Consulting scandals and how to avoid them

It was reported this month that Saudi Arabia’s Public Investment Fund had suspended its involvement with the international consulting firm PwC. Last month, Britain's Financial Reporting Council fined the same company for reported audit failures. China has also recently imposed a hefty fine on it and temporarily suspended its operations because of similar failures.

PwC, which is one of the so-called big four accounting companies, has reportedly shut down its operations in more than a dozen countries to prevent any repeats of the scandals that have surrounded its work. This came on top of a major retrenchment in recent years because many clients dropped the firm due to alleged questionable practices.

This is just the tip of the iceberg and a correction is obviously needed. Major international consulting firms, such as the big four and the “MBB” management consultancies, have come under scrutiny in recent years by governments, the media and clients. Courts have settled lawsuits against those companies, awarding significant damages — at times hundreds of millions of dollars — to the plaintiffs.

In 2023, an Australian parliamentary committee investigated consulting contracts and found that government agencies were failing to comply with procurement rules or demonstrate value for taxpayer money from those contracts. It also found that there was a common practice of extensions of consulting contracts and cost overruns as a result. It accused the firms of an “aggressive corporate sales culture.” The Australian government’s contracts with the four firms in question averaged about $1 billion annually, although the current government has reduced that to about $600 million following these investigations.

Major international consulting firms have come under scrutiny in recent years by governments, the media and clients

Dr. Abdel Aziz Aluwaisheg

Scandals also swirled around consultants during the COVID-19 crisis, including one related to the staggering expenses of more than £1 million ($1.3 million) per day on private consultants for the UK’s “test-and-trace” service and another about a firm advising both the US Food and Drug Administration and a pharmaceutical company it regulates. In France, there were accusations of fraud, tax evasion and shady political campaign work by a major consultancy firm.

Some of the consultants were accused of poor quality of advice, leaking confidential information and not disclosing their conflicts of interest. They were also accused of overcharging through the practice known as “land and expand,” which means pressuring clients to extend contracts or expand their scope. One of the most serious charges involved using bribery to land and continue contracts.

Another critique is that consulting firms have lost their professional ethos. In his 2013 investigative book “The Firm,” Duff McDonald argued that consulting has veered far from its traditional ethical standards, which were dedicated to advising clients in the public interest, to become a business focused on maximizing profit for its partners, leading to a slippery slope of scandals.

Disclosing conflicts of interest should be a given, but some consultants have not been transparent with their clients, such as advising both regulators and the companies they regulate without telling the regulators of this conflict. Similarly, some consultants advise competing companies or rival states.

Some of these ethical lapses and legal transgressions attributed to major companies are quite common throughout the consulting business, although the big firms are probably more prone to committing them for several reasons. Their operations are usually extended over many countries, making it difficult for senior management to exercise due diligence or prevent mistakes. Limited direct communications between senior-level staff at both ends, consultant and client, may lead to quality shortcuts and shortchanging clients in exchange for bribes or gifts.

Disclosing confidential information is also more likely with big firms because the supply chain is usually long and porous. In all these cases, the absence of an effective counterpart team at the client’s end to oversee the work of the consulting team usually leads to substandard products.

Consulting companies, especially the larger ones, are held to a higher standard of professionalism and ethics than other lines of work. This is a good starting point; major consultant companies should lead on reinforcing professional and ethical standards for their profession. If they do not address the current backlash by taking corrective steps, the flight of their clients will likely continue, likely to other, smaller consulting concerns, with whose leadership they can build a more direct and personal relationship.

In the final analysis, consulting companies are similar to other businesses in that they are only as good, efficient and honest as they have to be. If industry standards or regulations are not enforced, they will cut corners. And if the clients do not demand high-quality work, they probably will not get it. If clients do not closely supervise and meticulously review the consultants’ work, the final product will suffer.

Government agencies and businesses will continue to need consulting services for many purposes. They are more cost-effective than developing in-house expertise in all areas, which is extremely difficult when it comes to new areas such as harnessing the power of artificial intelligence or dealing with emerging financial threats or cyberattacks. They need to leverage the consulting firm’s reputation, name and expertise to push forward any new policies.

Disclosing conflicts of interest should be a given, but some consultants have not been transparent with their clients

Dr. Abdel Aziz Aluwaisheg

Consultants are also needed to develop new projects and ideas while allowing management to take credit for them. Conversely, there is a need to shift the blame to the consultant in case the agency has to be restructured or downsized.

With that in mind, and if the consultancy business does not regulate itself, what should clients do to ensure that consultants adhere to agreements and deliver the desired product? How can clients protect themselves from shady practices?

First, clear and detailed terms of reference must be agreed upfront, to help the consultant understand the client’s needs and help the client measure compliance.

Second, the client should establish a counterpart team to guide the consultants and ensure they are on the right track.

Third, clients should use nondisclosure agreements to protect confidential or sensitive information.

Fourth, clients should follow the news and avoid consultants known for shady practices. It would be useful to have a consultants’ watchdog to report any infractions to.

Fifth, governments need to strengthen their regulation of the consultancy business and hold those who breach the law accountable.

Without these precautions, malpractice will continue in the race to maximize companies’ profits and line the pockets of rogue consultants and unscrupulous officials.

• Dr. Abdel Aziz Aluwaisheg is the GCC assistant secretary-general for political affairs and negotiation. The views expressed here are personal and do not necessarily represent those of the GCC. X: @abuhamad1