7.11The committee repeats its recommendation directed to PwC in its first report.

7.12The committee recommends that PwC be open and honest with the Australian Parliament and people, and with the international community, by promptly publishing accurate and detailed information about the involvement of PwC partners and personnel (including names and positions) in the breach of confidential government information.

Engagement of consultants by the APS

7.13The committee acknowledges that consultants will continue to be engaged to provide expertise and other specialist services that the APS cannot be reasonably be expected to retain. However, the committee agrees that there is room for improvement in how the APS manages its engagement of consultants.

Differences in core values must be managed

7.14Consulting firms in Australia owe a primary obligation either to their shareholders, or to their partners, depending on their legal status. Some partners and employees in consulting firms must adhere to additional standards, for example the APES 110. Officers in the APS are bound by the APS values and code of conduct and must work to achieve the best results for the Australian community and government. Both consultants and APS employees must operate within the law and other professional codes as applicable.

7.15The motivations and values of consulting firms and the APS are different; however, are not necessarily incompatible. In a liberal democratic country like Australia there are a range of actors with different obligations and motivations. Each actor does not need to have the same obligations and motivations to work with the other.

7.16The committee considers that these differences must be managed to ensure that the Australian Government can obtain value for money, maintain confidentiality, gain knowledge, and ensure the public interest is served. The legal structures that the consulting industry operate within, as well as to whom primary obligations are owed, require targeted integrity assurances and management.

7.17The committee notes that the ethical standard that applies to accounting practices, APES 110 (which many consultancy firms claim to be bound by or operate under) has a requirement that professional accountants operate in the public interest.

7.18It is the committee's view that Australian Government contracts must operate to ensure that the values of the respective systems are properly applied in the conduct of contracts supporting consulting works.

7.19The committee recommends that the Department of Finance update the Contract Management Guide to require that Australian Government contracts include a clause that states service providers have a duty to act in the public interest when delivering work for the Australian Government.

APS capability to procure and manage contracts with consultancy firms

7.20The Australian Government relies on consultants to undertake certain necessary work for the APS when the skills are not available internally. There will be times when consultants are needed to investigate a particular issue, carry out a review or assessment to provide independent advice or suggest solutions to assist with APS decision making. Sometimes this work will also be technical and intermittent so there is little justification to retain a full-time employee.

7.21However, the sustained increase in the use of consultants has not been accompanied by an increase in capacity of the APS. The committee finds this concerning.

7.22Contract management is the principal way in which the APS manages the consultants that it engages. This includes planning for the contract, procurement, monitoring performance, managing variations, managing disputes and evaluating the final product or service delivered to ensure it meets the required standard and represents value for money.

7.23The committee strongly agrees that writing a good tender requires deep knowledge of whatever is being consulted on and that the level of capability of the public service directly impacts the quality of the consulting service that the government receives. That said, even the most experienced and diligent APS officer could encounter difficulties in managing contracts with large consultancy firms.

7.24The committee is supportive of and welcomes measures to increase the capacity of the APS. The committee has outlined in this report a range of measures announced, and in some instances, implemented, by the Australian Government to address this issue. For example, Australian Government Consulting (AGC), which is intended to provide in-house consulting services to the APS, and procurement and contract management training. The committee welcomes these efforts; however, it is too early to assess the effectiveness of these measures, and more is needed.

7.25The committee expresses concern at the capacity of AGC to meet the requirements of the APS. With a total capacity of 38 staff at full proposed employment in 2024–25, the scale of works that might be possible will be limited.

7.26The committee notes recent evidence from Senate Estimates hearings that the scale of projects the AGC is currently undertaking is relatively small compared with those contracted to other consulting firms including the Big 4. While a standard sized project for AGC is one that requires three to four people for three to four months, this would be a relatively small project for one of the Big 4 firms.

7.27The committee remains concerned about the APS's lack of capability when it comes to procurement decisions and the effective management of contracts with consulting firms. The committee agrees that the APS's ability should be enhanced in this area.

7.28The committee recommends that the Department of Finance improve the training of officials undertaking procurement to ensure that the Australian Public Service is adequately equipped to ensure that value for money is obtained in circumstances where it is deemed necessary to engage consultants.

Transfer of knowledge from consultants to the APS

7.29As noted earlier, the committee acknowledges that consultants will continue to be engaged to provide expertise and other specialist services that the APS cannot be reasonably be expected to retain.

