Tony Smith (Casey, Liberal Party, Deputy Chairman , Coalition Policy Development Committee) Share this | Link to this | Hansard source

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.

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak in support of the Corporations Legislation Amendment (Audit Enhancement) Bill 2012. I thank the member for Casey for his contribution and I echo his comments in congratulating the member for Oxley, the Parliamentary Secretary to the Treasurer, for his elevation. It is well earned and well deserved and it is nice to know there is a safe pair of hands from next door to my electorate looking after some of the money. On a slightly different note, I received a text from my brother while I was sitting here. He has just taken my sister-in-law Katie to the hospital where I think they are about to produce a new Perrett. I wish them well in that endeavour. My brother Tim and my sister-in-law Katie are, I am sure, like everyone and would wish a new Perrett to come into the world.

I return to the Corporations Legislation Amendment (Audit Enhancement) Bill 2012. Australia's financial markets have earned a reputation as fair and transparent over many years through the great efforts of Australian governments, both Labor and Liberal. These markets are supported by confident and informed investors and consumers. The Corporations Act 2001 sets out a regulatory framework to ensure that fairness and transparency are maintained in our financial markets. The Australian Securities and Investments Commission was set up under this act as a trusted independent regulator. Among its many activities, ASIC maintains a register of companies and a register of auditors and liquidators. Many advanced economies have a system in place that requires mandatory auditor rotation. Auditor rotation helps prevent a situation where an auditor becomes too familiar with the client and the independence of an audit therefore could, on some occasions, be questioned. Currently under the act a listed company must rotate auditors at least every five years. This ensures that auditors do not cosy up to companies by giving favourable audits in order to secure their business for years into the future.

In some circumstances, however, an auditor rotation can impact negatively on the quality of the audit. For example, an auditor may have developed specific knowledge and experience which, if removed from the auditing process, would reduce the quality of the audit. This bill before the chamber will enable directors of a listed company to apply to extend the rotation period by up to two years. The company will need to prove the extension is about maintaining the quality of the audit and that it does not give rise to any conflict of interest. Directors will also be required to disclose any extension of the auditor rotation period to ASIC. The auditor will also be required to agree to the extension. This amendment will therefore provide greater flexibility for listed companies with the auditor rotation requirements and will bring Australia into line with international best practice.

This bill also introduces other measures to improve the auditing process. For example, the bill requires audit firms to publish an annual transparency report. This will apply to those firms that audit at least 10 Australian entities, including listed companies, listed registered schemes, authorised deposit-taking institutions and insurance companies. Because of the structure of most auditing firms, which are normally set up as partnerships, it is difficult to access basic information, such as ownership, governance and business structure. This amendment will ensure clients or potential clients can obtain factual information about these auditing firms.

I understand that the EU and the US already require audit firms to publish regular transparency reports. Transparency reports will be required to be published online on the auditor's website within four months of the end of the year and a copy will be required to be lodged with ASIC. The specific information required in the report will be developed by regulation. However, it will include items like the firm's governance structure, internal quality-control systems, independence practices, fees and the entities that are audited. Information may be omitted from the report if its disclosure is likely to cause unreasonable prejudice to the auditor.

This bill also amends the Australian Securities and Investments Commission Act 2001 to remove some duplication in the roles of ASIC and the Financial Reporting Council. The FRC will take on a role of providing the minister with strategic policy advice and reports in relation to the quality of audits conducted by Australian auditors. They advise on the systems and processes used by auditors to comply with their obligations. ASIC will exclusively take on the role of monitoring auditor independence requirements, removing the current duplication with the Financial Reporting Council. This bill will also give ASIC power to disclose an audit deficiency in relation to specified failures by an audit firm. This would be issued where ASIC believes it is a sign of flaw in the audit firm's quality-control system. Auditors will then have 21 days before the report is published to comment on the deficiency.

This is one of those occasions when government needs to apply the gentle stick of regulation. Removing the veil and shining a light on the practices of auditors will lead to a better, more independent audit system—something that, as I said from the outset, is crucial to a thriving and robust financial system. I commend the bill to the House.

Andrew Leigh (Fraser, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak in support of the Corporations Legislation Amendment (Audit Enhancement) Bill 2012. As the previous speakers in this debate have noted, this bill aims to improve the quality of auditing in Australia's firms. The process of auditing is absolutely critical to the open, transparent system of corporate governance that we in Australia enjoy. The bill aims to strike a balance between ensuring that auditors understand the companies they are auditing—and certainly we all understand that companies have become steadily more complex over recent years, so understanding a company's accounts is a tougher job than it was in previous generations—and ensuring that auditors do not find themselves in a conflict-of-interest situation. This is good, in the long run, for our corporate system. It is also good for the auditors, who I am sure would not want to find themselves conflicted.

The bill will allow directors of a listed company or a listed registered scheme to extend the five-year auditor rotation period by up to two years, with the extensions consistent with maintaining the quality of the audit, and if it does not give rise to a conflict-of-interest situation. If the directors extend the auditor rotation period for a year they may, before the end of that year, extend it for another year. Australia's five-year auditor rotation period is consistent with that of countries such as Canada, China, South Africa, the United Kingdom and the United States. Each of these countries aims to strike that balance I spoke about—the balance between an auditor's depth and breadth of knowledge of a company's accounts and ensuring that they are not captured by the firm.

