Former productivity commissioner Allan Fels has called for the big consulting firms to be broken up so they can no longer provide both advisory and consulting services.

He proposed an enforced separation of functions during his appearance before a parliamentary committee investigating ethics in the consultancy sector.

Professor Fels said despite strong opposition to ring-fencing by the industry, conflicts of interest inevitably arise when auditing and consulting is done by the same firm.

He told the senate committee the PwC scandal has shown that neither self-regulation nor government oversight is working, and a legislative stick is needed.

“Non-audit activites have the potential to compromise audit,” he said on Monday.

“We therefore need legislation to break up the big four – and in time other audit businesses – and to prohibit audit businesses from doing consulting advisory and other forms of business.

We therefore need legislation to break up the big four – and in time other audit businesses – and to prohibit audit businesses from doing consulting advisory and other forms of business.

Professor Allan Fels

“It is now clear the self regulation and government oversight don’t work. I believe there’s a need to act now on the breakup.”

He said the speedy divestment of PwC’s government operations from its other business arms in the wake of the treasury scandal showed it can be done.

Professor Fels acknowledged the proposal may be seen as radical, but he said it was far simpler and more effective than other methods of dealing with conflicts of interest when auditing and non-auditing are done by the same firm.

“Surveys of auditors by regulators are consistently turning up problems in an uncomfortably large proportion of them, although disciplinary actions are infrequent,” he said.

No intention of ring fencing

Deloitte, which also gave evidence on Monday, said clients wanted multidisciplinary capability and it had no intention of ring-fencing.

“We believe that a global multidisciplinary model enables us to deliver high quality services to meet the needs of our clients, including government, it’s for this reason that we have no intention of ringfencing our business,” Chair Tom Imbesi said.

“When we think about how we structure ourselves it’s always about how do we best serve the needs of our clients,” CEO Adam Powick added.

New protocols needed

 Professor Fels also said there was a need to rebuild internal capability within government and the public service, and to establish clear protocols for when consultants are used by government agencies.

These should cover criteria for when consultants should and shouldn’t be used; transparency and potential conflicts of interest; what happens after reports are done; and ensuring competitive tenders in most cases.

He also said there need to be protocols around communication between governments and consultants, such as banning ‘secret messages’ and not conclusions agree to in advance, and a record of the processes by which consultants are engaged.

“Possibly we need a special inquiry to delve into those details,” he said. 

Deloitte refuses to provide information about misuse of government information. Read more about today’s hearing here.