This is Part Three of a three-part series on diagnosing the severity of a trust related matter and the suggested response.

In Part Three, in the face of a severe and calculated breach of trust:

• We observe social licence and self-regulation, giving way to legislated regulation and stiff sanctions.
• We learn that the definition of an appropriate response to a breach of trust does not come from the executives or the board of the offending business, nor does it come from the self-regulatory governing body.
• We conclude that the definition of an appropriate response must be derived from the opinions of a broad collective of stakeholders via quantitative and qualitative research.
• And finally, we question the capability and indeed appetite of members of an industry body to apply the appropriate sanctions following a wilful and calculated breach of trust.

In Part One we looked at matters where there might be enduring negative publicity that is usually only noticed by those directly affected by the matter. Surveying the market at the time, provided an objective conclusion that the best course of action was to ride the negative publicity out and from a marketing communications perspective, do nothing.

In Part Two, the regulator became involved, flagging a likely regulatory intervention. Often the perpetrator of the breach of trust is focused on minimising damage to its own brand and therefore, less concerned about a possible category wide, loss of social licence. At this time, the role of the industry body is to propose a self-governing response that will placate the regulator.

The breach of trust discussed in Part Three commenced in 2014 and the extent of the misconduct only become apparent to the public in 2023.

Wilful destruction of trust

Between 2013 and 2017, PwC provided the Australian Federal Government with advice on how to enact new laws to stop multinational companies avoiding tax in Australia. In a calculated breach of trust, PwC then monetised that confidential information and advised 14 multinational companies on how best to sidestep that very legislation that PwC had an input in developing.

What would be an appropriate response? Ask yourself, would you expect the Federal Government to be willing to acquiesce and allow the self-regulating governing body to decide the fate of the perpetrators and the firm? I expect you would argue that it depends on the extent of the governing body’s sanctions.

When it comes to organizational intent, conspiracy to defraud and a breach of trust, the PwC breach might draw some parallels with aspects of the 2015 Volkswagen emissions scandal where the corporation acted wilfully to cheat government emissions tests. The cost to Volkswagen in fines and settlements exceeded $20 billion and resulted in the US general manager of engineering and environment receiving a personal fine of $400,000 and a seven years jail sentence.

The direct consequences to PwC have included being effectively barred from Federal Government work resulting in the fire-sale disposal of the PwC government consulting arm. A handful of partners have also left the firm.

Typically, the category contagion risk has affected all major suppliers to the Federal Government. ‘Amid the fallout, federal agencies have cut spending with the big four consulting firms PwC, KPMG, Deloitte and EY by more than 40 per cent’ from Q4 2022 to Q4 2023¹.

In addition, the Government has responded with a 1000% increase in individual civil penalties and for entities, a maximum penalty of the greatest of either $15.6 million or 10 per cent of aggregate turnover to a cap of $782.5 million. This occurs amid the Australian Federal Police criminal investigation and a clutch of Federal Government legislation. In essence, the category-wide consequences of the PwC conduct will be a replacement of a largely self-regulation accountancy profession with a legislated regulated, black letter of the law."

Can self-regulation survive a wilful breach of trust?

What action was proposed by the self-regulating industry body that would this be sufficient to placate the Federal Government and the Australians? Arising from the PwC breach, the Institute of Chartered Accounts Australia and New Zealand (CA ANZ) put several resolutions to change the accounting profession’s professional conduct framework. Members of the CA ANZ were required to vote for the proposed changes.

Resolution 4 was designed ‘to reflect the significant reputational impact that misconduct by Practice Entities can have on our profession.'² The passed resolution raised the fine for the partner from $25,000 at the Professional Conduct Committee to $100,000 and from $50,000 at the Disciplinary Tribunal level to $250,000.

Let’s assume the maximum self-regulated fine of $250,000. PwC revealed that it received $1.5 million for advice from multinational corporations on how to side-stepping the legislation. So, the maximum sanction is a fine which is less than 20% of the revenue derived from the breach and in this calculation, we have not included the professional fees PwC charged the Federal Government for input into how to capture the tax avoidance.

The Federal Government and indeed, the Australian people might argue that the self-governing response was manifestly inadequate. It is worth noting that one in five CA ANZ members voted against raising the self-regulated sanction.

A different course of action might have been for CA ANZ to objectively measure stakeholders’ expectations and to align the proposed new sanctions to those expectations. The question is, would the accounting profession have voted for sanctions that were in line with the expectations of stakeholders. If your answer is “no” then you are agreeing that self-regulation in the instance of a willful and calculated breach of trust is untenable.

All in all

Societal expectations of organizations and how they conduct themselves continues to evolve. The characteristics and dimensions of what is “appropriate” is defined not in the boardroom or on the executive floor. It is defined by the source of the brand’s prosperity, namely customers, while also including the workforce, suppliers, communities, governments, and investors.

The main consequence of a breach of trust is usually, loss of goodwill and therefore, brand damaging. It is unlikely to be the organization’s public affairs colleagues who have the wherewithal to measure the damage to the brand or possess the communications toolbox to execute a “stop-loss” action.

In our experience, the CEO and indeed, industry bodies need to have an acute market listening and interpreting mechanism and when it comes to customers, lean heavily of marketing to understand the market’s expectation and lead the communications.

Finally, to recap on the main leanings from this three-part series, organizations sometimes mistakenly believe that trust is the outcome. The desired outcome is brand choice or retention of social license. Trust is often a variable that occurs in a causal pathway towards the desired outcome.

Drawing on learnings from the past two of this series, the most frequent folly we observe is executives and the board making trust an organizational goal, however, have little or no empirical evidence of how to build trust.

To build trust, you must first deconstruct trust into its constituent pillars and explanatory variables, model the importance of the hypothesized variables and then, set about to build or rebuild trust based on the drivers of trust and the desired business outcome.

References

¹Financial Review article: Canberra consulting firms cash in on demise of the big four. https://www.afr.com/politics/f...

²ANZ: Member Vote 2023. https://www.charteredaccountan...