Allan Fels, who previously oversaw the Australian Competition and Consumer Commission, told a Senate inquiry the big firms should only focus on auditing, rather than consultancy work.

The inquiry was set up in the wake of the PwC tax advice scandal, where a former partner passed on confidential government information to clients.

Fels said the government needed to introduce legislation to break up large consultancy firms.

“Self-regulation can’t be relied upon, nor can government regulation. We therefore need legislation to break up the big four,” he told the inquiry on Monday.

“The big four argued that there are benefits from combining consulting and advisory work in a business that does audit. This is a rather dangerous argument for them to run.”

Fels said a similar approach could be taken to the consulting sector to what happened with the country’s banks in the wake of royal commission findings.

“There is a severe conflict of interest of an actual institution and the interests of customers” he said.

“It was not resolved by self regulation and government oversight, and that it could only really be solved by a break-up and that’s now happened with banking. They have largely or totally got out of the most conflicting activities.”

Consultancy firm Deloitte will appear at the inquiry later on Monday, where senior executives will be forced to explain conflicts of interest

The firm said in a submission to the inquiry it was aware of two incidents of conflicts of interest.

In August 2022, it was identified Deloitte had breached its own independent and conflict management policy when it did not seek pre-approval from the auditor-general to audit an unnamed government entity, while it was also auditing other data held by the same entity.

The auditor-general later concluded it “did not represent an independence threat to the financial statements being audited”.

The second incident involved a conflict of interest identified by the auditor-general in its report on a home affairs department procurement.

Finance Minister Katy Gallagher said while she was aware of an over-reliance on consultancy firms being used for government projects, the scale became apparent after she won office.

“It is a problem – it is worse than I thought,” said.

“We’re taking steps to rectify that, but it’s going to take a bit of time because of the way the imbalance has occurred over particularly the last five to seven years.”

The finance minister said the government was trying to bolster in-house consultancy for the public service.

“There will always be things that you need to seek external advice from, but at the moment, the balance is out of whack,” she said.

Shadow treasurer Angus Taylor said conflicts of interest with consultants needed to be better managed.

“Government can become a better client. That means using consultants for when they have real value. There are times when consulting skills are extremely useful to government and to businesses,” he said.

“If there are conflicts of interest, they need to be managed properly, and they should be dealt with forensically and appropriately.”

Deloitte said the firm took its obligations about the use of confidential information seriously.

“Any matters in relation to the misuse of confidential government information would be investigated in line with our normal processes.”

-with AAP