Part 1 Preliminary and key provisions
CLARE CURRAN (Labour—Dunedin South)
: The Auditor Regulation and External Reporting Bill, which we spoke about in the House several weeks ago, strengthens the regulation of practitioners who carry out the audits of issuers. It also reconstitutes the Accounting Standards Review Board as the External Reporting Board and requires the Institute of Chartered Accountants to regulate auditors as a specialist profession, rather than as chartered accountants. It was introduced on 14 September 2010 and is now passing through its Committee stage. Labour supports this bill, and we have spoken about it in depth in the House on a number of occasions, because ultimately it is part of a suite of bills that are about restoring confidence in New Zealand’s financial markets. Although this is a very complex and detailed bill, we have closely scrutinised both this bill and the legislation that sets up the Financial Markets Authority at the Commerce Committee. There has been considerable debate at the Commerce Committee about this bill and about all the other bills that accompany it. It is important, as it is every time we get up to speak on these bills, to acknowledge that the work that was done to underpin this bill and the earlier bills that surround it was done by the previous Labour Government. Certainly, although the work of the select committee has been very important, the work done by the previous Minister of Commerce, the Hon Lianne Dalziel, is also important and must be acknowledged.
Just to recap, this bill now requires the Institute of Chartered Accountants to regulate the auditors who were formerly regulated as chartered accountants as a specialist profession. The Financial Markets Authority will now be responsible for auditor oversight in monitoring and reporting on the adequacy and effectiveness of the Institute of Chartered Accountants’ regulatory system.
A number of changes to the bill went through the select committee. We are debating Part 1 and, in particular, the changes that were made to clause 3. This clause sets out the purpose of the bill, which is: “to regulate auditors who carry out audits in respect of issuers and to establish an independent oversight system … to—(a) promote, in respect of issuer audits, quality, expertise, and integrity in the profession of auditors; and (b) promote the recognition of the professional status of New Zealand auditors in overseas
jurisdictions.” Clause 5 relates to the functions of the Financial Markets Authority under the legislation, which will include responsibility for setting the minimum standards for becoming a licensed auditor, granting accreditation to persons as accredited bodies, monitoring those accredited bodies, and carrying out practice reviews. The authority will also have responsibility for regulating overseas qualified auditors, which was formally the responsibility of the Registrar of Companies. Clause 8 stipulates that every person who acts as the auditor in respect of an issuer audit must hold a licence.
There was quite a lot of discussion—particularly in the submissions to the select committee—about licensing. The definition of “issuer” in the Financial Reporting Act 1993, firstly, covers those entities that seek funding through debt and equity instruments that are offered to the public and, secondly, includes banks, insurance companies, mutual funds, and other entities that take deposits. Clause 9 requires audit firms to be registered and for each engagement partner in the firm to be a licensed auditor. Breach of that clause by the firm would translate into every partner or director of the audit firm committing an offence and being liable to a fine not exceeding $50,000 if the breach took place under their authority and knowledge. Knowledge will be determined where they reasonably should have known—
STUART NASH (Labour)
: As my learned colleague Clare Curran pointed out, Labour supports the Auditor Regulation and External Reporting Bill. The bill is a very important part of returning the confidence of the New Zealand public in our capital markets.
I point out, even though we are talking about Part 1 of the bill, that Simon Power brought the bill to the House. Simon Power is a very hard-working Minister. I will quote Simon Bridges, who said that Simon Power has been the Minister responsible for bringing over 40 percent of the bills to the House. I do not think it is any coincidence that Simon Power has decided to resign from Parliament. I am not too sure why such a hard-working and enthusiastic Minister would decide to resign from Parliament when he is at his height and is charging ahead, but I suspect he is sick and tired of doing all the donkey work for his colleagues. How many people are in Cabinet? I do not know—12 or 14. There are a lot of them. If one Minister is doing 40 percent of the work, the question has to be asked what the other Ministers are doing. It appears that there is no plan to do anything. The other Ministers are not doing anything at all.
I will get back to Part 1 of the bill. As I mentioned, Labour supports the Auditor Regulation and External Reporting Bill because, as I have talked about in a number of speeches on a number of bills, it is absolutely important that the New Zealand public can have confidence in the people who are responsible for looking after and regulating our financial and capital markets. That did not happen. That confidence has disappeared.
I will take a step back. We all know that about $6 billion has disappeared, mainly from the savings of hard-working Kiwis who invested in these firms and who were let down by people who professed a competency in the tasks required to manage a lot of these funds and finance companies. This is where Part 1 comes in. Part 1 outlines the preliminary and key provisions of the bill. I suppose the main gist of the part is that it talks a lot about the fact that auditors and auditing firms must be registered. In the past a lot of the characters who professed competency in this area and who hawked their services were not registered. As a result, false confidence was built, which has been completely eroded.
If we go back to a provision that Ms Curran was talking about, clause 8, we see that if people breach the law, they are liable for a fine of up to $50,000. That clause will send out the message that Parliament is very serious about what we are doing here. It is simply not good enough to betray the confidence of ordinary, good, hard-working New
Zealanders who trust the experts who profess a competence and who put their name on a prospectus or any sort of offering and then absolutely let down those New Zealanders to the tune of up to $6 billion.
A lot of auditors out there are incredibly competent, are registered, have always been registered, have done a fantastic job, and will continue to do a good job. In fact, the Auditor Regulation and External Reporting Bill is the sort of bill, and Part 1 is the sort of part, that those auditors require, and they salute it. The bill gets out of the industry the cowboys who gave the industry a bad name.
Part 1 goes up to clause 9A. Not only does Part 1 make people or firms liable for prosecution if they are not registered and they say they are registered but it makes the other partners of the firms liable. Part 1 ensures that all partners in a firm—whether or not they do other tasks aside from auditing—must ensure that everyone who says they are an auditor is registered, or they could lose their licence or be liable to a fine not exceeding $50,000, which in anyone’s language is quite a lot of money.
Clause 5 sets out the Financial Markets Authority’s function, which again is quite important. A lot of us who have seen the news and the setting up of the new Financial Markets Authority will have seen the chair and the chief executive officer being interviewed. A lot of people are probably wondering what the authority will do and how we can be sure the authority will restore the integrity of our financial and capital markets to a point where people and investors have confidence to jump back in. If one thing is for sure, it is that we need New Zealanders to start investing in capital markets and our productive economy. No longer is it good enough to have investors simply putting their money into houses and the unproductive side of our economy. That investment will certainly not drive economic growth for this country. The Financial Markets Authority is a very good step forward.
