Social
In the realm of professional services, tax consultants play a vital role in providing advice on a wide range of matters, including potential tax liabilities and strategies for minimising tax. As trusted advisors, they are entrusted with highly sensitive client information sourced from various channels. Safeguarding confidentiality is of utmost importance, as any breach of this trust can lead to severe damage to reputation, legal liabilities, and significant Professional Indemnity (PI) challenges.
This precise scenario unfolded recently in the case involving PwC, one of the world's largest professional services firms, underscoring the intricacies involved in managing PI risks within the tax and broader consultancy sector.
According to allegations, in an email dated 2015, PwC's tax consultant Peter Collins violated confidentiality agreements by sharing government information with his PwC colleagues, who subsequently used it to assist clients and generate revenue. This breach of trust resulted in high-profile resignations, criminal investigations, and the potential loss of future government contracts worth hundreds of millions of dollars.
This incident highlights the considerable legal liabilities that can arise from a breach of contract, particularly with regard to confidentiality agreements and conflicts of interest in PwC's case.
Depending on the nature of the breach, civil liability claims can be pursued against both the individuals involved and the organisation. This is where PI insurance plays a critical role, as it covers the legal expenses associated with defending against such claims, including potential compensation to be paid to the plaintiff. While it seems unlikely that the Australian Government will file a civil liability claim against PwC, they are likely to sever ties with the firm. However, it is important to note that not all professional service firms will avoid facing the music in a court of law in the event of similar contractual breaches.
The PwC scandal also raises pertinent questions regarding the role of PI insurance in cases involving deliberate or fraudulent activities. Generally, intentional breaches or acts of fraudulent dishonesty are excluded from PI coverage. Nevertheless, most policies offer defence for the individual until a final decision is reached. Similar to the legal principle of "innocent until proven guilty," insurers maintain the same stance. However, if the individual is found guilty, the defence costs must be reimbursed.
Despite the potential coverage provided by PI insurance, the reputational impact of a scandal like this is not easily restored, making it imperative for consultancy businesses to proactively manage these risks internally. Consequently, several valuable lessons can be gleaned from this incident on how to effectively manage PI risks:
The PwC case serves as a compelling catalyst for the professional services sector to reassess its approach to confidentiality, integrity, and overall risk management. This entails not only re-evaluating internal controls, data management policies, and professional practices but also reviewing the wider regulatory landscape and accountability mechanisms in place.
Laurence Basell is Chief Operating Officer at Honan, Australia’s fastest-growing insurance broker, where he oversees corporate services including finance, strategy, information technology, legal, HR, marketing, and risk and compliance. His experience includes over ten years as a management consultant at PwC, leading a fast-growing start-up and overseeing strategy and operations for Dairy Australia.
