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Thursday, 10 March 2005
Page: 119

Senator CHAPMAN (3:55 PM) —by leave—I move:

That the Senate take note of the document.

The government’s response to parts 1 and 2 of the report of the Parliamentary Joint Committee on Corporations and Financial Services, which I chair, on the CLERP 9 bill, dealing with audit reform and corporate disclosure, is a bit like the curate’s egg: it is good in parts. The government accepted some of the recommendations from the committee and incorporated those amendments at the time the legislation was debated. Other recommendations are the direct responsibility of the Australian Securities and Investments Commission and that has been noted by the government in its response. I will certainly ensure that the committee take up those recommendations with ASIC. The government has agreed also to consider other of our recommendations in the context of the current draft exposure of the corporations amendment bill, and I look forward to the government incorporating those recommendations in that particular legislation.

In the case of some of the recommendations which the government has rejected, I can certainly accept the government’s arguments for rejecting them. For others I believe there is probably a 50-50 case for the government’s reasons for rejecting those recommendations as opposed to the committee’s original reasons for making the recommendations. Certainly in these circumstances I am not unduly fussed by the government’s rejection of those recommendations. However, this still leaves a number of recommendations made by the committee but rejected by the government where I believe the government’s reasoning does not stand up to close scrutiny in the light of the evidence garnered by my committee and the consequent reasons for our recommendations.

These rejections have a bit of an ivory tower feel about them. For example, recommendation 11 in part 1 of our report related to the need for direct and specific rather than vague language in regulations regarding remuneration determination disclosure when those regulations are promulgated. For the life of me, I fail to understand why the government would reject such a recommendation. The government’s response refers to the requirements of the legislation, which is all well and good, but that still does not preclude the need for clear language.

The government’s rejection of recommendation 14 is also disappointing. As a general principle I believe it is not appropriate that executive directors be involved in determining their own remuneration. It is a clear conflict of interest. Determination of remuneration for executive directors should be the role of non-executive directors of a company to decide. I also disagree with the government’s rejection of our recommendation 15 in relation to equity based remuneration. Equity based remuneration has the capacity to dilute shareholders’ equity in a corporation. Therefore, I believe—as does the committee, because we made this recommendation—that shareholders should have a say in the provision of such schemes, whether those schemes relate to directors or executives.

With regard to part 2 of our report, I remain of the view that the CLERP 9 chief executive officer and chief financial officer sign-off requirements are excessively stringent and I am disappointed by the government’s rejection of our first recommendation in the second part of our report. Also, I note the government’s view regarding our recommendation on having a ‘true and fair view’ definition. Nevertheless, I believe that an appropriate definition is needed and should be achievable.

Recommendation 8, regarding the deletion of note 2 of subsection 227B(1) of the bill, was based directly on evidence from the AUASB itself and is particularly relevant in the light of Australia’s adoption of international accounting standards. The government should have accepted this recommendation. The government’s rejection of recommendation 9—that the Financial Reporting Council hold its meetings in public, with a proviso for closed meetings where sensitivity demands it—is also disappointing. I do not accept that this is a matter for the Financial Reporting Council itself to decide. Transparency is an important principle of good governance and should be mandated in this situation.

The government’s failure to accept our recommendation 10 for an independent secretariat for the Financial Reporting Council is also disappointing. The reasons provided are unconvincing. If anything, the projected heavy workload for the Financial Reporting Council reinforces the need for it to have its own secretariat independent of the Department of the Treasury. The government’s refusal to accept various of our recommendations to ease the requirements in the legislation regarding former auditors and auditor rotation is unrealistic. I certainly understand the government’s concern regarding issues related to the HIH collapse. However, I doubt that, had these particular provisions previously been in place, they would have prevented that disastrous event. The clear evidence before the committee was that the provisions are unduly onerous. In particular, I am concerned that the proposals will reduce competition among auditing firms and be especially detrimental to the audit practices of small and middle-tier firms.

In conclusion, therefore, I urge the government to reconsider its position on these particular recommendations which it has rejected. They were made on the basis of careful consideration of the evidence before the committee and of the likely real-world effects of the legislation. I believe they should have been accepted.