CORPORATE LAW ECONOMIC REFORM PROGRAM (AUDIT REFORM AND CORPORATE DISCLOSURE) BILL 2003Cognate bill:CORPORATIONS (FEES) AMENDMENT BILL (NO. 2) 2003: Second Reading
Mr CADMAN (Mitchell) (6.41 p.m.) —I rise to speak on the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 and the cognate bill, the Corporations (Fees) Amendment Bill (No. 2) 2003.
The housing boom in Australia at the moment is due to the confidence of investors. But it is also in part due to a lack of confidence by investors in forms of investment other than real estate. We have a very high level of share ownership in Australia. Some have said that it is as high as anywhere in the world. But the preference of most Australians still remains to invest in real estate. It does not go away, it can be found at any time and it does not depend on secret deals or takeovers that nobody—certainly not the investor—understands.
These proposals seek to bring to light some of the decision-making processes of companies and corporations. Basically, many of the changes have been brought about because of some of the malpractices that have been identified in Australia and, in fact, worldwide. Australia is not the only country that has had an HIH type disaster. Confidence in decisions made by corporations really goes to the way boards operate, the way boards are supervised and the way decisions are implemented. The auditor is pivotal in providing confidence to anybody making decisions about investment.
Much of the discussion today in regard to these corporate law reform measures goes back to the role of the auditors. The House will remember the role of auditors in the HIH affair—the question of whether or not auditors should be board members, the information they had and the favoured treatment they may or may not have been able to give. Everything that could be done to destroy confidence in investment seemed to be done in that instance. The royal commissioner, Mr Justice Owen, certainly identified many of those areas.
Is Australia worse than any other country? No. Is Australia better? Yes, it is somewhat, compared to some of the failures in Britain, the United States and similar countries. But that should not give us any reason for complacency. This legislation, this corporate law reform, is timely and it flows in part from the royal commission into HIH. The role of overview by government was certainly lacking in the case of HIH. The problems that the various firms that were subsumed by HIH had were certainly known by the Superannuation Insurance Commission long before the company actually went down.
It seems strange to me that members of the Australian Labor Party come here today saying that these changes are not strong enough. They did not choose to implement changes, even though during their period in office some of the difficulties were known and some of the activities of friends of the Australian Labor Party—whether they were the Warren Andersons or the Laurie Connells—were well known. The Australian Labor Party chose to take no action whatsoever. Members of the Labor Party come to the House today claiming clean hands and new insight into the way in which these matters should be managed.
I think the government has moved solidly to put some really strong legislation in place but in a way that allows for companies to make decisions and move ahead and that provides for shareholders to take a view, express an opinion and be more proactive in companies. That is needed. Supervision by shareholders is needed. In any family company, supervision by shareholders is present at all times. The principle is reasonable enough; it is the shareholders' funds that are being used or abused by any corporation.
The role of the auditor—that pivotal person who supplies the information and has done so for some years now—has been extended into areas other than those financial. That is very significant. When reading about the proposals for change, I noticed that nothing could be more revealing than the changes that KPMG have had to make in the way they operate. There are also some factors that will limit government's role in bringing in some of the proposals suggested by the Australian Labor Party. There was an article in the Sydney Morning Herald on 22 November about Deborah Smithers, a corporate governance expert at KPMG, which outlines her role as a lawyer working in a company that provides audits. As a lawyer by training, she provides advice and mentoring to directors of KPMG clients, as well as dealing with internal clients of the firm. The article states:
Her work is unrelated to the job undertaken by audit teams, but she says that may not matter to those who see only that she works at KPMG.
That is a fair comment, because audit firms and companies providing financial services to companies, whether they be accounting services, bookkeeping services, audit services or general advice-giving on corporate strategy, employ people with a wide range of interests. Not all of them have expert knowledge about the balance sheet and the financial affairs of the company, because it is not their charter to give advice on those matters.
The government has been able to strike an understandable balance between the need for expert advice-giving and the role of the auditor. The government has established the Financial Reporting Council and will expand its role to include an oversight of audit-setting arrangements. The government also believes that the Auditing and Assurance Standards Board will be reconstituted, with a government-appointed chairman, to oversight the role and functioning of the Financial Reporting Council. These are activities that go to the supervision of auditors alone. This government considers that the measure to give auditing standards the force of law will enhance the rigour of the standards applying to the auditing profession and will improve ASIC's enforcement capabilities, because people will know precisely the expectations of the various players in the assessment of the financial health and status of a company.
The government has consulted significantly and widely across the industry on this, and I am aware of some of the people who have been involved in consultations, and their comments. There was a fear at one point that it was going to be so difficult for accounting firms to retain an audit section that they would close their audit sections and hive off the audit companies, and that the audit companies would become specialists in their own right and be able to charge very large sums to do auditing, because of the restrictions and limitations that would be placed on any company that claimed to provide audits. So the accounting firms of Australia, with lots of expertise and capacity to provide information and to do auditing, at one point were looking at whether or not they would subdivide their operations so that the difficulties being imposed by some of these corporate law changes would not affect their capacity to provide proper accounting processes. I am pleased to say that that has not happened. The government has been able to draw a balance that will allow proper accounting and auditing procedures to exist within the same advice-giving group.
During the period of consultation, the industry noted that the existing body of professional standards was not sufficiently robust—and I think that is an understatement. There is no doubt about it: there is hardly an Aussie who believes that what happened in HIH demonstrated a robust, professional standard, because it appeared that auditors in that situation were allowed to very easily move between their official roles as auditors and into the decision-making process on the board. During the consultation, the industry also noted that the standards were not in a suitable form to be immediately given the force of law as part of the transition to the new arrangements. So the force of law needed a refinement of the process of what the standards should be. It is intended that the bill will retain transitional provisions that will bring the existing standards within the legislative framework at the earliest opportunity—and rightly so.