7.30The committee considers that the transfer of knowledge gained or generated from the conduct of the consultancy must be appropriately factored into the design and conduct of the contract to ensure a continued growth in knowledge in the agency. Further, the transfer of knowledge should be monitored during the progress of the contract, measured, and appropriately reported as a part of the evaluation of the value for money and contract assessment reconciliation.

7.31The way knowledge transfer is achieved may vary on a contract-by-contract basis. The committee is of the view that in many circumstances the best way to achieve adequate knowledge transfer is through the implementation of a 1:1staffing ratio of consultants to APS staff on each project.

7.32The committee considers that the incorporation of knowledge transfer into the contracts entered into by the APS and consultants will increase the capability of the APS into the future.

7.33The committee recommends that the transfer of knowledge from the consultant to the Australian Public Service be factored into the design, management and evaluation of contracts.

The procurement framework

7.34The committee notes the development of the Commonwealth Resource Management Framework (procurement framework) over the last 10 years, including the introduction of the Public Governance, Performance and Accountability Act 2013. The committee also notes that although the Department of Finance is responsible for the stewardship of the procurement framework, it does not have a compliance role in managing Commonwealth procurements.

7.35This report has noted the recent establishment of the Management Advisory Services panel for the engagement of consulting services, and the development of a new Head Agreement which requires a service provider to disclose any adverse findings made by a court, commission, tribunal or any other statutory or professional body regarding the conduct of the service provider. However, the committee is concerned that this system relies on service providers, that is, consultants, to voluntarily disclose any misconduct.

7.36The committee welcomes the development of the Supplier Code of Conduct (Code), which will place a positive duty on suppliers to prevent and discourage breaches of the Code. However, the draft Code does not explicitly require Commonwealth suppliers to act in the public interest or explicitly comply with the APS Values. Given a Commonwealth supplier, including a consultant, is contracted to assist the Commonwealth fulfil its fundamental obligations to the Australian community, it is unclear why this has been omitted from the draft Code.

7.37Many partners of the Big 4 are subject to APES 110 as they are accountants. The aim of APES 110 is to require compliance with the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. The committee considers this might provide a starting point for development of a professional code for consultants. The committee reiterates that professional standard APES 110, which many consultancy firms claim to be bound by or operate under, has a principal which requires its adherents to 'operate in the public interest'.

7.38The committee recommends that the Department of Finance amend the Supplier Code of Conduct to include a requirement for service providers to:

act in the public interest; and

incorporate elements from the professional standard APES 110 that align with public sector values.

The Department of Finance should also publish guidance to illustrate examples of conduct that are consistent with these values.

Management of conflicts of interest

7.39The committee has examined how conflicts of interest are managed by consulting firms when they arise and is concerned that there are insufficient integrity assurances in place. Adding to the committee's concerns is the advice from the Department of Finance that it does not have access to a list of clients of the consulting firms and is unable to check itself whether a consulting firm might be undertaking work that would put it in a conflicted position. Rather the onus is on the consulting firms to responsibly manage conflicts of interest.

7.40The committee notes the added complexity of managing the conflicts of interest of consulting firms in the Australian market because it is dominated by a small number of very large players, that is the Big 4, who have substantial business interests across the economy.

7.41The committee considers that there should be a clear and consistent definition of what constitutes a conflict of interest, a conflict-of-interest breach, and expectations around the management of conflicts of interest. It is also important that APS staff who manage contracts require consultants to regularly update any conflict declarations to ensure that active disclosure occurs and information is up to date.

7.42The committee recommends that the Department of Finance review its guidance on conflicts of interest and provide a clear and consistent definition of what constitutes a conflict of interest, a conflict-of-interest breach, and expectations around the management of conflicts of interest. The guidance should also emphasise that active management of conflicts of interest must be an element of APS project management of the contract.

7.43Further, the committee considers that any conflicts of interest breaches should be held in a central register for use by government entities to promptly identify breaches for new/existing tenders and require government entities to consult the register before considering tenders (and any breaches must be publicly reported).

7.44The committee recommends that the Department of Finance develop a central register for conflicts of interest breaches for use by government entities.

AusTender

7.45AusTender should be an important tool for transparency of government expenditure. The committee heard that AusTender is difficult to navigate and a separate website (Love Me Tender) has been established to interpret the information that AusTender can provide. As a tool that public servants rely on to effectively manage their procurement activities, it is concerning that AusTender is not more user-friendly. The committee notes that the Department of Finance is currently working on improvements to AusTender.

