In negotiations last night, the Greens struck a deal with the National Party to include the Big Four global accounting firms in Royal Commission along with the banks. Now the government has backflipped on banks, it will be fascinating to see how the debate over the terms of reference plays out today

Update: the terms of reference are still in draft but the Big Four accounting firms appear to be off the hook.

There is the Big Four, and then there is the B-i-g Four.

The Big Four banks – ANZ, Westpac, NAB and Commbank – have paid $25 billion in tax in the past two years. They are prone to bad behaviour – ripping off customers, market rigging, money-laundering, the usual usury – although they are fairly transparent, publish proper financial statements and respond to public criticism.

Then there is the Biggest Four, the global accounting firms KPMG, Deloitte, EY and PwC. These four are supposed to be the gatekeepers of finance, the “auditors”. Instead, they are the architects of multinational tax avoidance. They don’t publish financial statements, they are structured through opaque partnerships, they have won $2.5 billion in government contracts over the past ten years; federal government alone.

Their cost to the taxpayer is immense. Yet they don’t respond to criticism except to claim there is nothing wrong.

To give you an idea of how powerful and how sneaky the real Big Four are, they have just managed to shift the blame for the biggest tax leak in world history, the Paradise Papers, onto a tiny Caribbean law firm which they instruct, Appleby. The media bought it hook, line and sinker.

Paradise Papers: media ignores the real tax culprits

Of the $31 billion in cash profits made last year by Australia’s big four banks, some $24 billion was returned to investors in the form of franked dividends.

Of the $150 billion in revenue globally made by the Bigger Four – revenue is the only number they reveal, and that is more rubbery than statutory – well, where did it go? Do they insure each other … are they really the Big One? Who knows, the accountants have never been made accountable.

The Royal Commission into the banks is a good thing, a thing for which we have long argued. Judges don’t get political donations so an independent judicial commission, instead of a parliamentary commission, will deliver punch, accountability and reform.

A good deal of the problem with the banks is “moral hazard”. They are not only too big and powerful but they are underpinned by taxpayers via the Reserve Bank’s “Committed Liquidity Facility”, effectively a bail-out fund.

As the banks own their profits and executive bonuses, and we the taxpayers own their risk, there is an incentive for bad behaviour and excessive leverage. When interest rates and or unemployment rise and the property markets fall, this leverage – made worse by the concentration of lending in residential property – will wreak havoc. Therefore, making the banks accountable now, rather than later, can only be a good thing.

Banks, the tax and the $14 billion insider trade

The key will be in the terms of reference and who is to run the Royal Commission. These are being thrashed out on the floors of parliament today.

Last night, Nationals Senator Barry O’Sullivan struck a deal with the Greens to launch a bid in parliament today for a Royal Commission or Commission of Inquiry into Australia’s banks.

As part of the deal, the Greens insisted the Big Four accountancy firms were included in the terms of reference for the Commission.

In the face of political oblivion, the government caved in this morning and agreed to a Royal Commission. There is deathly silence from the Biggest Four today as the debate rages over terms of reference.

It will be interesting to see whether Section 4, Subsection G of the Draft Terms of Reference for the Banking, Insurance, Superannuation and Financial Services Commission of Inquiry Bill 2017, lasts the day. Many phone calls will be made from influential quarters. The Bigger Four have been big political donors over the past decade.

This clause says, among the banks and other parties to be investigated by the Commission, are:
“an auditor registered with ASIC under Division 2 of Part 9.2 of the Corporations Act 2001”.

Inquiries help shine a light, but rarely give rise to reform