Second Reading Speech
Mr COSTELLO (Higgins-Treasurer)
I move:
That this bill be now read a second time.
Today the government is introducing the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003. The bill is the ninth stage in the CLERP program and builds on previous reform measures in the areas of accounting standards, directors' duties, fundraising, takeovers and financial services reform.
The bill is designed to modernise business regulation and foster a healthy and vibrant economy. It progresses the principles of market freedom, investor protection and quality disclosure of relevant information to the market.
The bill contains significant measures covering financial reporting and corporate disclosure more generally. Its provisions will achieve better disclosure outcomes, enhance auditor independence and improve enforcement arrangements in the event of corporate misbehaviour.
The bill generally implements the reforms proposed in the CLERP 9 policy proposal paper released in September 2002 and also reflects the outcome of consultations since that time.
In addition, the bill responds to the recommendations of the Ramsay report, Independence of Australian company auditors, and takes account of relevant recommendations of the report of the Joint Committee of Public Accounts and Audit, Report 391: Review of independent auditing by registered company auditors, and I thank the joint committee for its work. The bill also incorporates recommendations from the HIH and Cole royal commissions.
A draft bill was released for public comment on 8 October 2003 with submissions closing on 10 November. Over 50 submissions were received and these were considered in finalising the bill. The Business Regulatory Advisory Group, chaired by Mrs Catherine Walter, has considered the policy proposals and the provisions of the bill over a number of months. I would like to take this opportunity to thank members of BRAG for their participation in the process and the significant contribution they have made in developing this bill.
I also note that, consistent with the requirements in the Corporations Agreement 2002, state and territory ministers have been consulted regarding these reforms through the Ministerial Council for Corporations and have approved the bill.
Audit Oversight and Auditor Independence
An important part of these reforms is the establishment of a regulatory framework governing audit oversight and independence. Currently the regulation of the auditing profession is predominantly the responsibility of the professional accounting bodies. Legislative requirements are minimal and piecemeal. The bill therefore substantially builds on the current Corporations Act requirements and establishes a comprehensive framework governing the audit standard setting process and auditor independence.
FRC Oversight
The role of the Financial Reporting Council will be expanded to include oversight of the audit standard setting arrangements. The Auditing and Assurance Standards Board (AUASB) will be reconstituted with a government appointed chairman under the oversight of the Financial Reporting Council, similar to the Australian Accounting Standards Board. Auditing standards made by the AUASB will be given legislative backing.
The government considers that the measure to give auditing standards the force of law will significantly enhance the rigour of the standards applying to the auditing profession and improve ASIC's enforcement capabilities.
To facilitate the implementation of this policy, the bill provides for transitional arrangements whereby auditing standards which have been issued by or on behalf of Australia's professional accounting bodies will be given immediate legal backing. Standards subject to the transitional arrangements are subject to a two-year sunset clause, during which time the auditing standards board would be expected to revise the standards and reissue them as disallowable instruments made under the Corporations Act.
The objective of the provision is to provide a seamless transfer from the existing regime, under which standards are enforced through the professional codes of the accounting bodies, and the new arrangements.
During the consultation period, industry noted that the existing body of professional standards are not sufficiently robust and not in a form suitable to be given the force of law immediately as part of the transition to the new arrangements. Much of the profession's concern appears to be driven by the fact that criminal penalties will attach to a breach of these standards. In this regard, I recognise the profession's argument that some of the standards contain significant blocks of guidance which are not suitable for enforcement and were never intended to form part of the rules by which auditors need to abide.
The bill will retain the transitional provision and thereby bring the existing standards within the legislative framework at the earliest opportunity. However, for the purpose of addressing the profession's concerns, the bill provides that, during the first two years after the commencement of the act, an auditor will not commit an offence by contravening the requirements of either a legislative provision requiring audits to be conducted in accordance with auditing standards or with a provision of an auditing standard. This would only apply in relation to professional standards that are given the force of law on commencement of the act. Once the standard is remade by the auditing standards board, a breach will attract corresponding liability and penalties
While this would mean that the criminal sanctions of the act would not be available during the transition period in relation to a breach of the standards that are rolled over, it would still be possible for wrongdoing by an auditor involving those standards to be referred to the Companies Auditors and Liquidators Disciplinary Board or drawn to the attention of a professional accounting body for appropriate disciplinary action.
The FRC will also have an oversight and monitoring function in relation to auditor independence. This role will include advising the minister on the nature and overall adequacy of the systems and processes used by:
auditors to ensure compliance with independence requirements; and
professional accounting bodies for planning and performing quality assurance reviews of audit work.
Auditor independence
In relation to the oversight arrangements, the bill contains a number of measures to promote auditor independence.
The bill introduces a general standard of independence and a requirement that auditors provide directors with an annual independence declaration.
The bill also prohibits a number of specific employment and financial relationships between auditors and their clients which are considered to compromise independence.
A waiting period of two years will apply to partners of an audit firm or directors of an audit company directly involved in an audit before they can take up a directorship or senior management position with an audit client.
Consistent with the recommendations of the HIH royal commission, the bill also includes a restriction on more than one audit partner joining an audit client as a director or taking a senior management position.
