Perception of conflict
Former senior PwC partner Bill Edgeconfirmed on Mondayhe was still being paid by the firm while acting as the chairman of the Financial Reporting Council, a body responsible for overseeing the effectiveness of the financial reporting framework in Australia.
As head of the council, Mr Edge has previously stated the FRC has “found no evidence of systemic issues or major concerns” with audit quality, adding that he hadconfidencethat the big four firms Deloitte, EY, KPMG and PwC were doing their best to improve audit quality.
In contrast, thecorporate regulatorandthe joint committee on corporations and financial serviceshave both raised major concerns about audit quality in Australia.
Assistant Treasurer Stuart Robert said the PwC payments are “not relevant”, while Labor MP Julian Hill said the payments could lead to a “perception of a conflict”.Greens senator Peter Whish-Wilson was more direct, saying Mr Edge had to “make a choice” between heading the FRC and the PwC payments.
But no matter how the FRC and the government resolve the issue, the payments create the perception of a conflict of interest for all former equity partners of PwC.
Unfunded liability paid out of profit
The crux of the problem is the payments, knowledge of which is tightly held among current and former equity partners, are not superannuation or defined benefit income from a pot of money that has been set aside. Instead, they are payments made each year out of the firm’s net profit, tying the alumni partners to the firm’s ongoing operation.
This unfunded liability is believed to be worth roughly 20 per cent of the firm’s net profit, a figure that means it was worth more than $80 million around five years ago and would have exceeded $100 million in the past few years.
“[I]f the money is coming from PwC’s general funds, retired partners still have some interest in the continued success of the firm,” said Ian Gow, a professor in the University of Melbourne’s Centre for Corporate Governance and Regulation and co-author of a critical look at the firms,The Big Four.
PwC declined to comment. The details of its retirement plan are based upon a number of sources including current and former partners and other individuals familiar with the firm’s workings.
The main condition that PwC has on the payments is that retired partners cannot work for an ever-expanding list of rival firms. PwC, privately, argues this eliminates any concern about conflict of interest.
But, as Professor Gow points out, it doesn’t eliminate the fact that partners have a direct financial incentive to ensure the firm continues to thrive.
Are declarations required?
It also raises questions, such as if former partners are obliged to declare the payment and its quantum when dealing with decisions that involve PwC. Might they have to also recuse themselves from making decisions that involve PwC? And are either of these options practical for those in certain senior commercial roles?
There are no exact figures but there are dozens if not hundreds of former PwC partners in mainly commercial and not-for-profit roles across the country and this number grows every year.
That means the payments remain an ongoing, and growing, issue for the firm. PwC must continue to grow at a rapid rate to comfortably fund the payments and provide current-day partners with their income. So far, current CEO Luke Sayers has managed double-digit growth year-on-year.
The payments have created a stark generational divide at the firm. Existing equity partners echo their predecessors by grumbling about each CEO attempting to reign in the payments, while younger partners grouse about losing out on their share of each year’s profit to partners long since departed from the firm.
In Mr Edge’s case, the FRC had the first of its four annual meetings where the articles about the payments were discussed with a representative of Mr Robert’s office in attendance for part of the day-long meeting. But it is unclear what the parties will do next.
As any accountant will tell you, this isn’t about any actual conflict of interest, it’s all about the look. And any way you look at it, receiving payments from your old firm raises a perception of conflict of interest.
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