7.46The committee recommends that the Department of Finance improve the useability of AusTender by including:

detailed, consistent and meaningful descriptions of contracts;

clarity on the nature of contract extensions including links to the original contract notification; and

information on any concerns raised in relation to the service provider.

Regulation of the consulting industry

Scrutiny of self-regulated professions and the consulting sector

7.47The regulation and oversight of entities takes a number of forms in the Australian economy, with structures and regulatory agencies that have developed and been reformed over time.

7.48Companies and corporations are managed via Australia's well developed corporate regulatory system. Some professions have oversight provided by a combination of structures including partnership law and self-regulation standards. These bodies are provided with their standing via a combination of State, Territory and Commonwealth laws.

7.49Consulting firms, that have been at the centre of the committee's considerations, fall very much into the latter category. However, they do not carry the status of a 'profession'. They therefore operate in a grey area of regulation. In considering this question the committee is cognisant of the extraordinary range in scale of consultancies: a consultancy may be a 'mum and dad' small partnership providing local services, through to a multi-national partnership like the Big 4. For this reason, the committee is concerned about how any proposed new regulation might impact different consultants. Any new regulations should therefore be proportionately tailored to the scale of the business.

7.50Accordingly, the committee is proposing a range of measures to deal with the issues that have been brought to light though the conduct of the inquiry.

Partnership structure and size

7.51In Chapter 6 the committee considered evidence that the Big 4 are partnerships rather than incorporated companies, and that this produces transparency deficiencies, insofar as they are not subject to the reporting, compliance, and governance obligations imposed on companies by the Corporations Act 2001 and are largely outside the jurisdiction of ASIC. Additionally, while the Corporations Regulations 2001 (Cth) limits partnerships of legal practitioners to up to 400 partners, accounting partnerships can have up to 1,000 partners. It is not clear to the committee what the justification is for this difference.

7.52It has become clear that large partnership structures, which operate effectively as corporations, and often as multi-national corporations, are not subject to the same regulatory oversight and declaration requirements as those constituted under a corporate structure.

7.53While there is some rational for the structures as they exist, for example the requirement for an audit to be signed and certified by a real person, the development of these partnerships has developed well beyond that rationale to the extent that audit is not the majority of work performed. The partnership structure brings with it the rationale that all partners are jointly and severally liable and therefore have an interest in maintaining scrutiny and oversight of operations.

7.54However, the events of the last two years at PwC demonstrate that in organisations of that scale it is simply not possible for a partner to have the level of oversight required to effectively protect their individual interests. Many partners of PwC have learnt that lesson at their own significant cost in the aftermath of that scandal.

7.55Indeed, the committee heard that once a partnership grows beyond 100 partners it becomes difficult for partners to effectively manage their individual interests. In evidence to the Senate Standing Legislation Committee for Economics Estimates hearings, ASIC advised that while partnerships are legislated at a state and territory level, there is effectively no regulatory oversight infrastructure to monitor and provide oversight of partnerships.

7.56It is the committee's view that for organisations of the scale of PwC, KPMG, Deloitte, and EY that this is not acceptable and that reform in this area is required, particularly for partnerships in excess of 100 partners.

7.57In evidence to the committee, Treasury posed questions that should be asked when considering regulation. The committee notes that Treasury has recently issued a discussion paper considering this matter. The committee considers that the evidence to this inquiry demonstrates that the question of these large-scale partnerships is one that needs to be investigated.

7.58The committee has received a great deal of evidence about large partnerships and the failure of their regulatory structures. It is the view of the committee that the question of large partnerships and their regulatory structures should be reviewed. However, the committee has not received enough evidence to make specific recommendations and acknowledges that partnerships over 100partners also includes large legal organisations.

7.59The committee notes that the Australian Law Reform Commission (ALRC) can make recommendations that government should make or consolidate particular Commonwealth laws, repeal unnecessary laws, work towards uniformity between state and territory laws, or facilitate complementary Commonwealth, state, and territory laws. In that context the committee believes that a review of partnership structures should be undertaken by the ALRC, or other appropriate body.

7.60The committee recommends that the government commissions the Australian Law Reform Commission, or other appropriate body, to undertake a review of the legislative frameworks and structures of partnerships in Australia with particular focus on partnerships in excess of 100 partners. The review should make recommendations to provide for appropriate regulatory governance and oversight of structures of this scale.

