On partners

Insights from the inisde

ATO heavy-hitter Jeremy Hirschhorn has spent the past few months visiting partners at the big four and delivering the same message: start acting like the systemically important companies you are.

The speeches must be wonderfully tense affairs. I imagine lots of polite clapping and clenched smiles.

My experience of difficult interviews is the tendency of many partners to begin repeating my name every two sentences…

“So you see, Ed…”

“Well, Ed…”

“That’s a great question, Ed…”

But back to Hirschhorn. He is speaking from personal experience. He spent almost 20 years at KPMG (11 as a partner) before joining the ATO.

I’ve written a long piece about it here, Deloitte, EY, KPMG and PwC a 'systemic' tax risk: ATO (paywall), but I couldn’t use all of his quotes.

Here are a few bits of the speech I found insightful (emphasis added):

Partners and context:

Working in a firm, it is also all too easy to focus on work in progress (WIP) and lock-up, and where the next job is coming from, and viewing advice quality through the lenses of client relationship, negligence and firm exposure – in other words, a sense of as long as the clients keep coming back, and I don’t get picked up in an internal file review, it must be going well.
It’s also very difficult to truly know how you compare to others in the market, even at your own firm let alone other firms. In fact, a key theme that is sprinkled through this speech is of difficulties in having an accurate perception of oneself and others.

Aggressive tax advice and clients:

I have also come to the opinion that the tax market seems to efficiently match conservative advisers with conservative firms and clients, and similarly match aggressive advisers with aggressive firms and clients. The combination of these factors means that few participants in the tax system fully understand where they sit in the risk spectrum (and ironically it seems that the more conservative participants worry more, but the more aggressive participants often honestly believe that they are more conservative than average (perhaps because they are currently more conservative than they have previously been in their career). 

Being systemically important:

From an administrator’s perspective, there are fundamental differences between boutique and systemically important firms.
Boutique firms operate within a system and can, in a sense, view the system as a constant environment in which they operate. However, once a firm becomes systemically important, any actions of the firm will change the system, and other participants in the system (including the ATO and Government) will respond.
As such, a systemically important firm cannot simply view itself as a club of boutiques. If you describe a partnership as like a franchisor/franchisee model, where each partner runs their own franchise, this means that a systemically important firm must have much tighter controls over each of the franchise businesses, to ensure that they are operating consistently with the core brand.
To make this more tangible, where a partner in a boutique firm comes up with a “cute” piece of tax planning, which is then implemented by one taxpayer, the ATO will see this as a “one- off”. If, by contrast, a partner in a systemically important firm comes up with the same idea, the potential (or reality) of that idea being rolled out across Australia’s highly concentrated corporate tax base will mean that the ATO must respond more forcefully.
For those at “Big 4” firms, the concept of a “systemically important” firm plays out even more at a broader level: you are systemically important in terms of your broader effect on the capital markets, and I would put it to you this affects your licence to operate across a range of areas (as is currently playing out), but provides a further system constraint on “clever” advice. 

On hubris:

As an aside, I would also caution that if you have come up with a new and clever idea which gives non-policy outcomes, you should be very careful: very few ideas are truly new, and often there will be an old provision, so successful that the behaviour stopped and the provision is “forgotten”, that is directly relevant to your idea. There have been many very clever tax advisers, and it would be a rare idea indeed that is completely new.

And, my personal favourite, on complaining to your boss:

As a general rule of thumb, you will get further if you escalate issues early but also within the chain of command. For example, don’t go to the Commissioner, Second Commissioner or Deputy Commissioner if you haven’t spoken to the team leader or Assistant Commissioner first, and so on. In fact, escalating an issue prematurely out of the normal chain of command may inhibit future involvement by those officers due to the risk of perceived improper intervention or conflict. Also, escalate to deal with the blockage as you see it, not to ‘forum shop’ for a complete rehearing of the matter. That said, I emphasise don’t be afraid to escalate; we want cases to be raised when they are heading off track.

I hear you, man. I hear you.