Senator CONROY (3:45 PM) —The next block of opposition amendments relate to audit and financial reporting. Labor welcome many of the proposed reforms relating to audits and financial reporting in the CLERP 9 bill. We are particularly concerned about the provisions in relation to non-audit services and cooling-off periods. We are also disappointed that the bill fails to address the use of aggressive accounting techniques, an issue specifically raised by Justice Owen in the HIH Royal Commission report.

I want to start by discussing aggressive accounting techniques. I believe that shareholders are entitled to know when management is applying aggressive accounting techniques. In his report, Justice Owen said that in relation to the acquisition of FAI a certain accounting treatment was said to be in accordance with mandatory accounting standards. Yet evidence before the royal commission suggested that on an alternative view of the same accounting standards the item should have been recognised as an expense. This would have resulted in HIH reporting substantial operating losses. This goes to the heart of whether or not management can lean on an auditor to get the treatment they want—basically to smooth the profit flows and make management look better than they should. That is what is at the heart of this debate. This example illustrates the importance of an auditor disclosing alternative accounting treatments where the difference between them is material. What I mean by material is: if it can take you from a profit to a loss depending on the type of treatment. That is the issue these amendments deal with.

What I find frustrating in this debate is that whenever I talk privately to auditors and accountants, they say: `That company really pushes the envelope. They're really aggressive in their accounting interpretations.' It is clear that everybody understands, in a private sense, when someone is pushing the envelope. But when it comes to getting people on the public record—and we have had these experts from the industry before us at parliamentary committee hearings—to ask them what an aggressive accounting treatment is, everybody has amnesia. Nobody wants to say on the public record what an aggressive accounting technique is. Talk to them privately and they will give you a list. They have got no problems telling you: `This goes on all the time. That was pushing the envelope.' But you will not get a word out of any of them on the public record. It is very frustrating.

How do we get around this? No-one wants to point the bone. They are all afraid to break the cone of silence, to blow the whistle, because there will be ramifications. How do we fix it? Let us make it mandatory to disclose. Let us say that if management want to treat a particular transaction in a particular way, but there are alternative treatments and the auditor has an alternative view, then let us have that on the table. That way shareholders are able to do two things: they are able to judge the integrity of the management and they are able to ask why management is leaning on the auditor to get a process, standard or interpretation adopted? They can make a judgment about whether or not the company's reports are accurate and fair. Ultimately, it is their money being invested in these companies and they are entitled to know whether or not there is funny business going on in the way these things are accounted for. The most critically important reason why this amendment should be adopted is that it will restore the link between auditors and shareholders. At the moment it is clear from all of the evidence we have seen that auditors believe the people they owe allegiance to are those in management. Notwithstanding the way the Corporations Law is meant to work, auditors are appointed or elected—however you want to describe it—by the shareholders.

We want to send a clear message to the auditing profession. We want to tell them: `The people you owe your allegiance to are the shareholders. If management tries to lean on you, we want you to stand up, report it and take questions on this from your shareholders because ultimately the shareholders decide who runs the company and who should audit the company.' This will give power to the auditors to resist management, but most importantly it will give power to the shareholders to deal with auditors who will not stand up on behalf of shareholders, who will not blow the whistle and say, `No, we're not prepared to cop that particular accounting treatment.' That is what we need. We need to give power to the shareholders, but shareholders will not be able to deal with this unless they are told about it.

What is the secret? Let us lift the veil on these accounting secrets so that the shareholders who understand these issues can say: `Just a minute. Why did you adopt that accounting treatment? If you hadn't, it would have given a very different figure.' Shareholders are entitled to know that because if they then make a decision to either increase or decrease their investment in that company then they are informed. That is what this amendment is about and I hope it is adopted. I appreciate Senator Murray had an alternative way of trying to get to some of these issues and Labor did not support it. I am hoping Senator Murray will support this amendment.

In relation to non-audit services—

Senator Murray —Can amendment (16) be put first, because that is a distinct area, and then the others be put together?

The CHAIRMAN —I was going to ask Senator Conroy for clarification as to what he intended to move.

Senator CONROY —I intend to move amendment (16) separately.

The CHAIRMAN —And then you will you move amendments (17) to (20) and (23) together?

Senator CONROY —Yes. I move:

(1B) An auditor who audits the financial report for a financial year must report to members on:

(a) The impact of the position taken by the reporting entity where alternative accounting treatments are reasonably open from the reading of an accounting standard and the difference is material; and

(b) Significant matters arising in the audit process.