If we look at clause 5 and at the functions of the Financial Markets Authority we see that the authority’s function is “to issue licences to overseas auditors and to authorise the registration of overseas audit firms:”. Not only does the clause apply to New Zealand firms but it applies to every single person and firm that wants to say they are an auditor and to operate in New Zealand. That is most important because, as I mentioned, one of the main tasks of the Financial Markets Authority is to in some way restore a lot of that lost confidence.
In the interview with the chair and chief executive officer of the new authority those gentlemen stressed the absolute need for their first task to be restoring confidence in our financial markets. There is absolutely no doubt about that. They were very clear about their mandate. If anyone is unclear of the authority’s mandate, all they have to do is look at clause 5 to see what the organisation has to do. The Financial Markets Authority has to “monitor the audit regulatory systems of accredited bodies, report on the adequacy and effectiveness of those systems, and take action in respect of those systems that are inadequate or ineffective:”.
The authority is not only passive but also active. It is responsible for looking at, and keeping an eye on, everyone who is working under the guise of a registered auditor. If the authority sees action that is inappropriate, inadequate, or ineffective, then it is responsible for jumping in there and ensuring that that action is nipped in the bud. No longer can we have the sorts of financial disasters that have afflicted New Zealanders over the last 3 or 4 years. Like I said, they resulted in the loss of about $6 billion. That is far too much to take out of the savings of good, hard-working New Zealanders who thought that their money was safe.
Clause 5 outlines a couple of other things that the Financial Markets Authority has to do. It has to “perform or exercise any other functions, powers, and duties conferred or imposed on it by or under Parts 1 to 3.” So the brief is quite wide ranging. No one
should be under any illusion that the authority does not have teeth; it has a lot of teeth. It has a mandate to go hard, to go strong, to be seen to go strong, and to be seen to restore confidence in our system. The authority has to monitor the audit regulatory systems. It is not simply a passive body that will sit back and do nothing.
The authority has a very strong mandate from this Parliament, and that mandate is supported by all the parties. That is a little unusual, but all the parties agreed that something needed to be done. As a consequence, all parties have worked incredibly hard to ensure that we now have legislation that we can go out and be proud of. We can say to the public of New Zealand that we think and we believe we have got it right—but, as they say, the proof of the pudding is in the eating. Let us hope that the Financial Markets Authority actually does what the law seeks to do. I think it probably will.
If we look at the interpretation clause, we see that “audit firm” means “a partnership or body corporate that carries on the business of providing auditing services (whether or not it provides other services)”. So a general accounting company also has to be audited. I do not know whether people remember the Enron debacle, but that brought down one of the largest accounting and auditing companies in the world. The reality was that there was not enough distance between those who were auditing and those who were giving advice.
This bill ensures that everyone who says they are an auditor is registered. Thank you very much.
Hon Dr WAYNE MAPP (Minister of Defence)
: I will summarise what the two very good previous speeches have, in part, covered. As was noted, Part 1 of the Auditor Regulation and External Reporting Bill establishes the purpose of Parts 1 to 3, which is to regulate auditors who carry out audits. That regulation was primarily done by licence and process, and I note that the bill originally provided only for the licensing of auditors. The Commerce Committee recommended that the provision be broadened to allow for the registration of audit firms that include at least one licensed auditor.
The proposed change recognises that the quality of auditing depends both on the adequacy and the effectiveness of firms’ policies and procedures and on the expertise of individual practitioners. I also note that this issue has been widely recognised across the House and that all parties are supporting the change, for the reasons that have been well stated by the two previous speakers. Thank you.
CLARE CURRAN (Labour—Dunedin South)
: I would like to return to Part 1 of the Auditor Regulation and External Reporting Bill, and one of the major issues I would like to address is financial literacy. As my colleague Stuart Nash has just said, the bill is about enhancing confidence in New Zealand’s financial markets and the absolute importance of doing that. But one of the things we have to do to get that confidence in the financial markets is to actually ensure that the people who are investing know what they are investing in, and have an understanding and knowledge of the financial markets. That is the bit that is really missing in this bill and in all of the accompanying bills. The question has been put to the Minister in the chair, the Minister of Defence, about financial literacy. I would not mind hearing an answer from him on this issue, which has been raised in all readings of this bill and in all the other bills that have accompanied it. The importance of financial literacy is critical, because it is not just about the way the markets operate. Markets do not operate on their own—somehow out there in the ether somewhere. It is actually people who invest in these markets. How people invest in the markets and their understanding of them is one of the reasons why the Financial Markets Authority has been established—to try to create more fairness in the system. But the bit that is missing, as I have said, is about the understanding people have of how the markets operate, and the trust they can have in the information they are
being given. In order to have that trust they need to understand more about how the markets work.
I would like to read out some of the work the Retirement Commission has done, because I think it has a reference to Part 1. The commission has done quite a lot of work around this issue, and if the Minister in the chair, the Hon Paula Bennett, feels moved to respond, that would be quite good in terms of the thinking that the Government has in this area. The Retirement Commission initiated the National Strategy for Financial Literacy in November 2010, so it is quite recent. It states: “With involvement from many individuals and organisations across the public, private and voluntary sectors, New Zealand’s National Strategy for Financial Literacy was launched in June 2008. The strategy sets the direction for improving financial literacy in New Zealand. It provides a range of approaches that will achieve this improvement. Its focus is on developing the quality of financial education, and extending its delivery, sharing what works and working together. These strategies together will help achieve our goal of a financially literate population.” It would seem to me that if we have a financially literate population and have good laws in place, which are strengthened by the establishment of the Financial Markets Authority, by this bill, and by all of the other bills that accompany it, then we are starting to cook with gas, so to speak.
As I said, the bit that is missing—and it has been put across on so many occasions in every speech that has been given on this bill, particularly by members on this side—is that we could have the best legislation in the world, and can have good intentions, but we can still have dodgy practitioners out there who are trying to work their way around it, and we have a population that is not necessarily hugely financially literate. I know that in a previous speech on this bill my colleague the Hon David Parker talked quite a lot about this issue, and the complexity of this sort of legislation—and coming from a legal background he would know all about that. He talked of how the legislation is so complex, and the legislation that accompanies it so complex, that it is extremely difficult for the ordinary mum and dad investor or person in the community who has a bit of money—the number of them is declining right now—and wants to invest to understand it. The other issue that has been touched on as well is about the truth-in-advertising issue, which was brought up again and again in the Commerce Committee, where there is celebrity endorsement of financial products and ordinary people trust the celebrities and what they are saying. When a company is found to crash and people lose all their money, this is an extremely difficult issue for the ordinary person.
