George Pell silences PwC, EY, KPMG & Deloitte

George Pell

Global accounting giant PricewaterhouseCoopers (PwC) had won its most illustrious mandate yet, the first ever external audit of the finances of the Vatican, until its work was suddenly put on ice four months ago.

It was a “blow for financial transparency” cried the International Catholic News Weekly: “The work of PwC would have been the first of its kind and was going to provide a complete picture of Holy See finances, including a valuation of assets. But in April the firm’s work was unilaterally suspended exposing a power struggle between Australian Cardinal George Pell – who the Pope appointed to reform Vatican finances – and senior members of the Roman Curia.”

The Holy See however, is already far more transparent than its prospective auditor, PwC; indeed far more transparent than all four global audit firms put together.

At the stroke of a keyboard anybody can pull up the 2015 financial statements of the Vatican Bank and there find a full set of accounts, replete with detail about “related party transactions” and an Independent Auditor’s Report by PwC’s peer Deloitte.

This is the Vatican Bank mind you, not the church and the city-state, which are yet to face external audit. Yet it is no mean irony that this institution, long scrutinised for corruption and secrecy, displays greater openness than those who preach daily to governments about laws and policies, the Big Four audit firms.

“The financial statements present fairly, in all material aspects, the financial position of Instituto per le Opere di Religione (Vatican Bank) and its financial performance and its cash-flows for the year then ended in accordance with International Financial Reporting Standards” notes Deloitte in the 2015 accounts.

As part of our series of stories at about the immense power and opacity of the global accounting firms – PwC, KPMG, Deloitte and EY – further questions were posed last week.

Contacting communications people at each firm, this question was casually put: “and by the way, who audits your firm?” To which there were four responses:

“I don’t know”.
“Umm … ah … I should know this off the top of my head but I don’t.”
“I’d have to check that out for you.”
“I don’t know that.”

This was unsurprising. The sacred role of the “communications” operative, particularly in the Land of Big Four, is not to know, then to courteously deny requests to speak with somebody who might know, then ask for questions to be emailed, then politely decline to respond.

In this case however they appeared genuinely not to know. What a paradox it is that the world’s most powerful institutions with yes, more power than the Vatican – can’t and won’t reveal who audits them. All four firms later failed to respond to emailed questions too. Bear in mind that they themselves audit 98 per cent of the world’s largest multinational companies, rack up combined revenues of $US130 billion and are the principal architects of tax avoidance schemes which cost governments and taxpayers an estimated $US1 trillion a year.

Oligarchs of the Treasure Islands

To borrow from the Satires of the Roman poet Juvenal, “Quis custodiet ipsos custodes?” Who is guarding the guards?

The short answer is nobody. The guards are guarding themselves. And not only are they guarding themselves but they are writing the laws of nations.

Martin Lock, formerly the head of withholding tax for the Australian Tax Office (ATO), describes the sheer pervasiveness of the four firms, particularly in the area of formulating laws: “These same stalwart firms are ensconced on the Board of Taxation, its Working Groups, CPA Australia, the Institute of Chartered Accountants (since renamed CAANZ) and the ATO’s very own National Taxation Liaison Group, which the ATO describes as “one of the ATO’s eight stewardship committees which addresses strategic issues to benefit Australia’s taxation and superannuation system” and which “drives improvements … to … tax law interpretation, administration, design and policy (including technical issues); confidence in and compliance with the tax system; and ATO service delivery.”

Then there are the dozens of millions of dollars lavished yearly by governments upon the Big Four for consulting reports and advice, and staff “secondments” between the mega-firms and bureaucracies such as the Tax Office and the corporate regulator.

Is there any audit, any transparency or independent scrutiny of this vital public information though? There is supposed to be. The big firms have a statutory obligation under the Corporations Act to produce a “transparency report” once a year where they are required to disclose financial information “including revenues”. Amid pages of what can fairly be labelled “marketing fluff”, they take the narrowest possible definition of “financial information” and merely disclose revenue; little more.

The approach is no better in the UK and other countries and, as University of NSW academic Jeff Knapp, puts it, “They could do better on disclosure”.

“The transparency reports are more of an exercise in public relations. The firms should be forced to be more transparent than they are.”

A simple word count tells the story, says Knapp. In the Deloitte Transparency Report 2015, the words “audit quality” appear 31 times, “value” or “valuable” 22 times, “innovation” or “innovative” 20 times, “culture” 13 times and “excellence” 12 times but the word “profit” does not appear once. There are no details of the $1 billion in non-audit services to non-audit clients and, in the list of audit clients, no foreign multinational names appear.

The EY report is typical of the others. In the section on Document Retention Policy, the thing missing is the most relevant thing, that is, the detail of how long documents are retained. Nothing on political donations, nothing on profits or partner charge-out rates, no proper breakdown of government revenue. KPMG’s report, for what is is worth, is slightly more useful than the rest.

George Rozvany, a former Big Four insider and head of tax for Allianz Australia, said the transparency reports were “touchy feely … more appropriate for a weekend magazine than the required financial disclosures of a major organisation”.

“It must be remembered that the Big Four win huge contracts from various levels of Australian government but fail to disclose government donations in their transparency reports, or for that matter entertainment expenses and identities of government officials entertained – and related party transactions with offshore tax shelters: all relevant considerations in appropriate transparency.”
In August 2015, Australia was one of 32 nations signing the Addis Tax Initiative to assist developing improvements in the fairness, transparency, efficiency and effectiveness of their tax systems. So why let transparency go in Australia, he said.
“The government announced in the budget that it would introduce whistleblower protection for individuals disclosing tax evasion in the private sector. This may work for those disclosing internally, but appears entirely inconsistent from a policy viewpoint for those attempting to examine such matters externally”.

Rozvany has called for the Big Four to be broken up due to their high market dominance and political and commercial influence.
“The Big Four have, under a Rasputin-like cloak of illusion, strayed from their original and critical role of verifying the accuracy of financial accounts for all stakeholders, to be “accountants of fortune” merely representing the accounting position for multinationals and developing aggressive international tax avoidance practices,” he told last month.

In questions sent last week, each firm was asked about their disclosure failures, who insured them, whether they insured themselves (even each other) and who audited them. They were also asked, again, to comment on the conflict of interest in advising multinational clients on tax while advising governments on tax reform.
No responses were forthcoming.

The corporate structure of each firm is made up of local partnerships – partnerships don’t have to publicly report financial statements – which operate under a global banner. Somebody however must audit their accounts in each jurisdiction and it can only be concluded that each firm audits their own; if only to satisfy the firm’s partners that the profits are properly determined.

If this is the case, it is the height of hypocrisy as their business model, indeed the entire global system of commerce and corporate governance is based on the foundations of external, independent audits. Yet here we have the world’s most powerful organisations completely unaccountable, even put to shame on corporate governance and transparency by the Vatican. As an interesting aside, the hardliners of the Roman curia argue there should be no external audit of the Vatican as it is a sovereign nation and sovereign nations audit themselves, as the Vatican does. Pope Francis therefore could be reasonably said to be at the vanguard of sovereign transparency.

If the Vatican is eventually audited by PwC or another it would present a challenge. How, for instance, would the “property, plant and equipment” be valued? Would the Sistine Chapel and Michelangelo’s Last Judgement be valued on replacement cost?

If external audit is foisted upon them, then the hardliners in Rome might well quote Matthew 7:6 in respect of transparency and independence – “You hypocrite! First remove the log from your own eye, and then you can see clearly to remove the speck from your brother’s eye”.

  • John Webber

    Too Big to Nail