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JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003
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JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES
ACTING CHAIR (Mr Ciobo)
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003
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JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES
(JOINT-Tuesday, 6 April 2004)
- Committee front matter
- Committee witnesses
ACTING CHAIR (Mr Ciobo)
- Committee witnesses
- Committee witnesses
- Committee witnesses
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- Committee witnesses
ACTING CHAIR (Senator Wong)
Content WindowJOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES - 06/04/2004 - Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003
ACTING CHAIR (Mr Ciobo) —Welcome. This is a public hearing of the Parliamentary Joint Committee on Corporations and Financial Services regarding its inquiry into the exposure draft of the Corporate Law Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 and relevant and related matters. The committee expresses its gratitude to the contributors to this inquiry, including those who will be appearing before us as witnesses today. To date, we have received more than 60 submissions but we would welcome, and are still accepting, additional submissions.
Before we start taking evidence I wish to reinforce for the record that all witnesses appearing before the committee are protected by parliamentary privilege with respect to the evidence provided. Parliamentary privilege refers to special rights and immunities attached to the parliament or its members and others necessary for the discharge of parliamentary functions without obstruction and fear of prosecution. Any act by any person that operates to the disadvantage of a witness on account of evidence given by him or her before the parliament or any of its committees is treated as a breach of privilege. I also wish to state that, unless the committee should decide otherwise, this is a public hearing and as such all members of the public are welcome to attend. This is the committee's fifth public hearing for this inquiry. Additional hearings will be on 14 and 29 April and, possibly, in early May on dates still to be determined.
Welcome, Dr Longstaff. The committee prefers all evidence to be given in public but should you at any stage wish to give any part of your evidence in private you may ask to do so and the committee will consider your request. The committee has before it a written submission from St James Ethics Centre—submission No. 40. Are there any alterations or additions you would like to make to the submission at this stage?
Dr Longstaff —No.
ACTING CHAIR —I now invite you to make a brief opening statement and we will then proceed to questions.
Dr Longstaff —Thank you. The centre's submission focuses on the issue of whistleblower protection. There were three key elements that we sought to bring to the attention of those responsible for reviewing the proposed legislation, each in relation to whistleblower protection. The first was to do with the ability to expand the number of bodies to whom protective disclosures might be made. That has subsequently been taken on board and included in the amended draft legislation. But there are two other issues which we drew attention to and which we still think might bear further consideration. The first relates to the capacity for individuals to make anonymous disclosures and the second relates to the question of whether or not disclosure should be made in good faith.
On the first matter, we believe that anonymity ought to be an option available to people making disclosures. The only real objection to it that we can see might be a practical one of how you might identify a person who has made a disclosure subsequently if you do not have the means to identify them. With that in mind, we think it is quite possible that those people wanting to avail themselves of this protection ought to be given a unique identifier at the time the disclosure is made—it could be in the form of a number or an alphanumeric code—so that if, at a later date, other people seek to claim protection without being able to identify themselves, the person who did make the disclosure can be correctly identified and therefore continue to enjoy the protections afforded by the proposed legislation. With that in mind, we think that, on balance, public interest is better served by having people able to make an anonymous disclosure because, although the protections are afforded under the proposed legislation, many people looking at the history of what has happened to whistleblowers might have a reasonable apprehension that, should they become known as the person making the disclosure, some detriment will be suffered by them.
The second issue—and one that perhaps might seem a more unusual submission for St James Ethics Centre to make—is whether or not disclosure should be made in good faith. This is a matter we gave considerable thought and attention to. We decided that, on balance, the test of good faith ought not to be required because the key question would be whether or not the disclosure is actually true. Again, we see that it is in the public interest that true disclosures about matters which ought to be disclosed come forward, ideally in circumstances which allow the disclosure to be made internally in the first instance so that it can be addressed by the responsible people. But, even if it is made in a public forum and protected under the mechanisms proposed, it should still simply be tested on the question of truth. That is not to say that we are indifferent to whether people might approach making a disclosure with malice, but we think that, even if they do so, if it is true then it is still something which ought to be known because people can then act on it. The question of what we do with people or what judgments we form about people who act with malice ought to be left as an ethical question. A judgment ought to be made on that basis rather than on a legal basis—that is, determined by law. So we decided that the system would be better served if the good faith test was not applied. I am happy to expand on that in answer to questions but I think those are the principal points I want to make at this time.
