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Thursday, 14 November 2002
Page: 6459

Senator CONROY (8:14 PM) —I rise tonight to speak on the issue of auditor independence. This government is not committed to improving auditor independence. It is an advocate of self-regulation and will not take the necessary steps to protect investors. Let us look closely at the CLERP 9 discussion papers. Of the government's 41 proposals, how many actually involve the government taking regulatory action? Too many of the proposals delegate responsibility to the accounting profession, the ASX or directors, in circumstances where regulation is what is needed. For example, proposal 6 in the government's paper supports the immediate application of professional statement F1 on professional independence. CLERP 9 describes statement F1 as requiring auditors to identify and evaluate threats to independence and to apply safeguards to reduce any threats to an acceptable level.

The audit failures we have seen here and in the US demand a stronger approach. The provision of certain non-audit services create an obvious conflict of interest. Relying on auditors to police themselves on this matter is nonsense. Audit has been likened to a delegated supervisory role. Auditors in effect supervise the provision of financial information to shareholders. No-one would accept ASIC supervising a company and also giving it advice on a takeover. The same has to be true of an auditor.

In other aspects, such as proposal 39, CLERP 9 replicates what the government should have already done. In August last year Professor Boros was commissioned to investigate ways that companies can use technology to improve investor relations. Surely after that report the proposal could be far more specific than the general commitment outlined in proposal 39. I say that is simply not good enough. I want a strong economy. I want people to have faith in our institutions and economic systems. I want Australians to be confident that the economic and social infrastructure supports them in their lives and is not subject to distortion and manipulation by a well-placed minority. This clearly, though, is not the desire of this government. CLERP 9 is not sufficiently rigorous. It relies too heavily on maintaining the status quo and does not give sufficient weight to the needs of investors. Nor will the advisory bodies, which the government has established to deal with these matters, fulfil their obligations to protect investors and protect our economic institutions.

I want to expand on this issue by way of a recent example. In September 2001, the National Australia Bank had to write down $3.05 billion of its US mortgage arm HomeSide. This followed a $880 million write-down announced in July—that is $4 billion in total. The write-downs stemmed from the following: bungled hedging, $870 million; wrong interest rate assumptions, $755 million; other changes in assumptions used in the business's modelling, $1.436 billion; and goodwill, $858 million—a grand total of $3.93 billion lost to shareholders.

Properly, an independent review was commissioned into the events surrounding the write-downs of HomeSide. The executive summary of that review indicates that a combination of honest mistakes, incorrect assumptions, overvaluation of the business, poor staffing and a lack of head office control over HomeSide were behind the write-downs. Further, it concludes that in the opinion of those who conducted the review `there is no basis ... for any disciplinary action against any of the group executives, directors or auditors'. However, I would have thought that best practice would have required that the shareholders—the losers of the $4 billion—were given the chance to vote on this conclusion. The re-election of any directors will of course require shareholder approval. However, shareholders are unlikely to be given an opportunity in relation to the auditors of the National Australia Bank.

On 14 August 2002, KPMG was reappointed auditor for NAB. As the existing auditor was reappointed, I understand that this will not require shareholder approval. This is particularly important when the following circumstances are also considered. The last four annual reports indicate that KPMG has earned $68.7 million in fees from NAB of which just over a third is for audit services, and a former KPMG auditor who signed the audit report for NAB in November 2000 was appointed Executive General Manager, Risk Management of NAB, in January 2002.

There are good reasons for rotating auditors. These reasons are becoming apparent in the many revelations at the HIH royal commission. A new auditor is more likely to expose matters which the previous auditor may not have forced management to change or note in the audit opinion. This is even more important if the auditor faces a potential conflict of interest stemming not just from substantial audit fees, which may be lost if they are no longer the auditor, but from substantial non-audit fees, which may also be lost. Yet shareholders rely heavily on auditors, and auditors should never forget their duty to the shareholders.

It must be acknowledged that NAB did put the audit out to tender. But still KPMG, the auditor who did not pick up on the errors in HomeSide, was reappointed. KPMG received substantial non-audit fees from NAB. This is a crucial issue for the good governance of NAB. It needs to be explained. Questions need to be asked and answered. Yet very little has in fact been said.

On Inside Business on the ABC on 27 October 2002, spokesmen for Moody's and Standard and Poor's, while not doubting the financial strength of NAB—and nor am I— both raised questions on whether NAB had learnt from its past problems and will in future properly manage risk. The following week Peter Morgan, then of Perpetual Trustees, said of NAB:

I mean again I personally don't think there's been a lot of accountability or transparency with regards to what went on with HomeSide.

Yet very few others have spoken out about this issue. This is an issue that fund managers and superannuation trustees should be seeking an explanation for. The investors they represent need to know that their investments are being looked after. This case also raises questions about the role played by NAB's audit committee—and here I refer back to my comment that I suspect the government's advisory bodies are flawed. The reappointment of KPMG was managed by NAB's audit committee—and there have been a number of serious questions about the process that the audit committee went through. But putting that aside, the chair of the committee is Ms Catherine Walter. The chair of NAB's audit committee is also the chair of the Business Regulation Advisory Group, or BRAG.

BRAG was reconvened by the Parliamentary Secretary to the Treasurer to provide high-quality feedback from the community on CLERP 9. I presume it will have a prominent role in advising the government on the necessary reforms to corporate governance practices required to restore investor confidence and protect shareholders. Given what I have just described as happening at NAB, I have serious doubts whether that group will be able to fulfil its stated functions.

Relevantly, CLERP 9 states that the government will amend the law to strengthen restrictions on employment relationships between an auditor and an audit client including:

... a mandatory period of two years following resignation from an audit client before a former partner who was directly involved in the audit of a client can become a director of the client or take a position with the client involving responsibility for fundamental management decisions.

It would appear that NAB has made an appointment which directly contradicts this proposal. The government must explain how the appointments to BRAG were selected. I also note that the membership of BRAG does not include any investor or shareholder groups. The input of these groups is essential. Business regulation is not just for the benefit of business. Corporate governance is not just a matter for our corporate leaders. Good corporate governance practices are essential for well-functioning capital markets. They are essential if our economic systems are to work and support all Australians. They are essential if all Australians are to feel that they can participate fairly in the economy.

Currently, Australians are not confident. Corporate excess has created distrust of Australian companies by many ordinary Australians. This is not desirable. Labor will act to restore trust and to regulate where regulation is necessary. I do not accept that the government is doing enough, nor that its approach is right. Labor has issued a directions statement. Labor has introduced a private member's bill. We must do more than just slap the wrist of corporate crooks and threaten them with regulation if they misbehave again.