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Thursday, 21 June 2001
Page: 24895


Senator CONROY (3:45 PM) —I move:

That the Senate—

(a) expresses its concern about the decline in investor confidence flowing from:

(i) recent corporate collapses,

(ii) public questions about the indepen-dence of auditors and brokers, and

(iii) concerns about the competence and performance of the Australian Securities and Investments Commis-sion (ASIC) and the Australian Prudential Regulation Authority (APRA); and

(b) condemns the Minister for Financial Services and Regulation for his mishandled oversight of ASIC and APRA.

I speak today on the bungling by Mr Joe Hockey, the Minister for Financial Services and Regulation, of his responsibility to oversee the operations of ASIC and APRA. Investor confidence is on the decline, following recent corporate collapses. Questions have been raised as to how these collapses occurred and what the regulators could have done to avoid the collapses. What has the minister been doing to prevent these collapses?

The Australian Securities and Investments Commission is Australia's corporate regulator. Its new chairman, since his appointment, has acted to counter many of the criticisms made of ASIC. He has been required to respond to newspaper headlines of `toothless tiger' and `ASIC: no bark, no bite'. ASIC must also respond to the thousands of investors and creditors who have lost money in HIH, Harris Scarfe and One.Tel. There are also the investigations into the solicitors' mortgage investments schemes; Commercial Nominees; the failure of the Satellite Group Ltd; dealings by Water Wheel; one of my old favourites, John Elliott; and trading in Qantas securities. Yet how is ASIC being supported by the minister? The annual report for ASIC for the year 1998-99 said:

The extra funding we received this year of some $18 million was for our new work only. Achieving timely enforcement has put unacceptable pressure on our staff, to which they have responded very well. But we may now have too few staff on the ground to achieve the outcomes we and the government want.

Despite that being one of the most public and extraordinary pleas for assistance, following the May 2000 budget ASIC was forced to slash $7 million from its budget. That saw a loss of 70 jobs and the closure of the small business unit. Some of those functions have been absorbed into other areas of ASIC, but the Insolvency Practitioners Association have raised concerns about the loss of that unit, which must come more urgent with the recent increase in insolvencies. This year's budget did not assist ASIC any further, either. When you subtract the money granted for specific purposes, ASIC's appropriation for the coming year is only a mere $1 million increase in nominal terms. ASIC has been provided with only $1 million extra in nominal terms to deal with all of its other, and extensive, regulatory functions. In real terms, ASIC has suffered another cut in funding, yet the government is happy to spend $20 million a month on advertising in the six months to October to promote its policies.

The minister is not interested in the effective regulation and enforcement of Australia's corporations laws. The government is not interested in protecting the rights of small investors, creditors, employees and customers. We have a government that is prepared to squander money on blatant self-promotion to try to get itself re-elected, when one-tenth of that money would go a long way to addressing some of the corporate spivs who are loose in this country, who are getting away with murder and whom this government is not interested in dealing with. If the minister were interested, he would have addressed by now the public questions raised about auditor independence and the independence of brokers. Both actual independence and the perception of independence of auditors are essential if investors are to be confident that the accounts of a company present a true and fair view of its financial position.

Labor, in its corporate governance policy, has made a commitment to ensure the independence of auditors. That commitment was made prior to HIH, which many commentators have suggested raises serious questions over auditor independence. Mr Henry Bosch, the former head of the NCSC, recently said:

I'm personally a bit concerned about the widespread Australian practice of audit firms acting as consultants for the companies that they audit. Now in some cases I suppose that may be defensible, it certainly is economic, but it does I think unquestionably undermine the independence of auditors, make them less independent, because they are beholden on management for profitable business, which is likely to mean that on the margin they will be less critical than they might be, and might not wish to embarrass the management or the board.

But even before HIH, there were reports of a loss of perception of independence. Australian Financial Review journalist Lachlan Johnson, in December last year, surveyed 106 floats over the previous two years and found a number of cases where accounting firms acted as auditor, adviser and independent expert. Only one of the 106 company floats surveyed employed different firms to do an investigating accountants' report, an independent review of directors' forecast, and audit work.

The Australian Shareholders Association have also raised the danger in providing additional services for the independence of the auditor. Yesterday, we also learnt about Arthur Andersen's audit of Waste Management Inc. in the US. Arthur Andersen has agreed to pay $US7 million to settle federal charges for filing false and misleading accounts. The relationship between Arthur Andersen and Waste Management Inc. highlights the urgency for the matter of auditor independence to be dealt with.

According to the Securities Exchange Commission press release, until 1997 every chief financial officer and chief accounting officer in Waste Management's history as a public company had previously worked as an auditor at Andersen. Further, between 1991 and 1997, Andersen billed Waste Management corporate headquarters approximately $7.5 million in audit fees and, significantly, $11.8 million in other fees. The US has moved on this issue. Last year, the SEC announced a new rule to secure auditor independence. That rule identifies nine non-audit services that are deemed to be inconsistent with an auditor's independence and either prohibit or restrict the supply of those services to an audit client. The minister—Global Joe, or Hindenburg Hockey, as he is affectionately known—travels the world, but is yet to even remark on the US SEC rule.