ACTING CHAIR —When I had a look over your submission I was quite interested. With regard to that second limb, do you think it is possible to separate the two? Do you think it is possible to determine the truthfulness of a whistleblower's claims without exploring those avenues pertaining to whether or not there is malice involved or what their intention is?
Dr Longstaff —Yes, I do think it is possible. There is one philosophical school of thought which would say that there is no such thing as truth, but it is not a school of thought to which I subscribe. I believe that there are facts about things that occur, which can be checked and validated and, therefore, determined as being true, and that their truth does not depend on what the intentions of the person who spoke the truth happened to be. In that sense, it is reasonable to make that sensible distinction between the two.
Senator CONROY —I want to discuss the good faith issue, as a number of other witnesses have raised it. You mentioned that you used to leave it to whether the motive was ethical. Do you think it matters, at the end of the day, what the motive behind the disclosure is if their knowledge is accurate?
—It does not matter, really, in terms of what the objects of the proposed legislation are, although I can understand legislators being keen to avoid any kind of reward being given for unethical conduct, which purely malicious conduct would be. I do think the question of malice or good faith matters in general to a community and to the kind of society that we want to have, because I do not think we would be well served by having people being indifferent to the question of motives. But I think in terms of this particular legislation and the purposes which it seeks to serve it does not matter, because the principal objective should be to determine the truth so that the public interest is served by having appropriate notification made of those things which ought to be notified when there is no other reasonable alternative for somebody within an organisation.
Senator CONROY —An employee may be motivated by a malicious purpose.
Dr Longstaff —They may be, but, similarly—
Senator CONROY —There is an old saying: `When thieves fall out'.
Dr Longstaff —Nonetheless, that will not change the fact that the event that ought to be disclosed has occurred. I would think that typically companies would want to organise their own internal mechanism so that there is some capacity to provide some positive reward for people who make disclosures for the good reasons that we might think should exist. In other words, there would not be any question as to whether the protections formally applied ought to exist or not, but there may be some additional benefit to those who are motivated by proper kinds of concerns.
Senator CONROY —As I mentioned, the committee has had some discussion on this. Senator Brandis, who is not with us today but who is a lawyer, suggested a possible alternative. Your submission refers to the requirements in the US, where there is no good faith requirement. If we remove the good faith requirement, we need to reformulate the test. Senator Brandis suggested the test should be whether the whistleblower has an `honest and reasonable belief'. Do you think that gets us there?
Dr Longstaff —I think that could work. The test I would prefer is whether or not the claim is true, but that might be too high a test for a person wanting to come forward, because they may at that time be acting in good faith. So an `honest and reasonable belief' would be acceptable. It is to do with the fact that the person holds the belief. The reasonable test would be where I put the most weight, because the belief needs to be well founded and not some idle bit of speculation by the person seeking to have protections.
Senator CONROY —I want to talk about anonymous disclosures, which you referred to. Your submission says that whistleblowers should be able to be anonymous as they often fear the threat of reprisal. From a practical perspective, how do you offer the protection afforded by this bill to someone who remains anonymous?
—You allow a person to be identified if they seek to take advantage of the protection. The protection, as it would work, would be afforded to them from the moment they made the disclosure in an appropriate form. It is then a fact that it exists as a legal protection. It is up to them, though, to invoke it, and they can do so at any time. That might risk their anonymity, but if they wish to sit by and see what happens—and let us suppose they live in a more ideal world than most do live in and that there is no retribution for the disclosure having been made—then they may never invoke the formal privilege. But if they do so we need to be protected from the fact that a number of people might falsely claim that they have made the disclosure unless there is some unique identifier. The mechanism that we would propose as a practical measure is in that form.
Senator WONG —On the good faith issue, given that this is legislation which seeks to give people protection, would you agree that there should be some filtering mechanism so that not everybody who discloses something should be given the benefit of legal protection in this way?
Dr Longstaff —No, particularly no-one making a false claim ought to be protected.
