PricewaterhouseCoopers

Background

PricewaterhouseCoopers (PwC) is a multinational network of firms providing professional services including assurance, tax, advisory, consulting and legal services. Along with KPMG, Ernst & Young (EY) and Deloitte, it is one of the so-called “Big Four” accountancy giants. It was created in 1998, when Coopers & Lybrand merged with Price Waterhouse. In 2019 PwC employed 276,005 people in over 1000 offices in 157 countries¹ and had gross revenues of $42.4 billion. According to PWC, its purpose is to ‘build trust in society and solve important problems’.²

Relationship with the Tobacco Industry

PwC has audited more of the world’s biggest tobacco companies for longer than any other firm, while also earning many millions from the industry in consultancy and other fees.

Audit Work for Tobacco Companies

• Philip Morris International (PMI): PwC has been PMI’s external auditor since the company was spun off from Altria in 2008³
• Altria (formerly Philip Morris Companies): PwC describes itself as serving as the company’s auditor ‘since at least 1934’ (when PM became subject to reporting requirements), although it is unable to ‘determine the specific year’.⁴ It remains Altria’s external auditors in 2020.
• British American Tobacco (BAT): PwC were BAT’s external auditors from 1998 to 2014.⁵ Predecessor firms, Price Waterhouse and Coopers and Lybrand, also audited BAT subsidiaries around the world in the 1980s and 1990s.⁶⁷
• Imperial Brands (previously Imperial Tobacco): PwC was external auditors to Imperial Brands from 1996-2019.⁸
• PwC has also served as auditors to the Gallaher Group (now part of Japan Tobacco International).⁹

PwC was appointed Independent Auditor to the 1998 Master Settlement Agreement, meaning it has calculated and determined the payments owed by the American cigarette manufacturers to the 46 participating US states.¹⁰

Helping Tobacco Build Trust Through Corporate Social Responsibility

In 1999 PwC earned UK£5million from auditing BAT.¹¹ In May that year it pitched for further work helping BAT with its corporate social responsibility (CSR) development programme.¹² The estimated fee for the CSR work was UK£2-3million over several years.

BAT’s rationale for the work, according to PwC’s proposal, was that the tobacco company didn’t feel it received the “recognition it deserves”. One of BAT’s central goals, it said, was “to gain recognition for corporate social responsibility in a controversial industry”.

Improving its reputation, PwC said, would “add value” by helping BAT “avoid exclusion from mainstream investment funds”; help “reduce its liabilities” from litigation; and secure its licence to operate through “gaining the trust and support of society, government and regulators” and by “managing relationships with activist groups”.

The work would involve BAT embedding CSR policies into its business and then communicating this “to stakeholders, NGOs and pressure groups”. PwC proposed to tap its “extensive networks, relationships and knowledge of NGOs and pressure groups”, but cautioned that BAT engage in “limited direct engagement and dialogue” with “low risk” groups.

An early draft of the pitch with comments from BAT suggests it had a particular concern around NGOs. PwC’s proposal, for example, is changed from helping the tobacco firm identify “critical stakeholders” to “critical NGOs and pressure groups’” and BAT narrows “key challenges” to “key challenges from NGOs”.¹³

It is not known if PwC was awarded the business advising BAT on its CSR development programme. KPMG also pitched for the work later in the year¹⁴ and PwC was advised by BAT to  “await our further response on what they presented”.¹⁵

Just over a decade later, however, PwC recognised BAT’s CSR efforts, awarding the tobacco firm ‘highly commended’ at its annual Building Public Trust Awards for ‘People Reporting in the FTSE 100’.¹⁶

BAT wasn’t the only tobacco company PwC made a CSR pitch to. Two years after it presented to BAT, the firm approached Philip Morris (PM) with a similar proposal to conduct a Corporate Social Responsibility Reporting Roadmap.¹⁷ As with BAT, it is not known if PWC was hired.

In a related discussion with PM a month earlier, PwC’s head of reputation assurance, John Browne, is recorded as stating that PM, as a tobacco firm, “has more work ahead of [it] than other companies”.¹⁸ Browne, who previously worked on Shell’s CSR programme, warns that the process Is “not cheap!”. A record of the discussion states that Shell spent US$15-$20million over four years on its CSR reporting programme. External consultancy firms like PwC, KPMG and EY, are described in PwC’s 2001 pitch document as “beginning to play a critical role” in reputation assurance services.

Potential Conflict with Audit Work

The proposed team PwC put forward in 1999 to work on BAT’s CSR programme was led by Andy Popham. At the time, Popham was PwC’s Global Client Service Partner for British American Tobacco and responsible for “setting strategy for PwC/BAT projects”.

An ‘Andy Popham’ is also described in a BAT document a year later as the “PricewaterhouseCoopers partner responsible for [BAT’s] audit”.¹¹ Andy Popham is also listed in another BAT Audit Committee document in 2000 as providing “external audit commentary” on BAT’s accounts.¹⁹

Concerns have long been raised about the independence of auditors – and their willingness to challenge management on behalf of shareholders – if at the same time they are seeking to undertake lucrative consultancy work for the same companies. There is no suggestion of any wrongdoing in Andy Popham’s work for either PwC or BAT.