The DEPUTY PRESIDENT —Order! Senator Conroy, would you please use the appropriate title?



The DEPUTY PRESIDENT —Order! First of all, Senator Conroy can withdraw; and, secondly, Senator Calvert, you can withdraw.


Senator Calvert —I withdraw. I have heard that once already today in Senator Conroy's speech.


Senator CONROY —I withdraw.


The DEPUTY PRESIDENT —Thank you. Use the appropriate names for honourable members.


Senator CONROY —The minister is yet to respond to calls to even review auditor independence in Australia on a wider basis than just HIH. Another topic on which the minister has been silent is the issue of broker reports. The Prime Minister thumps his chest with the achievement that Australia ranks first among similar economies worldwide in terms of the proportion of the population that owns shares, yet little is being done by the government to promote and protect their interests. Investors rely heavily on broker reports to make their investment decisions. They need to be assured that the advice contained in those reports is accurate and has not been biased because of work being done in other sections of the financial institution for which the broker works.

Laura Unger, the acting chairperson of the SEC, said in a speech recently:

One of the most important sources of information has always been analysts. Unlike others, they put their name on their work-product and professional reputations are at stake. But, for a variety of reasons, including recent market events, there is scepticism of the objectivity of analysts' recommendations lately. One survey showed that in 2000, 99.1% of brokerage-house analysts' recommendations were `strong buy', `buy' or `hold' recommendations.

Investors are also becoming circumspect about research emanating from brokerage firms where analysts don't change their recommendations until after a stock begins to slide or after an accounting problem surfaces. Last year, while the NASDAQ composite index was dropping by 60%, less than 1% of analysts' recommendations were `sell' or `strong sell' recommendations.

The US is so aware of, and interested in, this issue that the US House of Representatives Committee on Financial Services is holding an inquiry into this issue. I see that Senator Chapman is in the chamber. I urge him, as chairman of our equivalent committee, to take similar action.

The problem in Australia has not been quantified, but there is anecdotal evidence to support some suspicions. There is a story of an analyst who made an accurate, but unpopular, sell recommendation on one of Australia's largest blue-chip companies being driven out of the research industry after being ostracised by the company. There are other reports of firms having tendered for, or having obtained, corporate advisory work and producing favourable broker reports. This issue needs to be addressed. It has been reported in the newspapers and the US is looking at it, but where is our minister? He is silent and asleep at the wheel, as usual.

The minister, sadly, is not just responsible for ASIC; he also has responsibility for the Australian Prudential Regulation Authority, or APRA. In the past two years under this minister, and while APRA has been under his stewardship, we have seen such debacles as: GIO, which he has more than a passing knowledge of and interest in; EPAS; REAC; HIH; and CNAL. APRA is charged with the prudential supervision of banks and other ADIs, life insurance companies, general insurance companies, superannuation funds and retirement savings accounts. Prudential supervision aims to protect depositors and other investors by ensuring that financial institutions adopt prudent risk management practices designed to ensure their continuing solvency and liquidity.

I want to refer in greater detail to several areas which are under APRA's supervision. In a Senate estimates committee on 5 June, an APRA officer said:

APRA has a large number of institutions potentially to inspect. What we have done is to take a far more risk based approach ... Basically we try to go to those institutions where the issues or risks appear to be the highest. In those cases where risk profiles do not appear to have changed all that much from one year to another, we put those down the order of priority.

However, the recent report of the Auditor-General into bank prudential supervision raised serious concerns about APRA's risk rating process. Page 49 of the report states:

... there is insufficient differentiation in the available risk ratings as the vast majority (86%) of banks representing 95 percent of total assets were rated as a `low' risk, a small number of banks were rated `medium' risk and only one bank was rated `high' risk. In these circumstances, the ratings provide an insufficient basis for prioritising supervisory activities for entities within the banking sector.

Accordingly, and not surprisingly, the Auditor-General has recommended that APRA review its risk rating process to ensure that ratings provide sufficient basis for prioritising supervisory activities.

The report from the Auditor-General also expressed concerns that APRA has adopted a `light touch' regulatory approach to banking and did not conduct in-depth bank examinations. Page 67 of the Auditor-General's report states:

APRA has not undertaken regular onsite visits to all banks and so it is unable to meet the Basle Committee best practice recommendation that it periodically verify that banks are adhering to their risk management processes, capital requirements, credit policies and liquidity guidelines. ANAO noted that APRA has not specified a minimum visit frequency for all banks, whereas the Reserve Bank of Australia (APRA's predecessor supervisor of banks) had a target of conducting visits to each bank at least once in every two years. ANAO considers that an improved risk-based approach would be for all banks to receive periodic visits in accordance with a specified minimum revisit frequency with the level of assessed risk determining whether visits should be more frequent and/or more intense.