Senator WONG —On that—and this is why I am attracted to Senator Brandis's formulation—if you utilise the truth or otherwise of the allegation as the qualifying factor, in fact you may be worsening the situation for some people who might have believed something to be true and, therefore, have complied with the good faith test in order to gain protection. But somebody who makes an honest and reasonable mistake as to the veracity of what they are disclosing, which they subsequently find to be untrue, may be deprived of protection under the legislation—that is a perverse outcome.
Dr Longstaff —It would be a perverse outcome. I am attracted to Senator Brandis's proposal.
Senator WONG —It is not an unknown formulation.
Dr Longstaff —No, it is not an unknown formulation. I suppose one of the things that does flow from the kind of proposal we put in its rather raw form is that people would probably approach making a disclosure with a proper degree of caution because they would know that they needed to be reasonably certain of the truth of what they were saying—in fact, they should be certain that it is true—before they would seek to make the disclosure. I accept that that may be too high a test to apply, so that is why I think perhaps a better formulation is that which Senator Brandis has suggested.
Senator WONG —Otherwise you actually might be making an error and then be deprived of protection.
Dr Longstaff —It might be a genuine error and they have made as good an inquiry as they could have made and, subsequently, they find they are without protection—I accept that, yes.
ACTING CHAIR —On your issue dealing with anonymity, I recognise that you say there should be a mechanism to follow it back. However, where you have a vexatious or a frivolous report, how would you see it actually operating in terms of having active discouragement? I am interested as to whether or not, because you have that ability to track it back, you are in fact circumventing any of the incentives that would apply through having the ability to report or disclose under anonymity.
—It is not really an ability to track back. You provide that person with a unique identifier so that, if they invoke the privileges of the protection, you can be sure that that is the correct person who is doing so. All you would know in practice is that you received some kind of a call. If they choose to be anonymous, you give them the unique identifier. From that point on, you may not be able to track them back, but the onus would then be on them if they wanted to invoke the privilege of the protection and say, `I am the person who was protected from that point of call. I can prove that I was by the provision of this unique identifier.'
That does not really go to the core of your question, which I think was about whether or not there are some other practical difficulties with not knowing the identity of the person who makes a protected disclosure. From what I have seen in practice with schemes which do operate like this—for example, hotlines and other services provided within companies already where a person can make an anonymous disclosure, albeit without the protections—typically what happens is that the information is sufficiently detailed to allow, say, a company to begin its own investigations to determine whether or not the thing that is said to have happened has in fact happened. So they are not really encumbered by any inability to pursue the matter because, typically, it is set up to find out exactly what you do need to know. If a person will not give you the information sufficient to proceed from that point then their bona fides in that matter in one sense would be open to some question because they will not provide the means by which the actual process can go forward. The actual day-to-day doing of this work determines the basis on whether or not you can proceed more than the identity of the individual who is actually making the disclosure.
ACTING CHAIR —You speak about other bodies and in your submission you touch on whether or not it should be broader than just ASIC. Would you like to expand on that for the committee?
Dr Longstaff —I think that argument may already have been accepted. What we were concerned to do was to ensure that there was some encouragement given, particularly to corporations, to establish internal mechanisms to which people could make protected disclosures. Our preference is that, if possible, organisations should be informed of issues arising in their own structures and be given at least an initial capacity to investigate and resolve those issues. I think that would better serve the proper purpose of management and the governance structures within companies. That was not going to be allowed if it was simply a disclosure to ASIC. As I said before, there are a number of programs already running within companies and in other organisations where disclosures can be made. They allow anonymity and they work well, but of course they do not have the formal protections considered by the bill.
ACTING CHAIR —So in terms of internal disclosure regimes, say, would you seek a mandated enforcement of those sorts of operations?
Dr Longstaff —That every company ought to? No. I think it would be a prudent form of best practice for companies to put in either their own internal one or something which is close to internal which they have some responsibility for arranging. Providing that the legislation does provide an alternative to go to an external party, such as ASIC, then the public is being served. Why a board or management would not avail themselves of the opportunity to create an internal mechanism under those terms I do not know, because it would certainly be in their best interests to do so.