I will go back to the National Strategy for Financial Literacy because I would like to know what the Government thinks actually thinks about it, whether it is committed to it, and what it is doing to support it, and how important this is in terms of an adjunct or a complementary strategy that must go with this legislation. Government members said that the worldwide economic downturn in finance company collapses in New Zealand has highlighted the importance of financial literacy, and that it is high on the agenda in New Zealand and internationally. Well, it might be high on the agenda in New Zealand when we have organisations like the Retirement Commission, which is a pretty important organisation, turning up to the select committee and saying it is important. But I would like to see where the Government thinks this is important and what it is doing to support it. Around the world they say that the impact of the crisis on ordinary people has created what we call a “teachable moment” for financial literacy. People are more aware that they need to manage their money well, but unfortunately their knowledge of how to do it is patchy. Although they say that the ANZ Retirement Commission’s financial knowledge survey in 2009 showed some improvement over the same survey in 2006, it is a reminder that we still have much to do. There was little change in the number of New Zealanders with a low level of financial knowledge. I say
to the Minister that that is critical. If there is no change happening on the financial literacy side of the equation, where will we see an improvement in this issue? People are important, I guess is the message here.
The survey also highlighted gaps in knowledge in areas for improvement, with low income or less education not necessarily being predictors of low financial literacy levels. The take-up of financial education is varied at school level and beyond. We have to ask ourselves why that is, and whether it is because it is not being taught or there is not enough emphasis on it, and the importance of this issue is not flowing through into the rest of society and through our economy. Evaluation of what works best, in terms of delivery, is still being developed, and as we look for ways to help New Zealanders understand more about the increasingly complex and challenging financial environment, it provides the strategy to ensure it is relevant today, and I would like to know what the Government is doing about that. I think one of the really good examples of that is the evidence of loan sharks and the impact they are having in Auckland, and how, with reference to Part 1, this underpins the importance of this legislation and why we are having it. Although financial reporting is hugely important to investors, regulators, and other financial market participants in the way resource allocation decisions are made, there is also an extremely important issue around financial literacy for New Zealanders.
- The question was put that the amendments set out on Supplementary Order Paper 239 in the name of the Hon Simon Power to Part 1 be agreed to.
- Part 1 as amended agreed to.
Part 2 Licences, registration, accreditation, and role of FMA
STUART NASH (Labour)
: Part 2 is the guts of the Auditor Regulation and External Reporting Bill. It sets out the licences, registration, accreditation, and role of the Financial Markets Authority.
I will talk about a couple of points initially. They cover licences issued by accredited bodies. I have a couple of questions. If you will indulge me, Mr Chair, I would like to ask the Minister in the chair, the Minister for Social Development and Employment, to answer my questions. Clause 10 talks about licences issued by accredited bodies. If we remember Part 1, we see that part of the role of the Financial Markets Authority is to ensure that the systems of accredited bodies operate in a way that is adequate and effective. Accredited bodies are allowed to “on an application made by a natural person, issue a licence to the person if the accredited body is satisfied that the person—(a) meets the prescribed minimum standards; and (b) is otherwise a fit and proper person to hold a licence.”
I suppose one of the two questions I have is what the prescribed minimum standards are. I have looked through the bill to see whether there is a list, a schedule, or anything that sets out the prescribed minimum standards. This, I suppose, is where we got into a little bit of trouble before. We all know that auditors now have to be registered—that is clear. But Part 2 says how a natural person can get a licence. It states that they have to meet the prescribed minimum standards, but I do not know what the prescribed minimum standards are. If we go through the bill we see that it talks about competency, etc., but it would be good in the schedule or somewhere else just to understand what those minimum standards are.
This is not just for me. As we know, and as I mentioned about 10 minutes ago, a lot of New Zealanders have lost a significant amount of money. As I alluded to briefly, the chair and chief executive officer of the Financial Markets Authority both outlined and underlined the fact that their very important role was to restore the confidence of our
investors in our capital markets and our investing economy. Therefore, I think, we all are keen to understand what those minimum standards are. No doubt they are understood by the Financial Markets Authority and no doubt they are understood by an accredited body, but I think investors themselves would like to know.
Clause 10(b) refers to “a fit and proper person to hold a licence.” This may be a little ambiguous; I am not too sure what a fit and proper person is. Of course, I have in my mind what that means. It probably means that person cannot have a conviction for fraud. It may mean that person cannot have any sort of conviction. Does “fit and proper” mean a person cannot have had a conviction in the last 5 years, or ever? I am not too sure. Does “fit and proper” mean they have to be able to run 10 kilometres in under 40 minutes? I suspect not. I suspect that is a different definition of “fit and proper”, but maybe I am wrong. Maybe we require our auditors to be able to run 10 kilometres in 40 minutes, so that when they make a mistake they can get out of there really quickly.
That brings me to clause 11, which talks about licences issued by the Financial Markets Authority to overseas auditors. Here we are saying that accredited bodies can issue licences to New Zealand - based auditors, but my impression is that only the Financial Markets Authority can issue licences to overseas auditors. That sort of makes sense. Who knows the resources of the overseas auditors? Who knows where they are applying for a licence from? Maybe they have to come to New Zealand to do it; I am not too sure. It may be that auditors based in Australia come over to New Zealand to audit large corporates; I am not too sure. I suspect that is the reason, but I am not 100 percent sure. I think a lot of the investing public probably have the same questions as I do.
The bill talks about an overseas auditor being a person who meets the prescribed minimum standards. Again, I am keen to know whether the prescribed minimum standards for an overseas auditor are the same as the prescribed minimum standards for a New Zealand auditor. I assume they probably are. It is a fair enough assumption. But it would be good to know whether my assumption is correct. We all know that if we make an assumption and it is not correct, then we can end up in big trouble. I suspect many of the people who invested in a lot of the organisations that lost significant amounts of money made an assumption that the people who were dealing with their money were experts, when they were not. That is why I am curious to know a little bit about what minimum standards are.
Again, talking about overseas auditors, clause 11(c) states “the person is required, under the law or the regulatory requirements of the person’s home jurisdiction, to comply with requirements for maintaining the person’s ongoing competence, and that those requirements are equivalent to, or as satisfactory as, the requirements under section 17;”. That makes a lot of sense, and I am not querying that. But if we look at clause 17, we see that it talks about ongoing competence requirements. Again, I have just a couple of questions around this. I am sure the Minister can allay my concerns. I am sure that the Financial Markets Authority has a good list that says someone who is an accredited auditor in the United States of America has to meet similar or higher competency standards than an auditor in New Zealand. I am assuming that if an auditor based in Australia is a qualified auditor or a registered auditor, they also have to meet the same competency standards.