The Basle Committee on Banking Supervision is a committee of banking supervisory authorities which was established by the central bank governors of the Group of Ten countries in 1975. The committee adopted a set of core principles in 1997 which were subsequently adopted by the G10 and many non-G10 countries. These are contained in the document Core principles for effective banking supervision. Principle 16 of the core principles states:

An effective banking supervisory system should consist of some form of both on site and off site supervision.

However, it is obvious that APRA, under this minister's stewardship, has decided that this core principle is somehow flawed.

The Auditor-General also found:

Unlike a number of European and North American supervisors who visit the Australian operations of their banks, APRA does not have a structured program of visits to the offshore operations of Australian banks with none of the ... banks in ANAO's sample having been visited since 1997.

What are the reasons for the infrequency in visits? Apart from the new risk based methodology adopted by APRA, which I have already referred to, the Auditor-General found that the on-site visit teams are yet to be fully staffed, and that is affecting the ability of APRA to conduct on-site visits. The Auditor-General found that, at the time of their audit fieldwork, the three visit teams were understaffed by 25 percent.

The Auditor-General's report also raises concerns about APRA's reliance on the internal audit work of banks. His reports says at page 59:

The Basle Committee's Core Principles for Effective Banking Supervision require supervisors to assess the scope and effectiveness of each bank's internal audit unit's operations, policies and procedures. In this context, ANAO noted that, when the Reserve Bank held responsibility for prudential supervision of banks, the Bank reviewed banks' internal audit functions. In comparison, APRA does not periodically review banks' internal audit functions to assess what (if any) reliance can be placed upon this work. APRA also does not seek advice from banks' external auditors on the extent to which they rely on the work of internal audit and, where the external auditors rely on internal audit, details of the external auditor's assessment of the internal audit function.

While APRA informed the Auditor-General that the internal audit function was reviewed as part of its new methodology, the Auditor-General's report states:

... such assessments were often not documented and ANAO considers explicit regard should also be had to: the nature and extent of the assignments undertaken by the internal auditors; the technical training and proficiency of the internal auditors; and whether internal audits are properly planned, supervised, reviewed and documented.

Minister, it is time to explain what questions you have asked about APRA's supervision. Why has the minister accepted this method of supervision? Did the minister know that the new risk based methodology would lead to a decline in visits and, in the words of the Auditor-General, the ability to:

... provide APRA with an increased understanding of banks' risk management systems and an insight into their risk management culture as well as enabling material issues identified through off-site supervision to be pursued.

Did the minister know about APRA's reliance on the internal audit function of the banks but then was not properly assessing whether that reliance was appropriate?

It is time to ask what oversight the minister is exercising with APRA. Maybe the reason lies in the comment of one financial institution recorded in the report of the Auditor-General. Page 52 of the report reads:

ANAO notes that there is evidence that APRA's approach has not been universally successful. APRA's records state that one of the banks in ANAO's sample has breached various Prudential Standards and has a culture that appears to treat ongoing compliance with the Prudential Standards as a burdensome imposition that may be dispensed with if it interferes with the bank's primary function of developing business.

Banks do not want to be regulated, and they appear to be winning.

I will turn to the regulation of superannuation by APRA. The Governor of the Reserve Bank has recently expressed concerns about the supervision of small superannuation funds. We have also seen the collapse of CNAL and EPAS, which my colleague Senator Sherry will say more on. Turning to the prudential supervision of insurance, I have only three letters for the minister: HIH. The royal commission is inquiring into the cause of the collapse of HIH. The recommendations of the royal commission will be closely reviewed. However, I hope the royal commission will also inquire into the reasons for APRA's apparent hesitation to act on HIH. A lot more can be said on HIH, and I am sure my colleagues will have much more to say.

Unfortunately, I cannot say that HIH is an isolated incident. APRA and the minister have form in the collapse of REAC. The competence and performance of APRA must be reviewed. I and, I am sure, many others have lost confidence in APRA. The minister has failed in his job of ensuring that APRA and Australia meet world's best practice. The minister has failed to provide to investors a world's best prudential system. The minister has failed miserably in the implementation of the Wallis reforms. Like ASIC, APRA has also been found to have been penny-pinching. The Senate Select Committee on Superannuation and Financial Services heard last week that APRA had, in order to save $60,000, asked the Government Actuary to stop producing regular reports on insurance companies after 1998. So $60,000 has been saved at a cost of $4 billion, and thousands, if not tens of thousands, of Australians have been massively hurt by this collapse. APRA also has staffing problems. I have referred to the number of staff already, but others have raised questions as to the expertise of the staff of APRA. An officer of AMP giving evidence— (Time expired)