ACTING CHAIR —What about the breadth of people eligible to be protected? Are you comfortable with the reach at present or do you think it needs to include, for example, suppliers of goods?
—I can see new arguments, increasing arguments, why it should extend beyond simply employees. I know that this would cause some concern in certain circles, but business practice is developing now, with the integration of suppliers and the whole importance of the supply chain. I do not know if we are quite there yet, but, given the prevalence of that practice, I can see we are heading in a direction where you might very well contemplate including those people who are, if you like, integral players within a business's activities. Is that something which is being canvassed?
ACTING CHAIR —It is an issue that the committee has discussed and has been raised, so we are keen to get different points of view on it and hear people's thoughts on the issue.
Dr Longstaff —I am not a lawyer, so I do not know what the implications are around contracts and other things, but if you ask: `Is it a general issue? Is there likely to be a case for extending it to critical players within the life of a company's activities?' then I would say, `Yes, that makes some sense and will increasingly do so in the future.'
ACTING CHAIR —In terms of actually encouraging the reporting of wrongdoing, and preventing unlawful reprisals that flow from that, do you think that the current model sends the message that the whistleblowing scheme is in fact focused on these areas and is not open to frivolous and vexatious claims?
Dr Longstaff —I do. I think it is not just because of the specific legislation itself but because of the general context in which it has been proposed. I think that the default setting for people is to take these schemes quite seriously and to understand that they ought not to be used for vexatious reports or for frivolous claims to be made. I think that within that context, which is unlikely to change, the balance is pretty right.
ACTING CHAIR —There is another point with regard to multiple directorships. In terms of keeping good corporate governance, do you think there is an argument for legislating to place some limit on the directorships a person can hold?
Dr Longstaff —On balance, no, because I do not know how the legislation would actually allow a proper determination of the particular details of any one director. Different directors have engagements which bring different weight upon them in terms of the contribution they need to make. It is not just a variable around things like the size of the company—quite large companies can have relatively low workloads because they are well organised and are operating well, while small companies can have massive requirements of directors. So taking a fixed number of companies as an index of overcommitment I do not think would make much sense. Rather I would like to see some mechanism, probably an informal mechanism, by which those directors who overcommit are able to be identified by their peers and there is some safe process by which pressure will be brought to bear in order to have them scale back their commitments so that they can properly discharge their duties which arise under the law.
ACTING CHAIR —So would that be, again, just a case of best practice?
—It would be. The reality is that there is some kind of moral courage required, I suppose, by other directors, to tap people on the shoulder when they think that they are underperforming and say, `Are you really certain that you are able to discharge these duties?' To say that it is just a matter for a single director to determine on their own judgment, I think is probably not right, because they are probably prone to overestimate their capacity to do the work. Unfortunately, at this point in time I do not think we have a community of directors—if I can call it that—who are capable of dealing particularly well with failure within their own ranks. But I do not think a formal legislative provision saying, `This is the cut-off point,' would actually do the job. It is more about the culture that exists within boardrooms.
ACTING CHAIR —You would be familiar, obviously, with the cooling-off periods that are envisaged as part of the legislation. Would you be keen to make some comments on your thoughts on that? For example, other submissions have indicated that, for a former auditor who seeks to move into corporate management et cetera, the cooling-off period should apply from the time the auditor no longer has that company as a client, rather than from the time that the auditor leaves the firm they were with. Would you be interested in making some comments on that or, more generally, about the rotation and cooling-off periods?
Dr Longstaff —I do think that there is some benefit to be had from specifying cooling-off periods. I think that the benefits come from the peculiar time in which we find ourselves now, where there are such low levels of trust in all sorts of institutions, but in this case around the institutions of business, and a perception within the community that those who provide professional services in some senses have become less like members of a profession and more like people who participate in various businesses that just happen to offer what used to be called professional services. The distinction between a business and a profession is important in this, although this is probably not the place to go into it. The more significant point is that the public, I think, has lost a degree of confidence.