The bill also introduces the requirement for audit firms to publish an annual transparency report if they conduct audits of 10 or more Australian entities over the following categories: listed companies, listed registered schemes, authorised deposit-taking institutions and insurance companies. That, again, follows common practice in the European Union and the United States. This transparency report is important because audit firms tend to be structured as partnerships. That means there is less information publicly available about those audit firms than would be the case if, for example, audit firms were corporations. The regulations will provide details about the information that has to be provided in the transparency report. It will have to be posted on the auditor's website within four months of the end of the year to which it relates, and a copy must be lodged with ASIC on or before the day it will be published. It is important in the context of considering these corporate governance reforms also to recognise other ways in which we improve the quality of corporate governance in Australia. It was my pleasure on 23 February to open the Australian Institute of Management's office in Childers Street in Civic in my electorate. That office is a first-rate facility for promoting high-quality management in the ACT with breakout rooms, a high-quality library and facilities for providing training to improve not only private sector but also public sector management in the ACT.

The Australian Institute of Management has also produced an important report recently, Gender diversity in management, which looks at another core corporate governance issue—that is, the share of women on boards. The report notes that if you look at the top 200 ASX boards, as at 31 January 2012 only 14 per cent of those board members are women. If you look at executive key management line roles, only four per cent are held by women. If you look at women in executive key management support roles, only 24 per cent are women. The report considers the question as to whether boardroom gender quotas would be appropriate—this was a proposal made by Elizabeth Broderick in 2009—and recognises there are other countries that have mandated corporate quotas: Norway, Spain, Iceland, France and the Netherlands. It also recognises the countries that are proposing them such as Belgium, Canada and Italy.

I would like to acknowledge much of the important work that has been done within my electorate on ensuring greater gender diversity on boards and in ensuring that women are represented in Australian business as they should be. I would like to pay particular tribute to Julie McKay of UN Women Australia, who spoke extremely articulately at a recent forum at the National Press Club about the importance of raising the share of women in key management roles. Julie spoke also about the fact that these quotas are often initially opposed but are often necessary to bring about cultural change. That cultural change is critical if we are to ensure that Australian companies are as representative as the communities they serve. We have organisations that are dedicated to serving women. The ACT Women's Legal Centre is one of those. These organisations have recognised that providing greater gender diversity is an important part of ensuring a stronger Australia.

Finally, I would like to go to the Corporations Legislation Amendment (Audit Enhancement) Bill, which amends the Australian Securities and Investments Commission Act. This removes the existing auditor independence function from the Financial Reporting Council and gives the FRC a role in providing the minister and the professional accounting bodies strategic policy advice and reports on the quality of audits conducted by Australian auditors. It gives ASIC the power to issue a public audit deficiency report in relation to an individual firm and allows it to communicate directly with an audited body on significant matters that are identified during the course of the exercise of ASIC's statutory functions in an audit.

I congratulate Mr Ripoll on his ascension to the role of Parliamentary Secretary to the Treasurer. I am sure that he will continue to work hard in this area. It is one that he understands perhaps better than anyone else in the parliament. He will work diligently on the issue of gender representation on boards, an issue that is important to me and to many people in this place. I commend the bill to the House.

Bernie Ripoll (Oxley, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

I want to thank all honourable members who took part in the debate on the Corporations Legislation Amendment (Audit Enhancement) Bill 2012 and say thank you very much to those who spoke for their kind remarks; they are much appreciated.

Australia's audit regulation framework is robust and it is stable. It plays a critical role in the functioning of our economy by producing effective audits that provide a necessary external check on the integrity of financial statements. It is necessary from time to time, however, to examine the framework and make adjustments that respond to the new challenges our economy faces. This bill makes a number of improvements to the audit regulation framework, to ensure that it is operating as best as it can. The bill provides flexibility for directors in the auditor rotation requirements. Auditor rotation is necessary to maintain audit independence but in some circumstances it can result in a loss of knowledge and expertise that is detrimental to the quality of the audit. The bill strikes a balance between these two factors by allowing directors to extend the five-year auditor rotation period by up to two years, if it is consistent with maintaining the quality of the audit and does not give rise to any conflicts of interest.

The bill also introduces a requirement for audit firms performing significant audits to publish an annual transparency report. Firms will be subject to this requirement if they conduct audits of ten or more Australian listed companies, listed registered schemes, authorised deposit taking institutions or insurance companies. The bill removes unnecessary duplication in the work of the financial reporting council, the FRC, and the Australian Securities and Investments Commission, ASIC, by removing the existing auditor independence function from the FRC and in its place giving the FRC a role of providing the minister and the professional accounting bodies strategic policy advice and reports in relation to the quality of the audits conducted by Australian auditors. The bill provides ASIC with the power to issue public audit deficiency reports on individual firms to increase the transparency and accountability of audit firms. Auditors will have the opportunity to remedy a failure and to provide comments on an audit deficiency report before the audit is published. Lastly, the bill allows ASIC to communicate directly with an audited body in relation to significant matters that it identifies during the course of the exercise of ASIC's statutory functions in relation to an audit.

In summary, this bill will make improvement to Australia's audit regulation framework to ensure that it continues to foster high-quality audits that strengthen market confidence and also to ensure that the framework remains in line with international best practice. I commend the bill to the House.

Question agreed to.

Bill read a second time

Ordered that this bill be reported to the House without amendment.