James Paterson (Victoria, Liberal Party) Share this | Hansard source

I move:

That the Senate take note of the report.

I rise to take note of the Regulation of auditing in Australia report. I'll put the headline up-front: the committee has delivered a final report in addition to its interim report, which was tabled in February. In the intervening period, not much has changed about auditing but everything has changed about our economy, and that reflects the concluding comments that the committee has made today and will be tabled today.

In short, the committee stands by all 10 recommendations which were made in our interim report in February 2020. Those recommendations were made on a bipartisan basis in a unanimous report encompassing all members of the committee. I take the opportunity to place on the record my appreciation for all members of the committee who worked together in a collegiate way on this issue and in this interim report and now final report and, in particular, the deputy chair, Mr Georganas, and Senator O'Neill, who initially referred this inquiry through this chamber to the committee.

Our interim report in February found that although there were widespread concerns among stakeholders about the quality of audit in Australia there wasn't good evidence available to the committee, hard empirical evidence, that there was a systemic problem with audit in Australia. What we did identify was a perception about the problem of audit quality in Australia. Many stakeholders, whether they were shareholders or academics or industry associations or other groups, believed that there were perception issues in the industry that needed to be addressed.

We made 10 recommendations. Some were aimed at the industry, some were aimed at the regulator ASIC, others were aimed at the financial FRC and others were aimed at government in order to address those perception issues. We believe that if those recommendations are faithfully implemented by all those bodies then the reputation of the audit industry in this country will be enhanced and greater confidence will be restored to the industry, because the confidence that investors are able to place into the financial statements made by companies is a crucial part of a free market economy. It allows the efficient allocation of capital. It allows the trust in markets that are essential to this industry, and auditors have a crucial part to play in that.

In our concluding comments tabled today, we stand by all 10 of those recommendations. I won't go through all of them individually and I won't go through them in detail, but there were some which have attracted particular interest and particular comment. Our seventh recommendation in our interim report was to implement a mandatory audit tendering regime, which would require company boards after a 10-year period of using one auditor to either engage in a tender process to potentially choose a new auditor or, if they didn't wish to do so or didn't believe that it was necessary to do so, to explain that decision to their shareholders. That could be in the form of a note in their annual report or another means whereby they demonstrated to their shareholders that they had thought about this issue and they had decided they wanted to stick with their current auditor for whatever reason.

There are good reasons why you might wish to keep an auditor for longer than 10 years. Having an auditor for a long period of time allows them to develop a familiarity and an understanding of your business. It's typical that in the first few years of an audit enormous resources have to be expended to get to understand a company and its operations and that over time the audit process becomes both more efficient and more effective. However, the longer period of time that a company is audited by the same auditor, the greater the risk that the independence of the auditor is compromised and, perhaps in some ways more importantly, the greater the risk of a perception that that auditor's independence has been compromised.

We have seen a few high-profile companies and auditors who have been in audit relationships for many decades. In fact, there was one celebrated case, I think it was 67 years, where the same audit firm audited a company for that time. Of course, the audit committee chair on the board of the company that was audited would have changed many times in those 67 years. The chief financial officer in that company would have changed many times in those 67 years, and the lead audit partner in the audit firm would have changed many times in those 67 years. Nonetheless, it sent a message to the regulated community, to the audience for those audit reports, that a cosy relationship may have been established, and that has undermined confidence in the system.

What that recommendation is asking companies to do is to either undertake a tender every 10 years or to demonstrate to their shareholders why they don't believe that's necessary.

Some have said that a 10-year period is too short, and it would absolutely have been up to the committee to recommend a different period—it could have been 12 years or 15 years. I don't think there's anything hard and fast about the 10-year rule, but it is important that some sort of process is put in place here to demonstrate that boards understand that their relationship with their auditor should not be set and forget and that they should not allow the perception to form among their shareholders or other stakeholders that it has become set and forget. They should demonstrate that they're considering this.

Another recommendation that has attracted some comment and interest is recommendation 9, which is about establishing internal controls for financial reporting. It has been put to the committee that there would be costs involved in implementing this recommendation, which is undoubtedly true, and that in some instances and for some businesses this may not be necessary—for example, a family owned business where the family is both the management of the company and the owner of the company. Who would they be assuring except themselves? That is a good and fair point. It is also true that, even in larger businesses, there would definitely be transition costs in implementing this recommendation.

The committee understand that, and, in light of the changed economic climate that we're in, our recommendation is that government consider all of the recommendations, but, in particular, recommendation 9, on the basis of, firstly, the time lines for implementation—we should consider very carefully the appropriate time lines—and, secondly, the thresholds for implementation. At which level is it appropriate, whether that is by revenue or by some other measure, to implement them? We urge the government to carefully consider that, because at the moment, quite rightly, businesses and their partners—whether their auditors or other service providers—are solely focused on trying to save their businesses, to save as many jobs as possible and to grow on the other side of this crisis. The committee certainly does not want to distract them from that important task or to impose costs on them at a time when they're focused on that task. They absolutely should be focused on that crucial task. But we believe that, with appropriate time lines and by appropriately staggering the implementation of these recommendations, all 10 could be adopted—and adopted successfully—both on the audit side and on the company side, to enhance the reputation and quality of audit in this country.

I will just conclude by revisiting one of the recommendations in the interim report which most attracted my interest and enthusiasm, and that was recommendation 10, about the introduction of digital reporting. I believe there are huge gains for auditors, for the businesses that they audit and also for other market participants from digitising our financial reporting. It is amazing to me, as I discovered through this inquiry, that in 2020 there are still companies and auditors who engage in a fairly manual process of data entry to extract data from companies for the purposes of financial reporting—that it isn't automated and that it isn't more efficient. Other jurisdictions, including the European Union and the United States, have successfully implemented digital financial reporting. It has lowered the cost of audits and lowered the costs for other market participants in assessing the quality of audits. And it allows much more independent third-party verification of those numbers. It allows those numbers to be used in a lot of other ways that enhance the confidence that all market participants have in this process.

There is little more to add to the concluding comments, which are relatively brief, except to say that, compared to February, when the interim report was handed down, we are in a different world. Certainly, the committee recognises that. It hasn't changed the substance of any of the recommendations that we have made but it does change the posture, I guess, that we've taken on this. Our final recommendation to government in the concluding comments is that the government should carefully consider both appropriate time lines and thresholds for the implementation of these recommendations, taking into consideration the new and very different economic climate that we're now in, thanks to COVID-19, and of course the necessary government responses to COVID-19, which have had an enormous impact on our economy.