In normal circumstances, you would say, `Oh well, this is just a matter that the professions can be left to deal with themselves,' but I do not think we are in normal circumstances. I think we are in extraordinary circumstances at the moment, where people have to go beyond what would be normal practice in order to restore trust. On that basis, at least for a period of time, a requirement for a cooling-off period makes good sense. As to whether it should begin from the point at which a person or a firm is no longer involved with a particular client, that again goes back to a view about whether or not the traditional views about a partnership—where the knowledge of one partner is deemed to be the knowledge of all—prevail as an ideal, albeit a fiction, in large organisations, or whether or not that can be set aside for some of these more corporate models that now exist. In that case, the existence of Chinese walls and the sheer size of these organisations mean that, once you no longer have involvement with a company, you are truly removed from any contact with its affairs.
If you wanted to have an abundance of caution in relation to this, you would start the cooling-off period from the point when the firm discontinues its association, the argument being that, before that point, there is some reasonable basis on which a partner—particularly in a partnership—might be notionally in possession of information about the firm and have some kind of vested interest in and/or connection with them. That means that the cooling-off period would not have been effective if it had just started from the end of that particular individual's association with the client.
—Have you looked at the separate issue of the threshold tests that apply to objective and transparent reasonableness when it comes to a conflict of interest, and the tests that apply for that? Do you have any comments about the different measures that may be introduced with respect to conflicts of interest?
Dr Longstaff —No, not specifically within the legislation, but I am happy to answer questions on matters of general principle, if you want to outline those.
ACTING CHAIR —Something the committee is looking at, for example with respect to conflicts of interest, is the issue of the reasonable person making a decision or, indeed, the actual party doing the audit being not capable of forming an objective and impartial view about any conflict of interest. As a threshold test, I would be interested in your comments on whether you think that goes too far, is an appropriate balance or does not go far enough.
Dr Longstaff —Let me give you some general thinking on it—it may or may not be helpful in relation to that. My general view about conflicts of interest—perhaps more in the sense of a side comment—is that they are better off termed `conflicts of duties' that can arise in these circumstances. Either way, to get a proper sense of what is at stake here, there is a standard framework that makes pretty good sense to me, which is based around disclosure and informed consent. I do not believe that a person who has a conflict of duties, such as an auditor or any other person providing professional services, can of themselves determine that it is appropriate for them to continue to act in a particular matter. I think it can only be decided by those people whose interests are actually at stake—where there is a conflict of some kind. On that basis, if they give informed consent, that should be enough to continue. At least it should form a rebuttable presumption in favour of people being able to continue on that basis. But it is very important in that case that those people who are in a professional relationship be diligent to their ability to identify and disclose the conflict and that they be prepared to be bound by those people whose interests are at stake.
ACTING CHAIR —Does your organisation have any thoughts on the prohibition or otherwise of cross-selling of non-audit services?
Dr Longstaff —No strong views. I can understand the arguments that have been put in terms of the way the provision of services, such as audit services, could potentially be affected by considerations other than the direct professional obligations that arise around, say, auditing, mainly by the provision of other services. If I sound ambivalent about this, I am a bit, because I do believe it is unfortunate in some senses that we have got to a point where we do not believe that the professional obligations are sufficiently well held to be able to act as a bulwark against the temptations that might apply in other areas.
I have no doubt that there was a time when people did provide a range of services under one global structure, and they did so totally faithfully in terms of their duties owed to the clients and to the community as auditors. They understood that, as professionals, there was a social compact which they needed to honour, and that was enough. I am not sure at the moment that the professions have given enough attention to the maintenance of the culture that makes that possible. So my ambivalence comes from the fact that, I think, in an ideal world—and a world that used to exist—it would be possible to have a kind of omnibus service provider. But until such time as the professions are able to be clear that that is what they want to be—namely, a profession rather than a series of businesses providing professional services—I think that some formal distinction of what they do may be required.
—Do you see that erosion of professional standards coming about through a breakdown in the educative process or on the enforcement side?