If we look at clause 17(1)(a) we see that it “requires its members to complete the competency programmes to maintain their ongoing competence;”. I have friends who are accountants and auditors, and I know that members of the Institute of Chartered Accountants, which I assume is different from auditors, have to have ongoing training. That is fantastic, because as we here know more than most, the law is always changing.
Accountants and auditors always need to keep in touch with the latest law so they can advise their customers and their clients accordingly.
But if we look at clause 17(3), we see that “Any competence programme may”—I am not too sure why it does not say “must”—“require a member to do 1 or more of the following, within the period, or at the intervals, prescribed in the programme:”. Again, it makes a lot of sense, and I think I understand what the Act means. But I am not sure what it means when it states: “may require … or the following, within the period, or at the intervals, prescribed in the programme:”—and I am not sure whether that period is annually, biannually, or once every 5 years—“(a) pass an examination or assessment (or both): (b) complete a period of practical training: (c) complete a period of practical experience: (d) undertake a course of studies: (e) anything else that the accredited body considers appropriate.” It sounds great. I really think it will work very well, and I hope it works very well, but I am just not 100 percent sure in my mind what it actually means and how it will work.
I ask members to keep in mind that I started my speech by talking about clause 11, which deals with the granting of licences to overseas auditors. I bring my question back to clause 17 and ask how the Financial Markets Authority will ensure that overseas auditors meet these competency requirements. I have no doubt that it is a lot easier to ensure that New Zealand - based auditors and New Zealand - licensed auditors meet those requirements, because here there are courses all over the place. I am sure that, after what has happened, every licensed auditor will make doubly sure that they meet not just one but a number of these requirements, because they know their reputation is on the line.
Again, we go down the list that the Financial Markets Authority can use in terms of licensing an overseas auditor. It talks about a person being “otherwise a fit and proper person to hold a licence”. I think most of us understand what that means, but, again, I am not sure what the actual test is. It probably relates to criminal convictions and that fact that people cannot have been banned, but I would not mind a bit of clarification around this clause.
The other thing I am interested in is licences issued by the Financial Markets Authority. I am talking about clause 12, which deals with licences held under section 11. Clause 12(3) states: “Every person who fails to comply with this section”—and it is quite a long section—“commits an offence and is liable on summary conviction to a fine not exceeding $10,000.” Why is the amount $10,000 and not $50,000? I suppose that is the question I have here. In Part 1 the fine is $50,000 if a person fails to comply with clause 8, which basically means that if a person hawks himself or herself as an auditor and is not, if one says one is an auditor and is not, or if one markets one’s firm or company as an auditor and it is not, under clause 8 one is liable to a fine of $50,000. Yet if an overseas auditor, or an overseas person who wants to become an auditor and audit a New Zealand company, does not meet these requirements, then they are liable upon summary conviction to a fine not exceeding $10,000. Maybe I am reading this wrong. Maybe they will get a $50,000 fine and then the $10,000 fine, but I am not clear on that.
Hon Dr WAYNE MAPP (Minister of Defence)
: I will put on the record the notes of the Minister of Commerce on Part 2 of the Auditor Regulation and External Reporting Bill. Part 2 outlines the requirements that applicants must meet in order to be eligible to receive a licence from an accredited body, including, as has been noted, the requirement that every applicant be fit and proper. The licence must be issued for a maximum of 5 years. Conditions may be imposed upon the licence to specify the kinds of issuer audit in respect of which the auditor is licensed to act.
It is worth noting that a person issued with a licence is required to complete programmes in order to maintain their ongoing competence, and where an auditor has failed to satisfy the minimum standards, the bill enables the professional accounting accredited body to suspend or cancel that auditor’s licence.
The Financial Markets Authority may grant accreditation to any person, provided that the person meets minimum prescribed standards, including that they be fit and proper, and the accreditation may be subject to conditions. Once every 4 years the Financial Markets Authority must also review the quality of the systems, policies, and procedures of every audit firm that includes at least one licensed auditor. The Commerce Committee recommended that the Financial Markets Authority publish an annual report of quality reviews conducted and be allowed to publish further reports on particular quality reviews.
Accredited bodies are responsible for investigations and disciplinary actions against their members who are licensed auditors. Supplementary Order Paper 239 provides that an accredited body must give the Financial Markets Authority reasonable assistance, and it adds an offence provision where a body fails to provide assistance. The Supplementary Order Paper further provides for the cancellation of registration of an audit firm found to have obtained registration through false or misleading actions. Finally, the Supplementary Order Paper provides for protection from liability for accredited bodies in the execution of their statutory auditory and regulatory functions unless it has been shown that the body has acted in bad faith or without reasonable care.
These provisions are needed to protect regulators from legal threats by parties whom they are investigating and to provide them with the incentive to act firmly when it is in the public interest to do so.
CLARE CURRAN (Labour—Dunedin South)
: I rise to take a call on the Auditor Regulation and External Reporting Bill, and in particular Part 2, “Licences, registration, accreditation, and role of FMA”. With regard to the issue of licensing firms versus licensing individuals, this bill proposes the licensing of individuals rather than firms. Clause 10 states that only a person who meets the prescribed minimum standards and is otherwise a fit and proper person to hold a licence will be issued with a licence by an accredited body.
I want to refer to some of the submissions received by the Commerce Committee. The New Zealand Institute of Chartered Accountants considered that the primary focus of the licensing regime should be on firms rather than individuals. It recommended that the bill be amended “to provide for the firms to be licensed, with nominated individuals being identified by the firms for evaluation by, and registration with, accredited bodies …”. The institute noted that that approach was adopted in the United Kingdom. It considered that licensing firms reflected how auditors presently operate in the central role that a firm’s systems and processes play in audit quality, and its preferred model was that the licensed firm would be engaged to do an audit and would select which of its registered auditors would conduct the audit.
There was discussion about whether the changes should be made to reflect the major role that the firm’s policies and procedures play in promoting audit quality, but it was noted that the system appearing in the Companies Act 2006 in the UK was not fully consistent with the New Zealand Institute of Chartered Accountants’ preference for firm licensing as an alternative to individual licensing. The UK system licensed individuals and allowed firms to issue licensed audits provided that the majority of partners in that firm were licensed auditors and that the firm was under the control of licensed auditors, which is essentially, I think, the guts of the system we have ended up with.
