Will Labor’s crackdown on the big 3.5 go the way of previous re-regulatory moments?

We’ve seen the same pattern before in other sectors of the economy. A poorly regulated, politically connected industry dominated by large corporations so abuses its power and influence that the community outcry forces politicians and normally toothless regulators to investigate scandals and misconduct. The result is humiliation for senior executives, resignations, and a crackdown from governments — a re-regulatory moment fueled by promises of “never again”.

Then the headlines come to an end, the public and the media move on, and the industry gets to work watering down the additional regulations, extracting more favours from politicians, warning of the terrible unintended consequences of a harder line on them, and exploiting external events to argue that things really weren’t so bad before.

Think banking at the Commonwealth level. Think gambling in Victoria and NSW.

Will the same cycle play out in government auditing, tax planning and consulting? It’s another poorly regulated, politically connected industry dominated by four large corporations (well, the big four is now the big 3.5 in Australia) beset by scandal after scandal, with executives humiliated before senate inquiries and reluctant regulators under fire for their failures. And yesterday arrived the crackdown, the “re-regulatory moment”, with the government’s economic and finance ministers and attorney-general announcing a suite of measures to significantly increase penalties, bolster regulators and lift the veil a little on the secretive world of tax relations between companies and the tax office.

Labor’s package is a comprehensive one, led by a mammoth and welcome rise in the maximum penalties for advisers and firms promoting tax exploitation schemes from a mere $7.8 million to $780 million, and expanding the laws around tax exploitation schemes to make them easier to prosecute.

It will also develop a package of measures aiming to increase the paltry range of sanctions available to the Tax Practitioners Board, update laws on the kinds of complex tax avoidance schemes now promoted, “clamp down on systemic abuse of our tax system perpetrated by tax agents and other bad actors”, curb the use of legal professional privilege to obstruct investigations, examine whether regulation of consulting firms is needed, increase the tax office’s information-gathering powers and ability to work with law enforcement, review the use of confidentiality arrangements across the whole Commonwealth and strengthen handling of conflict of interest, and increase the visibility of cases where consultants and auditors have lost contracts.

But that package will be developed based on consultation with the industry and agencies “to ensure options are targeted and effective”. The consultation will begin in the coming months (watch out for contracts for consultants to help with the consultation with consulting firms).

That consultation will be where the big 3.5 will get to work trying to undermine the crackdown, explaining the unintended consequences, warning of lost jobs, detailing the unworkability and impracticality, and pushing to reduce the resulting legislation, regulations and changes to documents like the Commonwealth Procurement Rules as much as possible.

On some proposals, government agencies and the big 3.5 will have directly opposite interests. In others, they’ll be aligned. Neither government departments nor consulting firms want to see any reduction in their ability to use commercial confidentiality as a means of reducing scrutiny by parliament, the media and the public. Nor will agencies be very interested in seeing stricter rules around conflict of interest management, especially if it restricts their flexibility in using the same firms and consultants over and over.

Treasury and Finance, and Jim Chalmers and Katy Gallagher, thus have their work come out for them if they’re to avoid looking like Josh Frydenberg abandoning vast swathes of the banking royal commission recommendations, or Daniel Andrews in Victoria and Chris Minns and the Independent Casino Commission in NSW looking after Crown and Star (not to mention, in Minns’ case, the pokies lobby).

If implemented, the suite of measures will be a strong response to the persistent poor behaviour across PwC, KPMG, Deloitte and EY. But there’s one crucial feature missing. The ultimate conflict of interest for three of those firms is that they provide consulting services to government while their tax planning arms advise large corporations on how to starve governments of revenue by avoiding and in some cases evading tax.

No firm that plays an active role in advising corporations on avoiding Australian tax should be able to work for the Australian government. It’s a conflict of interest that can never be managed away. PwC has dealt with that conflict by giving away its consulting arm. The remaining big three continue to benefit from taxpayer money that they try their damnedest to reduce through their work with tax-dodging multinationals.

Now fixing that would make for some interesting consultations.

Should consulting firms be allowed to advise both government and tax-avoiding corporations? Let us know by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.