Professional standard schemes

7.61The committee considers that for the APS to be assured of the integrity of the consulting services that it procures, improved oversight and regulation of bodies like Chartered Accountants Australian and New Zealand (CA ANZ), CPA Australia, and the Institute of Public Accountants (IPA) is required (these bodies represent chartered accountants, only some of whom are consultants).

7.62The committee is concerned that where Parliaments have given the privilege of self-regulatory structures to professional bodies, such as the above, it is appropriate that there is a level of scrutiny as to how those self-regulatory structures and standards are managed and applied. Professional standards are established and regulated under a series of state, territory and Commonwealth legislation that comes together under the Professional Standards Council.

7.63While the committee acknowledges that this arrangement is a form of regulation which can work effectively, this inquiry has raised questions in relation to the application of some standards systems. Accordingly, the committee is of the view that organisations that operate under those arrangements should report on an annual basis to the Parliament which provides the imprimatur for the standards with the opportunity for parliament to interrogate those annual reports.

7.64The committee recommends that the Australian government:

require those organisations that operate professional standards as self-regulatory regimes, to report annually on the operation of those standards to the Joint Standing Committee on Corporations and Financial Services; and

require these same organisations to appear before that committee to provide oversight on the operation of the relevant standard.

The committee recognises that the Commonwealth government may need to work with state and territory governments to implement this recommendation.

Need for strong and independent regulators

7.65The Committee notes that the revelations that led to the establishment of this inquiry would not have occurred without the diligence and determination of Australia’s regulatory bodies. The committee is concerned at the evidence that indicated attempts to influence the progress of investigations and deems any such attempts to be unacceptable. The committee commends the work of the TPB in its work to date and anticipates the outcome of the remaining investigations.

7.66The committee received evidence that unlike professions such as accounting, law, medicine, and engineering, there is no specific registration regime for consultants. This can result in some consultants being subject to no oversight and others being subject to multiple overlapping oversight and regulatory regimes (for example if the person is also a legal practitioner or a registered tax agent). As a result, some standards apply to some consultants, creating an uneven gap in regulation.

7.67As indicated in earlier chapters of the report, provision of consulting services to the Australian Government have approximately trebled every decade since the 1980s. There has however not been the development of parliamentary oversight mechanisms in the same way there has been for capital works projects through the Public Works Committee which is one of the oldest parliamentary committees which was established in 1913.

7.68As a comparison, an analysis of the annual report of the Public Works Committee shows the committee considered projects to the value of $3.7 billion in 2023. A compilation of data by the committee shows consultancies and services contracts in excess of $3.0 billion over the same period. While capital works projects considered by the committee require provision of costing to a level of confidence for approval prior to commencement, and approval of any increase in project budget, as well as assessment of projects at completion, consultancies and services have no such parliamentary oversight.

7.69The conduct of IT services contracts has been particularly problematic and infamous for cost overruns, for example, the Parliamentary Expenses Management System (PEMS).

7.70The committee considers that the establishment of a Joint Standing committee of the Parliament with provisions similar to those applied by Joint Standing committee for Public Works would be an appropriate mechanism to provide oversight to this significant public spend.

7.71The committee recommends that the Parliament legislate to establish a Joint Standing Committee to review and approve consultancy and services contracts with provisions and thresholds similar to those in the Public Works Act 1969 but appropriately adjusted to suit the requirements of providing oversight for this significant element of government spending.

7.72The committee recommends that the Senate pass the following order:

That:

there be laid on the table, by the Minster for Finance, biannual statements on expenditure on consultancy contracts which provide for consideration to the value of $2million or more, by all Australian Public Service departments and agencies;

the statements are due not later than the tenth day after the end of the preceding six-month period commencing 1 January and 1 July;

each report is to include, in relation to each contract, details of the:

-dollar value;

-subject matter;

-duration;

-contracting government agency;

-firm or entity providing the work;

-an explanation of what the contract is expected to deliver/purpose of the contract;

-any changes or extensions; and

-any matters of probity or conflict of interest that have arisen in the conduct of the work.

each report is to include the total amount of all current consultancy contracts in each agency or department.

The order is of continuing effect until the Senate Finance and Public Administration References Committee has reported to the Senate that Recommendation 8 and 11 of this report have been implemented.