The second issue that I would like to touch on again, as I did in an earlier speech on this bill, is the limitations on liability. We considered quite seriously whether this bill
should be expanded to introduce measures to limit auditors’ liability, but we could not recommend amendments to that effect because the advice given to us at the select committee was that there was no scope for it under the bill. However, the commentary on the bill refers to this issue because we recognise that some form of liability limitation would harmonise—and that is an important issue—the New Zealand system with international practice. It is my understanding that this is generally the intent of this legislation and accompanying legislation to do with the establishment of the Financial Markets Authority. It is about harmonising New Zealand’s legislation with international law and international practice. We spent a lot of time on this issue and we asked for a lot of advice on international practice. We considered it very carefully in light of the jurisdictions that have adopted alternative liability systems and some of the approaches that have been adopted elsewhere.
I note again that there has not been any response from the Minister of Commerce on where this might be going and what might be happening next in this space. In my previous speech on financial literacy, I said that it would be useful if the Minister could give us a response.
STUART NASH (Labour)
: As my colleague Clare Curran said in the very first sentence of the very first speech on Part 1 of the Auditor Regulation and External Reporting Bill, this is quite complex legislation. It is indeed. It is a hundred pages. We would think that a bill governing the licensing of auditors would not need to be a hundred pages, but it does. As I look through it, I understand why it is such a long piece of legislation and my colleague’s comment that it is complex legislation.
I am going to lead into why I am a little unsure of the use of some of the language in clause 17. I am a little unsure why some of the language is used. The two words I will focus on are “may” and “must”. To me, the word “may” means if one wants to do it, one can, and the word “must” means it absolutely has to be done. I am not too sure why in some places the word “may” has been used and in others the word “must” has been used. I will give the Committee a couple of examples. I ended my last discussion on this bill by talking about ongoing competency requirements. Clause 17 states that “An accredited body must, in accordance with the requirements prescribed under section 24(1)(c),—(a) require its members to complete competency programmes.” I go to clause 24(1)(c) and I see that clause 24 starts with the title: “The FMA may prescribe licensing, registration, and other matters”. Clause 24(1) states that “The FMA may, by notice in the
Gazette,—(c) prescribe requirements for ongoing competence that must be complied with by persons who are issued with a licence under section 10;”. I will not go back to clause 10 again, because that is in Part 1 and we talked about that enough. It is about how one goes about getting a licence.
I am unsure why we talk about an accredited body that must do it under clause 24(1), then when we go to clause 24 we see that the “FMA may prescribe licensing, registration, and other matters”, but clause 24(1)(c) states: “prescribe requirements for ongoing competence that must be complied with by persons …”. Again, when I read clause 24, it says to me that if the Financial Markets Authority does not want to, then it does not have to; but if it wants to prescribe licensing, registration, and other matters, then that is all very well. I think that the word “must” would have been a better word to use there. I say that because as has been mentioned, and as is an ongoing theme in a lot of the speeches on this bill, it is about restoring the confidence of everyday New Zealanders in our financial markets. That is one of the major roles of the Financial Markets Authority. I would have liked to see the title of clause 24 state: “The FMA must prescribe licensing, registration, and other matters.” Clause 24(1) states: “The FMA may, by notice in the
Gazette,”. Again, I would like to have seen the word “must” used there. In my humble opinion, that would provide a little more certainty.
I would love to know the minimum standards for licensing. I think the vast majority of New Zealanders would like to see that gazetted, including standards relating to required competence, qualifications, and expertise that a person must meet in order to be issued with a licence by an accredited body or by the Financial Markets Authority. That is pretty important. Let us face facts—that is pretty important. Again, as mentioned, there were a lot of unscrupulous characters out there. There were a lot of good characters and a lot of very good professionals, but there were a lot of unscrupulous characters. I think we owe it to the public to ensure that the standards relating to the required competence, qualifications, and experience is out there and is gazetted.
That is not stated here, but it leads me on to the register, which is talked about in Subpart 3. It is the register of licensed auditors and registered audit firms. Clause 29 is about the register of licensed auditors and registered audit firms. It states: “The Registrar must establish and maintain,”—that is good—“in accordance with this subpart, a register of licensed auditors and registered audit firms.” Again, I may be getting into semantics, but I am a little bit unsure why the words “may” and “must” have been used. We see in clause 30, “Operation of and access to register”, that: “(1) The register may be kept—(a) as an electronic register; or (b) in any manner that the Registrar thinks fit.”
Hon Dr WAYNE MAPP (Minister of Defence)
: I will give a brief answer to the issues raised by Ms Clare Curran, which she has raised in respect of both parts to date, about financial literacy. I can advise that the Minister of Commerce has asked officials to develop a financial literacy work stream. The work is in the early stages of development. It is worth noting that the Government has recently transferred responsibility for the Retirement Commission to Vote Commerce, and this recognises the important linkages between the financial literacy functions of the commissioner and financial markets’ regulation. Thus, this should promote increased investor confidence. Thank you.
Hon STEVE CHADWICK (Labour)
: I will take a call on Part 2 of the Auditor Regulation and External Reporting Bill. As we get into the nitty-gritty of debate on Part 2 about licences, registration, and accreditation and about the role of the Financial Markets Authority, I find that the provisions in the bill are remarkably similar to initiatives that Labour began when we were in Government about professionalisation of the medical profession and then of the police. Similar models came into being, and I know that the Hon Lianne Dalziel became concerned, when financial market concerns for investors began, that perhaps professionalism needed to be raised and the bar needed to be raised in relation to auditors.
The bill is a good bill, and we are supporting it because it is really important for investors, regulators, and others who participate in the financial markets to know that there is confidence in the information they are dealing with.
I can see that in New Zealand there were indicators at the time of the first failings of companies like Blue Chip and others that started this ball rolling that some of the finance companies lacked the competence that was necessary to carry out the audits or did not have a sufficient degree of independence. Part 2 gives the degree of specificity that we need to make sure that there are ongoing competence requirements. That component of Part 2 is very good.
There is also a right of appeal, which I think is a fair provision for those who may fail to be issued a licence through the Financial Markets Authority. The prescribing of licensing and registration is incredibly important. My colleague talked about the minimum standard. I found the minimum standard in clause 25.
One of the issues that I know the Hon Lianne Dalziel would have liked to talk about in respect of the responsibility of the Financial Markets Authority and the new board that has just been established is that it was a bit of a lost opportunity when the Minister of Commerce did not carry over some of the expertise from the initial establishment board. The board worked really hard and developed great expertise on how the Financial Markets Authority would work in respect of the provisions of Part 2 of the bill.
Ms Dalziel noted that only one member of the establishment board has been appointed to the Financial Markets Authority board, and that another has been appointed as an associate member. I think there was a bit of a failing in that process. Some of the members of the initial board may have decided they did not want to go on to the Financial Markets Authority board, but so much expertise is required in a reform process. When the development of professionalism for auditors was accepted as something that had to happen, it is a pity that the strategic thinking of the initial establishment board was not carried through. That is not a criticism; it is an observation. It is a pity that those people are not on the Financial Markets Authority board.
