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Tuesday, 13 March 2012
Page: 2759


Mr TONY SMITH (Casey) (19:29): I rise to speak on behalf of the shadow Treasurer and member for North Sydney on the Corporations Legislation Amendment (Audit Enhancement) Bill 2012. I will state at the outset that the coalition will be supporting this bill. The bill proposes changes to the law relating to the auditing industry. It proposes changes to the frequency with which auditors must be rotated, allowing for a two-year extension of an auditor's term, which currently sits at five years. Further, it introduces transparency reports for larger auditors, which will help prospective and existing clients to be more fully informed about the operations of their potential auditor. The bill also changes the responsibilities of the Financial Reporting Council to remove duplication between the operational roles of that council and of the Australian Securities and Investments Commission, in respect of the audit independence function. Following this change, audit independence powers will reside solely with ASIC under the existing powers. Finally, the bill gives ASIC the power to issue audit efficiency reports.

The bill is an incremental but nevertheless worthwhile improvement to the audit process. It has the widespread support of the audit industry. The legislation is the outcome of a Treasury review of the quality of audits in Australia. This was instigated following the global financial crisis in 2008. This review found that the legal framework was, overall, robust and stable and was in line with international best practice and no fundamental changes were required. This is a tick of approval for the former Howard government's major audit reforms, which were introduced through the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act some eight years ago, in 2004. The issues addressed in this bill are very much tweaking rather than wholesale, for those reasons.

With respect to each of the schedules, schedule 1 Part I deals with auditor rotation. It retains the existing mandatory five-year auditor rotation but allows for a two-year extension of the terms under certain conditions. The extension is only to be available when recommended by the company's audit committee where that committee is satisfied that an extension is consistent with maintaining the quality of the audit and there is no conflict of interest. The recommendation of the audit committee must be by formal resolution and in writing. There is no obligation on company directors to accept the audit committee recommendation to extend an auditor's term. The advantage of this measure is that it could be beneficial for a business to retain expertise about a client and the audit for a longer period of time. This would particularly be the case for a complex business where a significant amount of in-house knowledge is required to fully understand and monitor the business activities.

For the auditing firms, this measure will reduce the cost burden incurred in regularly rotating between clients. Of course there is a danger that allowing an audit firm to remain for longer with a client may jeopardise the separation of the interests between the client and the audit firm. On balance it is judged by the industry that the option of extending the time that an auditor remains with a client from five to a maximum of seven years will preserve the chief objective of the rotation rule, which is to maintain the independence of auditors and prevent them from being captured by clients.

Part II of schedule 1 deals with transparency reports. It will require audit firms to publish an annual report of their activities, if they provide services for 10 or more listed companies, listed registered schemes, authorised deposit-taking institutions and insurance companies. The objective is to improve the transparency of the audit activities of larger audit firms. Many firms are partnerships and so are not required to make public a range of information on their activities, as they are shielded by their business's structure. This new requirement will help prospective and existing clients to be more fully informed about the operations of the auditor. It will help identify potential conflicts of interest or any potential issues which may arise from one firm being dominant in one particular business sector. The actual disclosure requirements are not contained within the bill and will instead be dealt with by the way of regulation. The coalition trust that the final regulations will strike the appropriate balance between necessary disclosure and regulatory burden. A range of matters have been foreshadowed in the explanatory memorandum as being required in disclosure regulations. These include, firstly, the auditor's legal structure and ownership; secondly, information about any networks of firms to which the audit firm is linked; thirdly, information about the auditor's governance structure; fourthly, information about the internal quality control system of the auditor; and, fifthly, details of when the last reviews of the auditor took place. This measure will impact a relatively small number of larger auditors. Whilst this provision adds further cost to compliance for those affected auditors, it is not expected to be particularly onerous, as the required information should be readily accessible. While the coalition is philosophically opposed to more regulation for the sake of it, in this case the costs to auditors are expected to be low and to be warranted by the benefits to the industry and to clients.

Part 1 of schedule 2 deals with audit independence and makes changes to the powers of the Financial Reporting Council, as I outlined at the beginning. It removes the audit independence function from the FRC, and in its place the FRC gains a greater role in advising the minister and the professional accounting bodies in relation to audit practice. This includes strategic policy advice and reports in relation to the quality of audits. As mentioned at the outset, this change will eliminate the current duplication that exists between the operational roles of the FRC and ASIC in respect of audit independence function. Following this change the audit independence powers will reside solely with ASIC under existing powers. This provision also broadens and more clearly identifies the FRC role in providing advice to the minister and accounting bodies. Removing overlaps and duplications in the functions of government bodies is of course always a good thing and viewed as a sensible step by the coalition.

Part 2 of schedule 2 deals with audit deficiency notifications. It expands ASIC's powers to enforce the quality of audits by granting new powers to issue audit deficiency reports on specific auditors. These may be issued where specific failures are identified during an ASIC audit inspection. Currently those inspection reports are confidential, and ASIC reports on the aggregate of its inspections. The new power will not compel ASIC to publicly report deficiencies; it merely gives it the right to do so at its discretion. Where significant weakness is found in quality control or in the conduct of an audit which may be detrimental to the quality of the audit, ASIC may issue such a report after six months of the auditor being notified of the deficiency, but only if the auditor has not undertaken remedial action.

The coalition is always wary about expanding the powers of regulators unless it can be shown to be clearly in the public interest. In this case, ASIC is simply being given powers to make public the information it collects about the performance of particular auditors. It is in effect a power to name and shame. This provides a powerful incentive for an audit firm to fix any organisational problems within that prescribed time frame. The coalition supports this initiative.

Finally, under the current law, ASIC is prevented from directly communicating with an audited body or its audit committee in the exercise of its functions in relation to an audit. This means it cannot make the auditor body aware of any concerns it may have with the quality of the audit. The bill gives the power to ASIC to communicate directly with company directors, management or the audit committee if significant matters regarding the quality of the audit are identified during an audit inspection. The argument is that it is in the interests of an audited body to know if there are issues with the audit being conducted on its operations. Naturally, the coalition supports this change as well.

As I said at the outset in delivering this on behalf of the shadow Treasurer, the coalition is supportive of the bill. We are very happy to support well-reasoned legislation where consultation has been extensive and the industry is in agreement, and this is one rare occasion where that is the case. On behalf of the shadow Treasurer, I commend the bill to the House.

While I have the opportunity, I congratulate the new Parliamentary Secretary to the Treasurer, who is just getting some last-minute instructions. I congratulate him on his appointment to that role. I think all members of the House would agree that the member for Oxley comes to that role with extensive experience from his time in parliament. I will miss him as the chair of the Joint Committee on Corporations and Financial Services, of which I am a member, and I would like to think—but I cannot be sure—that he will miss me.