The issue of PwC’s independence and the integrity of its audit was anticipated ahead of BAT’s AGM in 2000 after PwC was paid £6.7million by the tobacco firm in 1999 for non-audit advisory and consultancy work.¹¹ In a BAT document called ‘AGM Q&A Book 2000’, PwC provides a series of “sample questions and answers” that appear to be designed to deflect criticism. For example, in response to a question on PWC’s procedures to avoid “potential independence/integrity problems” from its non-audit work, PWC cites “professional standards” and provides the following answer: “PricewaterhouseCoopers have satisfied the [BAT’s] Audit Committee that they comply with these standards.”¹¹

Philip Morris was also a longstanding audit client of PwC’s when the accountancy firm approached it to work on its corporate responsibility reporting roadmap.

Exaggerating the Negative Economic Impact of Tobacco Regulations

The tobacco industry has long claimed that restrictions on its product would have negative economic consequences beyond the companies’ balance sheets. Credible third parties have been used by the industry to push this line with policymakers and the media.

The accountancy giants have produced numerous reports to calculate the economic impact of tobacco. BAT, for example, commissioned PwC to prepare economic impact assessments in ten markets BAT operated it, which were planned for publication on its website in 2000.²⁰

However, the quality of the accountancy firms’ work in this area has been heavily criticised.

• A 1992 report on the economic impact of the tobacco industry in the US by Price Waterhouse argued that a proposed excise tax on tobacco would destroy hundreds of thousands of American jobs.²¹ A subsequent review by rival firm Arthur Anderson, said that the firm’s “grossly exaggerated” and “one-sided analyses” were so “flawed” as to produce “patently unreliable results”.²²
• Another Price Waterhouse economic study in 1993 used by business groups with links to tobacco to oppose a smoking ban in California claimed that it would jeopardise 82,000 jobs in California and cost the state more than $3.5 billion. A review of the study, which was based on a survey of hotel and restaurant managers, concluded that Price Waterhouse omitted “a key conclusion, if not the key conclusion, that over 61% of respondents thought that there would be no impact or positive impact on sales from the proposed ban”.²³
• Analysis by PwC in 2005 for the Casino Association of New Jersey on the economic effect of a smoking ban again made claims of huge losses in jobs and tax revenues to the State.²⁴ The analysis was criticised by Stanton Glantz, Professor of Medicine at University of California, as based on a “series of unsupported assumptions” and not on hard data.²⁵

Big Four accountancy firms have also produced reports pushing the tobacco industry argument against plain packaging: that it will increase the illicit trade in tobacco products because plain packaging will make counterfeiting easier.

PwC produced reports, funded by BAT, in the 2000s that purported to show the growing problem of Australia’s illegal tobacco market. For example, a 2010 PwC report, claimed that 12% of tobacco consumed in Australia was smuggled, costing $624 million in lost tax revenue.²⁶ This figure is regarded as an exaggeration and not supported by official statistics on smuggled tobacco seizures. Proposals to introduce plain packaging in Australia date back to the early 1990s. Regardless of the tobacco industry’s warnings, the Australian Parliament passed the government’s proposed plain packaging legislation in 2011.

Potential Conflicts of Interest

As well as providing consultancy and other services to the tobacco industry, the Big Four accountancy firms also provide services to governments around the world. This can lead to potential conflicts of interest.

PwC, for instance, was hired by the European Commission’s Directorate-General for Health and Food Safety to conduct a study on the implementation of ‘track and trace’ solutions, which are designed to eliminate the trade in illicit tobacco products. In 2016 German MEP Fabio De Masi questioned the decision to hire PWC.²⁷ He noted that the firm works for PMI, the tobacco company behind the industry-favoured track and trace system, Codentify, which was being considered by the European Commission and “the very system [PwC] is meant to assess”. “Why does the Commission not play it safe by hiring a company without ties to the tobacco industry?” De Masi asked. In response, the Commission said that PwC had signed a declaration of ‘no conflict of interest’ and noted that auditors are subject to strict rules on professional conduct.

Controversies Outside of the Tobacco Industry

Like all the big accountancy firms, PwC has been implicated in a number of high-profile scandals and controversies in recent years. These include:

Selling tax avoidance

PwC, like the other Big Four companies, has a history of developing and marketing complex tax avoidance schemes for clients. A 2015 UK Parliamentary inquiry concluded that PwC’s activities represented the promotion of tax avoidance “on an industrial scale”.²⁸ A 2005 US Senate report concluded that PwC sold tax products to clients, despite evidence that some were abusive or potentially illegal tax shelters.²⁹

Audit failures

PwC has been investigated and fined for the poor quality of audits it has conducted, including for the retailer BHS, which collapsed in 2016. The UK regulator described BHS’s accounts, signed off by PwC, as incomplete, inaccurate and misleading. It also raised concerns about PwC’s failure to properly monitor conflicts of interest: PwC earned eight times more from consulting work for BHS than it did from auditing. PwC admitted to “serious shortcomings” with its audit work for BHS and was fined £6.5million.³⁰ This is one of a number of large fines targeting PwC’s audit work. The firm has also paid undisclosed sums to settle lawsuits brought against it.³¹

TobaccoTactics Resources

• Big Four Accountancy Firms
• British American Tobacco
• CSR Strategy
• Deloitte
• Ernst & Young
• Hiring Independent Experts
• KPMG
• Philip Morris International