Part 2, with all it specifies, shows us that the old model of self-regulation of the industry, and of accountants acting as auditors, was outdated, and that we had to move to the changes made by the bill. It is great that the Minister has picked up the bill. It was tabled in September, and here we are in May at the Committee stage. The bill is very necessary and very much required for investor confidence in the financial markets.
Those are the only remarks I will make about Subpart 2. The provisions follow quite a prescribed process, which I have seen applied in other professional regulations. We are learning from this kind of process, and we will be looking at other professional groups. I think that for real estate agents and others we looked at establishing a similar authority. The provisions are good. We may be looking at other professions, and we will learn how the provisions work when they are applied in law as we move towards the bill’s enactment. Thank you.
STUART NASH (Labour)
: I seek your indulgence, Mr Chair, to talk again about Subpart 3 of Part 2, “Register of licensed auditors and registered audit firms”. This is a very important provision; I think it is a great idea, personally. It starts with clause 29, which basically states: “The Registrar must establish and maintain, in accordance with this subpart, a register of licensed auditors and audit firms.”
I have a slight issue in respect of clause 30, “Operation of and access to register”, which makes sense. It has to be there. It states that the register “may be kept—(a) as an electronic register; or (b) in any other manner that the Registrar thinks fit.” That makes sense, but then it states: “The register must be available for access and searching by members of the public unless suspended under subsection (3).” I am not too sure what that means, because when I look at subsection (3), I see that it states: “The Registrar may refuse access to the register or otherwise suspend the operation of the register, in whole or in part,—(a) if the Registrar considers that it is not practical to provide access to the register; or (b) for any other reason that is prescribed by regulations”.
Again, I have a little bit of difficulty with the language that is used here. I am just wondering under what circumstances the registrar would decide to refuse access to the register, and what the test is for practicality and for what is not practical. Does it mean that if a bloke comes in at 4 o’clock on a Friday and the registrar has a game of golf at 5.30, as far as he or she is concerned it is not practical? I am using a ridiculous example there, but, again, it has not been quantified. I think the investing public would probably not mind knowing what that test of practicality is, because it is quite important.
Clause 31 talks about the purpose of a register, which is quite important. It will enable any person to “determine whether a person is a licensed auditor and, if so, the
status and relevant history of that person’s licence;”. That makes complete sense because, as we say, it is about transparency, knowledge, and getting information out there. If a person has come to me and wants to audit my firm as a licensed auditor, it is only fair and right that I should be able to go somewhere and determine whether that person is telling the truth. If for another reason I want to find a registered auditor, I can go to the register. But if the registrar considers that it is not practical to provide access to the register, what does that mean? When I turn up, does the registrar say: “Sorry, it is not practical.”? It is interesting, and it would have been good to have that quantified a little bit more.
As for the provisions on the purpose of the register, one thing here sets off a little bit of an alarm bell for me. Clause 31(a)(iii) states that the purpose of the register is to enable any person to “know which licensed auditors have been disciplined within the last 7 years.” That is very interesting. Earlier we talked about people having to be fit and proper persons to become registered auditors, but this clause implies that in fact an auditor can have been disciplined within the last 7 years. It may be set out in this bill—as I said, it is a 100-page bill and there is a lot of work here—but under what conditions can an auditor be disciplined yet allowed to remain as a licensed auditor?
I am assuming that this discipline process works by a person putting a case to the relevant authority—which, I assume, in this case is the Financial Markets Authority—their complaint is heard, and maybe the Financial Markets Authority disciplines that auditor. The disagreement in that case might be over the size of the bill charged. But if the person has been disciplined due to a really serious consideration to do with fraud or negligence, is there a process for expelling that person? I would have thought that if a person had been disciplined, they would not fit the “fit and proper person” test. Maybe I am wrong, and maybe I am being a bit too hard, but, as mentioned, the role of the Financial Markets Authority must be to restore the confidence of the investing public in our financial markets. Maybe this is where that role becomes practical. If someone complains to the registrar, saying that it is unfair and breaches their privacy rights that the register states that they have been disciplined, which they do not want people to know, that may be a practical test.
Hon Dr WAYNE MAPP (Minister of Defence)
: In relation to some of these issues, it is perhaps a pity that Mr Nash was not on the Commerce Committee. Some of his questions might have been appropriately answered by his colleagues. But for the information of listeners it is worth knowing that the register itself will be an online document, as we would expect, given that the bill itself states that it will be in electronic form.
I have to say that some of the issues that have been raised by the previous speaker are rather tendentious, and people will make their own interpretations as to the amount of time that has been spent in the Committee on this matter.
Stuart Nash: Mr Chair—
The CHAIRPERSON (Lindsay Tisch): No, the member has exhausted his calls.
Stuart Nash: I raise a point of order, Mr Chairperson. The Minister said that the register must be kept online. The bill actually states that the register may be kept online. There is no “must” there.
The CHAIRPERSON (Lindsay Tisch): That is a debating point, and you have exhausted your calls. Maybe a colleague would like to pick up that issue.
CLARE CURRAN (Labour—Dunedin South)
: First of all I put on record my appreciation of the comments of the Minister in the chair, the Minister of Defence, on financial literacy and the work that is being done by the Government in that area. I note that it is in its early stages. I am pleased to hear that it is happening, and that it is being
seen as important and a priority. I also note that those of us on this side of the Chamber will be keeping an eye on this issue, because we see it as being extremely important.
With regard to Part 2 of the Auditor Regulation and External Reporting Bill and the licensing and registration accreditation issues, I will go back to the harmonisation issue and think about why we are doing this reform—this regulation of auditors—in the first place. As we know, it is hugely important to investors, regulators, and other financial market participants. It has now been acknowledged that, in this increasingly complex world with its increasingly complex legislation, the people doing the investing require more and more assistance with financial literacy.
This legislation is here because in New Zealand there have been strong indications that the auditors of some of those failed finance companies lacked the necessary competence to carry out those audits, or did not have a sufficient degree of independence. I think that demonstrated that New Zealand’s self-regulatory model is no longer within the range of acceptable auditing regulation systems, and that New Zealand needs to change in order to obtain the right to practise in Australia and other jurisdictions such as the European Union, which is where that harmonisation issue comes in. I know that the Minister responsible for this bill, the Hon Simon Power, has that issue in mind, and he has talked a lot about it, but with this legislation we have not yet seen the ability to move towards that harmonisation.