Dr Longstaff —I think it is a mixture of things. What we ask professions to do is a fairly extraordinary thing. We live in a world in which the general settings for what we do are determined by the philosophical underpinnings of a market economy in which the pursuit of self-interest is formally acknowledged and licensed, in a sense. We believe that individuals pursuing their self-interest will lead to an increase in the common good because of the operation of the so-called invisible hand. What we say to members of the profession is something quite extraordinary: we don't want you to do that. We actually want you formally to exclude the pursuit of self-interest in favour of acting in a spirit of public service. Each profession has a defining end and each of them has a responsibility, as I say, to act in a spirit of public service where their own personal interests come right at the bottom of those things they might give consideration to—the welfare of a client or of the community are ahead of their personal interest.
In times gone by we recognised more formally the extraordinary nature of what we ask members of the professions to do and entered into a kind of social compact in which a number of benefits were recorded in return for that promise being kept. There were limitations on the kinds of work that might be done, there was a certain kind of status attached. One of the things that has happened over time is that we have seen a progressive erosion of the bargain and so a lot of people in professional life—you see it within the law, you see it within accounting and other things—have said, `Well, if that's what it means to be a profession and if the benefits of that social compact have eroded as part of broader social change, why should we stick to it?' It has become very tempting under those terms actually to become a business or a guild or something like that which is not defined by those professional obligations.
When that happens, it affects a whole lot of things. The context within which the education of members of the professions takes place changes and the credibility of a claim about ethical commitments becomes open to question. There is general erosion that takes place. I do not believe it is irreversible but I do think it is quite a serious matter of public policy as to what we do about the professions in this country and how we restore some of the balance. I hope, I think not in a naive way, that it will be possible to get that balance right, because I think society is far better served by having an informal set of self-regulating gatekeepers who actually are able to exercise judgment about the public interest without having to rely exclusively on legislation, regulation and surveillance in order to protect us. I think we are far better served economically, socially and in a whole lot of ways by having strong professions, and I think we have lost too much without even noticing it.
ACTING CHAIR —Does the CLERP 9 introduction of incorporation of auditors and proportionate liability run counter to the idea of professionalism?
—The incorporation elements can do. I think there are some risks in that. I have always been concerned about incorporation. I understand some of the business cases that are made by people who have an interest in this but I think that does run counter to it. The notion of proportional liability and even some of the discussions in other places about the capping of liability under professional standards legislation I think do make sense, for the kinds of arguments I was just referring to a moment ago in terms of the social compact. For example, where liability issues are either allocated differently or capped, society is saying to members of the professions, `Providing a prudent level of provision is made for people who may be placed at risk by you through the profession of your services or the schemes ensure basic coverage, there should be some ability for society also to recognise that, in return for you undertaking your professional obligations and proper and prudent systems of risk management, we will confer a benefit which ultimately benefits society as a whole.' So I think the liability issues are not so much a concern for maintaining that sense of professional status. Incorporation is a real risk because it pushes us further along the line to saying these are just businesses. Maybe that is what they are now and maybe we need to acknowledge that and let go of the myth, but I believe we lose something as a society if that happens.
ACTING CHAIR —On that point, submissions from other witnesses have tended to indicate that there is a reluctance to engage in the activity without those protections being afforded. Do you think it is swings and roundabouts?
Dr Longstaff —I actually think that reluctance may be overstated. If the protections in terms of proportional liability and limited liability, the cap, are there so that people know they are not going to be completely ruined by an honest mistake while still making sure that the public interest is served by risk management and a prudent level of insurance in the form of protection, then I think there are lots of people who are still going to be attracted to the ideals that underpin what professional service used to be. It is not a peculiar phenomenon just for people in the professions. We see all around us now an increasing number of people who are looking to find work that is meaningful. In terms of seeking private employment in businesses, businesses all around the place, not just in Australia but also around the world, will talk of people who are actively choosing employers for whom they can feel proud to work.
The ideal of being a member of a profession I think is still very attractive to people but, as I say, it has lost some of its credibility. From talking to the accounting professions, I find it extraordinary that one of the things that their younger members press them to do more about is ethics. It is not about, `Make us more skilful so we can earn a lot more money', it is, `Do more to try and establish a profession to which we can belong and feel proud.' I think that, if you solve the liability issues, that is the major thing being done. The incorporation I think is about something else.
ACTING CHAIR —Thank you for appearing today, Dr Longstaff.
Proceedings suspended from 10.52 a.m. to 11.04 a.m.