The bill requires auditor rotation after five consecutive years. In light of concerns surrounding the impact of this requirement on smaller audit firms and those operating in rural and regional areas ASIC will be able to extend the period after which rotation is required to up to seven consecutive years.
The bill also requires listed companies to disclose in their annual directors' report the fees paid to the auditor for each non-audit service, together with a description of the service. In addition, the annual directors' report of each listed company must include a statement by directors that they are satisfied that the provision of non-audit services does not compromise the auditor's independence. This also reflects the recommendations of the HIH royal commission.
The exposure draft of the bill dealing with the general standard of independence and cooling-off periods applying before an auditor can move into a directorship or senior management position of the audit client has been changed to reinstate the original CLERP proposals in these areas.
The government believes it is essential to reinforce the independence of auditors from their clients. However, it is also necessary to ensure that regulatory requirements are appropriate for the Australian market. In particular it is important that the rules are not such as to narrow the pool of available competent directors. The standard on independence will promote certainty for auditors in discharging their obligations and will take into account the nature of the Australian market.
Continuous disclosure and infringements
One of the principles of Australian market regulation is that timely disclosure of relevant information is crucial to ensure that markets are well informed. The continuous disclosure regime is one way in which effect is given to this principle.
The bill will give ASIC greater flexibility to deal with contraventions of the continuous disclosure provisions of the Corporations Act by strengthening the enforcement mechanisms for continuous disclosure.
The maximum civil penalty that a court can impose on a body corporate will be increased from $200,000 to $1 million, but remain at $200,000 for an individual.
ASIC will be able to seek civil penalties against persons involved in a contravention of the continuous disclosure provisions.
ASIC will also be able to issue an infringement notice containing a financial penalty to a disclosing entity in relation to less serious contraventions. There are adequate safeguards to ensure that ASIC does not abuse this mechanism and the government will review its operation two years after the provisions commence.
The first step in the process of issuing an infringement notice is that ASIC, after consulting the relevant market operator, gives the disclosing entity a written statement setting out the reasons for believing the entity has contravened the continuous disclosure provisions.
It must then give the disclosing entity an opportunity to appear at a private hearing before ASIC, giving evidence and making submissions in relation to the alleged contravention.
It is only then that an infringement notice can be issued. The contents of the notice are specified, and the penalties are tied to the market capitalisation of the relevant disclosing entity.
ASIC may only publicise compliance with an infringement notice, and is limited in how it may do this. While compliance forestalls court action, if an entity fails to comply, ASIC cannot enforce the infringement notice. Instead, it must decide whether or not to initiate court action.
Should ASIC decide to initiate legal action, the fact that an infringement notice has previously been issued will have no bearing on the subsequent proceedings.
Remuneration disclosure
The bill also introduces a number of measures designed to enhance transparency and accountability in relation to decisions surrounding director and executive remuneration.
Details of directors' and executives' remuneration will need to be disclosed clearly in a marked section of the annual directors' report-to be known as the remuneration report. Shareholders will be given an opportunity to comment on the content of the report and vote on a non-binding resolution to adopt the remuneration disclosures.
The vote is a mechanism for shareholders to directly and clearly communicate their views to the board of directors at a company general meeting. It will assist directors to more accurately assess the opinion of shareholders on remuneration than would otherwise be possible from discussion and comment at a general meeting alone.
The vote does not detract from the authority and responsibility of directors to determine executives' remuneration and the vote is advisory only. This recognises that it is the proper function of directors to determine executives' remuneration. It also recognises that directors are ultimately responsible to shareholders for the decisions they make, including decisions on executive remuneration.
However, by requiring that shareholders have the opportunity to clearly express their views on a detailed remuneration report, this amendment will enhance transparency and will improve accountability between directors and shareholders.
Consistent with the current provisions of the Corporations Act, directors and senior managers will be required to disclose information on their remuneration. The disclosure requirements will be extended to apply to the corporate group and disclosure of the top five senior managers in the group will also be required.
The bill also amends the shareholder approval requirements in relation to directors' termination payments. It is proposed that the existing exemptions from the requirement to seek shareholder approval in respect of damages for breach of contract and agreements entered into before a director agrees to hold office will no longer apply where the payments exceed a certain limit.
I consider these measures will substantially improve the information available to shareholders and enhance the accountability of directors.
Other measures
The reforms in the bill are wide ranging and also include:
the establishment of a Financial Reporting Panel to resolve disputes between ASIC and companies in relation to accounting treatments in company financial reports; and
the reconstitution of the Companies Auditors and Liquidators Disciplinary Board to ensure that a majority of persons hearing matters are non-accountants.
The bill also:
introduces a specific licensing obligation for financial services licensees to have adequate arrangements for managing conflicts of interest; and
implements proportionate liability in respect of economic loss or damage to property.
Overall, this bill will implement significant reforms in the area of financial reporting and corporate disclosure more generally and will bring our regulatory framework into line with world's best practice.
I commend the bill to the House and present the explanatory memorandum.
Debate (on motion by Ms Roxon) adjourned.