We considered carefully whether the bill should be expanded to introduce measures to limit auditors’ liability—this is going to the limitations on liability issue—and we recognised that some form of liability limitations would harmonise the New Zealand system with international practice. However, we concluded that we could not go down that path, because the scope of the bill would not allow us to. But we signalled that we would like to see the issue addressed in the broader review of securities law, in regard to amending the Securities Act 1978 and the Companies Act 1993 to remove the prohibitions on issuer and company audits being carried out by bodies corporate, and to replace auditors’ current exposure to joint and several liability with alternative systems such as proportionate or capped liability.
There certainly was a lot of discussion in the Commerce Committee about this issue. As I think I said in my previous speech, we asked the officials for really comprehensive advice and they provided it. I certainly acknowledge that comprehensive advice, because it will hopefully provide the underpinning to whatever happens next in relation to this limited liability issue.
Four alternative approaches have been adopted elsewhere, and I will touch briefly on them. The first one is incorporation. In many jurisdictions, companies and limited liability partnerships are able to carry out audits, and those limited liability partnerships are an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility to organise their internal structures as traditional partnerships. The second approach is proportionate liability, which is where the court determines liability among the negligent parties according to their share of the blame, which allows the courts to have regard to the comparative responsibility of any wrongdoer who is not a party to the proceedings. The third approach is liability caps, with the amount of liability to be capped at a multiple of the fee and/or a fixed dollar amount in relation to any one course of action. The fourth is contractual restrictions on liability; under that approach the auditor or the preparer may contractually agree to a restriction in liability.
We looked at a number of jurisdictions internationally—including Australia, the United Kingdom, Singapore, and Hong Kong—where auditor liability reform had been considered and was still being considered. Some of those jurisdictions, such as Australia, have already settled on their policies and laws, and we would do well to look
more closely at them. I hope that in terms of a broader review of the securities law, we will go down that path and look at that jurisdiction. Given the fact that Australia is moving ahead on this issue, and that it is one of the parts of the world where harmonisation is so important, we could well do no better than to look at what is happening over there. Other jurisdictions, such as the United Kingdom, have implemented some reforms, and they are now evaluating their performance. Others, such as Singapore and Hong Kong, are at a stage where they are considering and identifying the issues with their current regimes. They are still at the beginning of the process of considering possible reforms.
As I said at the beginning, although we considered that the amendment around limitations on liability would be outside the scope of this bill, we asked to see this issue addressed in the broader review of securities law. If the Minister is able to give a comment on how and when that issue will be addressed, that would be quite useful. The select committee believes that consideration should be given to amending the Securities Act and replacing the auditor’s current exposure to joint and several liability with alternative systems such as proportionate liability or capped liability. We would very much like to see that addressed. I am interested to see what the response is from the Minister, if possible, and I look forward to hearing it.
- The question was put that the amendments set out on Supplementary Order Paper 239 in the name of the Hon Simon Power to Part 2 be agreed to.
- Part 2 as amended agreed to.
Part 3Amendments to other enactments, regulations, transitional provisions, and other miscellaneous matters
Hon GEORGINA TE HEUHEU (Minister for Courts)
: Tēnā koe, Mr Chair. Tēnā koutou. I have just a few comments on Part 3 of the Auditor Regulation and External Reporting Bill, “Amendments to other enactments, regulations, transitional provisions, and other miscellaneous matters”. Part 3 of the bill provides for amendments to other enactments and for various regulation-making powers. The transitional provisions allow New Zealand and overseas auditors who have acted as an auditor in respect of an issuer audit at any time in the 2 years prior to be treated as holding a licence, subject to meeting transitional requirements prescribed by the Financial Markets Authority.
Part 3 also includes various miscellaneous provisions that, first, exempt the Auditor-General from the requirement to hold a licence; second, provide the Financial Markets Authority with the power to amend or evoke orders, directions, or notices under the bill; and, third, provide for an offence of making false declarations for the purpose of obtaining any licence, registration, or accreditation under the bill.
Supplementary Order Paper 239 makes a number of consequential changes to the Financial Markets Authority Act, to permit the Financial Markets Authority to exercise its general information-gathering powers and information-sharing powers when carrying out its auditor regulation functions, and to exercise the same statutory management - related powers that the Registrar of Companies has under the Corporations (Investigation and Management) Act, but only in relation to an accredited body. Thank you.
STUART NASH (Labour)
: The honourable Minister for Courts has given a pretty good overview of what Part 3 of the Auditor Regulation and External Reporting Bill contains. I will make a couple of points. Subpart 2, “Regulations”, talks about how the Governor-General, by Order in Council, can “make regulations for all or any of the following purposes: … (i) prescribing fees and charges that the Registrar or the FMA
may require to be paid to him, her, or it (or the rate at which or the method by which fees and charges are to be calculated)—(i) in connection with the exercise or performance by the Registrar or the FMA”. I just wonder whether the rates have actually been set yet, or whether the Financial Markets Authority or the registrar has any idea of what the rates will be—whether the Financial Markets Authority, even though it has just been established, has come up with a schedule of rates. Again, I suppose my ever so slight concern is that I believe that we need to ensure that the regulations are not expensive in any way, shape, or form—nor should they ever hinder any New Zealander from accessing the register to have a look to see whether an auditor is on the register.
Before Mr Chair Robertson arrived I was talking about the register, which holds the names, occupations, and a whole lot of details of registered auditors. The Minister Wayne Mapp stood up and said that the register is an online document, that of course it is an online document, and that the bill states that it must be an online document. Well, in fact, the bill does not state that, at all. The bill states that the register may be an online document. That is where I have a slight concern. I assume that the register will be an online document. We are in the 21st century, so it is a reasonable expectation. I am assuming that any person can have a look at that online register. It makes sense, I would have thought, that if someone is a licensed auditor, they would want to be on the register. But I hope that there is no cost to access the register, because if there is, it may put people off. That is my only concern. I am just wondering whether the fees have been set.
Clause 75 in subpart 3, “Transitional provisions”, is headed “Certain auditors treated as holding licence”. When I first read the clause, it set off alarm bells. The clause states: “This section applies to a person who,—(a) immediately before the commencement of this section, is a chartered accountant who has, at any time within the 2-year period before that commencement, acted as the auditor in respect of an issuer audit; and (b) satisfies the transitional requirements”. I suppose that has to make sense, does it not? A lot of accountants out there have acted as auditors. I suppose we cannot say that a regime is coming into place, and at that point if someone has acted as an auditor but is an accountant and does not have a licence, then that person can no longer practise business. There has to be a transition period; I understand that. I just hope, again, that the provision is well policed and that the Financial Markets Authority or an accredited body ensures that the provision is very well policed. I know about this requirement. I have a superannuation fund that is audited, as a lot of us do. We talk to a lot of accountants, and they say we must go to a licensed auditor. The message is out there; the word is out there. But I just hope that the provision is not taken advantage of and that it is very well policed.