As I have already said, the Financial Reporting Council will have an oversight and monitoring function. This role will include advising the minister on how things are going. The council will advise the minister on the processes used by auditors to ensure compliance with the independence requirements and it will advise the professional accounting bodies on planning and performing quality assurance reviews of audit work. There is an assurance process in this legislation for the independence of the auditor. It provides that auditors must provide directors with an annual independence declaration; they must be able to say to the boards, `Here is a statement of my independence and freedom from outside interference that would jeopardise my continuance as auditor.'
It also proposes restrictions in the way the audit will allow partners to join an audit client as a director or in taking a senior management position. There is a waiting period of two years, and this will apply to people working for companies. Deborah Smithers of KPMG is a classic example of somebody working for an audit company who could be affected by the decision to make it a longer period. She is not involved in any way in the financial decision making process, so it is my view that a waiting period of two years to apply to partners of an audit firm or directors of an audit company who are becoming directly involved in a directorship is an adequate period of time and ensures the separation.
The bill requires an audit rotation of five years. This is presently a shorter period. I think the Australian Labor Party is proposing four years, but five years is considered too short by some. In circumstances where there may be difficulties in acquiring auditors, such as in country areas, a period of seven consecutive years may be given by ASIC. The description of the service provided by auditors is also required to be presented in the directors' annual reports so that the fees paid to auditors can be equated against the service they provide. There cannot be any hidden advantage given to auditors for faulty advice or for advice that goes beyond what is proper. I guess what I am saying is that an auditor should receive just reward and not extraordinary reward for not presenting a full and detailed report. Disclosure is required of the work that is done for the fees paid, and I think that is fair enough.
As proposed by Justice Owen, there will also be certainty for auditors, which will assist them in discharging their obligations and will take into account the nature of the Australian market. The government intends to support the policies recommended by Mr Justice Owen in retaining independence, but it is also necessary to ensure that regulatory requirements are appropriate for the Australian market. Continuous disclosure is another part of the process. This continuous disclosure regime is one way of making sure that the public are aware of all changes in companies' circumstances and that the marketplace, the stock exchanges and those involved in the process are always aware of what the changes may be. There is a change in the maximum civil penalty that the courts can apply. In the case of a corporation it will be raised from $200,000 to $1 million, but for an individual it will remain at $200,000.
There is a need for remuneration disclosures, and this is something that seems to get right up the noses of the Australian Labor Party because they want it to even go further. In fact, I think many of them would prefer to vote in the parliament about what the remuneration should be for directors and senior executives. I know that some of the payments and payouts—the golden handshakes—are extraordinary and are, in my view, absolutely wrong. People should not be paid for failures; people should be paid for success and results. The details of directors' and executives' remuneration will need to be disclosed clearly in marked sections of the annual directors' report. This section will be known as the remuneration report. Shareholders will be given the opportunity to comment on the /files/includes/content.csss of the report and to vote. At an annual meeting shareholders will be able to inform the chairman whether or not they approve of the proposed package for senior executives and directors and whether or not the shareholders think they are worth it. It is a non-binding expression but, I tell you what, it will be reported pretty widely.
That will affect the market standing and status of that particular company. You can imagine headlines in the Financial Review, the Australian or the Sydney Morning Herald about what people are doing for what they have been paid. I think this is a very worthy innovation and something that will have a salutary effect on the way companies and corporations operate. It is for shareholders to be told what a person is supposed to be doing, whether they are achieving the results that are set out in the terms of their employment and how much they are going to be paid for it. I think that is completely appropriate.
We have had a discussion in this place over the last little while about how much MPs are paid. The country can make its own judgment about those things, but details of directors' remuneration should be open and known to investors who are putting in their hard-saved cash to get a return to build their families' wealth and security. There will be a vote mechanism for shareholders to directly and clearly communicate their views of the board and the company so that they can indicate to the directors what they want without detracting from the authority of directors.
The committee that will examine this proposed legislation is the Parliamentary Joint Committee on Corporations and Financial Services, chaired by a friend and a fine parliamentarian, Senator Grant Chapman. In his media release about the committee's inquiry, Senator Chapman says the committee understands that the government, Treasury and others have consulted widely and it will be looking with enthusiasm to consulting more widely during the inquiry process. I think that the Treasurer, Mr Peter Costello, has found a balance in putting a check on failing to keep people informed. In this legislation there is a proposal to keep auditors very closely under supervision and constantly reporting what they are up to and to supervise directors and chief executive officers and what they are paid.
According to a report in the Australian Financial Review dated 5 September, chief executives reject the provisions of CLERP 9, as it is known, giving investors the right to register a non-binding vote. Well, tough cheddar—I believe that investors should have that say. I notice that some of the aspects of the legislation have been rejected by Hugh Morgan. But I am sure that Hugh Morgan, like anybody else who wants the best for Australian business, will understand the reasons for it. ASIC's Executive Director of Policy and Marketing, Malcolm Rogers, said that the final policy statements that are dealt with in CLERP 9 will ensure that the people affected will be able to plan ahead. They will be given a two-year transitory program and they will be able to plan ahead for the changes necessary. What Australia is looking for is a better result for shareholders and for the Australian public. (Time expired)
Author: Hon Alan Cadman MP
Source: Speech - House Hansard 16th February 2004
Release Date: 18 Feb 2004