In a stark reminder of the pitfalls of generative AI in professional services, Deloitte Australia has agreed to refund nearly AU$98,000 to the federal government following errors in a AU$440,000 report riddled with fabricated references. The incident, uncovered by a university researcher, has sparked calls for stricter oversight on AI use in high-stakes consulting work.
The controversy centers on a 237-page report commissioned by the Department of Employment and Workplace Relations (DEWR) in July 2025. Titled a review of the Targeted Compliance Framework, the document assessed the integrity of IT systems enforcing automated penalties in Australia’s welfare compliance regime. Intended to bolster the government’s crackdown on welfare fraud, the report’s recommendations were meant to guide policy on automated decision-making. However, its footnotes and citations were marred by what experts deem “hallucinations”—AI-generated fabrications that undermine credibility.
Specific errors included a bogus quote attributed to a federal court judge in a welfare case, falsely implying judicial endorsement of automated penalties. The report also cited non-existent academic works, such as a phantom book on software engineering by Sydney University professor Lisa Burton Crawford, whose expertise lies in public and constitutional law. Up to 20 such inaccuracies were identified, including references to invented reports by law and tech experts. Deloitte later disclosed using Microsoft’s Azure OpenAI, a generative AI tool prone to inventing facts when data is sparse.
The flaws came to light in late August when Chris Rudge, a Sydney University researcher specializing in health and welfare law, stumbled upon the erroneous Crawford reference while reviewing the publicly posted report. “It sounded preposterous,” Rudge told media, instantly suspecting AI involvement. He alerted outlets like the Australian Financial Review, which broke the story, emphasizing how the fabrications misused real academics’ work as “tokens of legitimacy.” Rudge flagged the judge’s misquote as particularly egregious, arguing it distorted legal compliance audits.
Deloitte swiftly revised the report on September 26, excising the errors while insisting the core findings and recommendations remained intact. The updated version includes an AI disclosure and a note that inaccuracies affected only ancillary references. In response, DEWR confirmed the review, stating the “substance” of the analysis was unaffected. Deloitte, meanwhile, has mandated additional training for the team on responsible AI use and thorough review processes.
The refund—equivalent to the contract’s final installment—resolves the matter “directly with the client,” per a Deloitte spokesperson. This partial repayment, over 20% of the fee, has drawn criticism from Senator Barbara Pocock, the Greens’ public sector spokesperson. “This is misuse of public money,” Pocock argued on ABC, likening the lapses to “first-year student errors” and demanding a full AU$440,000 return. She highlighted the irony: a report auditing government AI systems, flawed by unchecked AI itself.
This episode underscores growing scrutiny of AI in consulting. The Big Four firms, including Deloitte, have poured billions into AI—Deloitte alone plans $3 billion by 2030—yet regulators like the UK’s Financial Reporting Council warn of quality risks in audits. As governments worldwide lean on consultants for tech policy, incidents like this fuel debates on mandatory AI disclosures and human oversight. For now, Deloitte’s refund serves as a costly lesson: AI may accelerate work, but without rigorous checks, it risks eroding trust in the very systems it aims to improve.
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