Going back to clause 72, “Amendments to other Acts”, the other thing I will talk about, which we have talked about on a couple of occasions, is that the legislation is very complex. The name of the bill—the Auditor Regulation and External Reporting Bill—would not suggest that it is complex, but it is complex. It basically turns on its head, or regulates, the whole auditing industry.
As a consequence, a number of Acts have been amended as a result of the bill—for example, the Building Societies Act 1965 and the Companies Act, as one would imagine. The bill seeks to amend Section 198 of the Companies Act, “Appointment of partnership”, which we have talked about before, and states: “A partnership may be appointed by the firm name to be the auditor of a company if,—(a) in the case of a company that is an issuer, the partnership is a registered audit firm: (b) in any other case, all or some of the partners are persons who are qualified to be appointed as auditors of the company.” That makes sense. It is not in the interest of any company
whatsoever to say it is a qualified auditor and then send someone who is not a qualified auditor to do an audit.
The bill seeks to amend the Friendly Societies and Credit Unions Act 1982 and the Industrial and Provident Societies Act 1908. That is an old Act. I think it is from before Mr Chair entered the House.
Hon Clayton Cosgrove: He’s not that old, is he?
STUART NASH: Oh, he is not that old, actually.
The CHAIRPERSON (H V Ross Robertson): The member must not refer—
STUART NASH: I apologise, Mr Chair. The bill talks about “a registered audit firm by its firm name to be the auditors of the society (in which case, all the partners in the firm, from time to time, who are licensed auditors are deemed to be appointed as the auditors).” I suppose I am trying to highlight here that the process was pretty lax before the bill came into place. I suppose that is one of the reasons why every single member in the House is supporting the bill.
The process was pretty lax. According to the Acts that will be amended by the provisions in the bill, an auditor did not have to be registered. There is no doubt about it: most of the organisations covered under the Industrial and Provident Societies Act acted with competency. The auditors who did the work there were good people, but my experience with any of those sorts of organisations is like it is with a lot of others. What happens is that a very well-meaning person says they can do the accounts, and everyone else says it is great that there is someone who is prepared to do them. That person can be the treasurer; he or she can do the accounts. [Interruption] It is like a lot of the organisations we are members of. We love people, but it is hard to find a treasurer. But the bill now states that those accounts have to be audited. That makes sense; it protects the societies, the members of the boards, and the governing bodies.
The Public Audit Act changes are quite interesting. The bill states that the “Auditor-General may ask for quality review in respect of audits of issuers (1) The Auditor-General may ask the Financial Markets Authority to arrange for a quality review to be carried out of the systems, policies, and procedures applying to the employees of the Auditor-General who assist in the carrying out of audits of issuers under this Act.” I hope that because the bill states that the Auditor-General may ask for a review—it does not compel the Auditor-General to do so—the Auditor-General asks for a review with monotonous regularity in the first couple of years.
The reason I say that, as I have said before, is that a recurring theme throughout the bill is restoring for everyday New Zealanders confidence in our financial markets. I think that if the Auditor-General carries out a number of these quality audits or asks the Financial Markets Authority to arrange for a quality review, it will help in the ongoing process of building up New Zealanders’ confidence in our financial markets and it will get them reinvesting. After we have taken a hit of $6 billion, a lot of people have been scared off. We do not need that fear, if the economy is to go forward.
The bill seeks to amend the Securities Act 1978 and states: “For the purposes of this Act, qualified auditor means—(a) a licensed auditor; or (b) a registered audit firm; or (c) in the case of an issuer that is a public entity under the Public Audit Act 2001, the Auditor-General or any other person who may act as the auditor under that Act.” I suppose what I am saying again and highlighting is that the Acts being amended really did not meet the requirements of the investing public.
The bill goes a long way to meeting those requirements. This 100-page legislation goes a long way. It will not do it on its own; we acknowledge that. There is still a lot of work to be done. As members of this House will know, legislation that was designed to increase confidence has already gone through the House and been passed.
Another Act that is being amended by the provisions of the bill is the Superannuation Schemes Act 1989. Again, the bill defines an auditor as “(a) a chartered accountant (within the meaning of section 19 of the New Zealand Institute of Chartered Accountants Act 1996); or (b) a licensed auditor”.
The legislation is good. It is complex. That is one of my concerns—that it is complex—but I hope the complexity does not put people off gaining an understanding of what we are trying to do. I certainly hope it does not put auditors off getting licences, or put chartered accountants off becoming licensed auditors, because we need licensed auditors and we need them to do a very competent job. The bill goes a long way. Thank you very much.
CLARE CURRAN (Labour—Dunedin South)
: I am pleased to take a call on Part 3, “Amendments to other enactments, regulations, transitional provisions, and other miscellaneous matters”. Going back to the core reason for the Auditor Regulation and External Reporting Bill, which my colleague Stuart Nash has just talked about, it is about creating an independent oversight system for issuer audits in order to promote the quality and expertise of the auditor profession. Although some of us in this House might think that being an auditor is not necessarily something we would aspire to—
Hon Members: Ha, ha!
CLARE CURRAN: —and that is not in any way meant to put down auditors—it is, and it remains, a critical profession.
Lynne Pillay: And respected.
CLARE CURRAN: And it is a very respected profession. Hands up, anybody in this Chamber who is an auditor. There must be a few across—
The CHAIRPERSON (H V Ross Robertson): I am sorry to interrupt the honourable member. The debate is with the speaker standing, not with members across the Chamber.
CLARE CURRAN: Thank you, Mr Chair. I was talking about the importance of the auditor profession. I wanted to underline that, because if we do not have good auditors, then we will not have a financial system we can feel confident about. Taking the merriment out of the debate, I say that it is time to be serious and that it is a critical profession.
This legislation, as has been mentioned on many occasions, is part of a bunch of legislation that is meant to underpin the new Financial Markets Authority. I point out that it is as yet untested.
I am very pleased to hear tonight that the financial literacy side of the equation is apparently being addressed by this Government. I would like to see that extend to the impact that the nefarious loan sharks are having on many unsuspecting people out in the community. I would like to see the Government address that part of the equation, because it all turns on the ability of people—the information that people have, how informed they feel, and how skilled they feel—to invest and to trust the system. Having respectable and trusted auditors is all an important part of that equation.
This is complex legislation. It is 100 pages long, as my colleague has pointed out. It is very detailed, and without it I am sure that the Financial Markets Authority would be poorer.
I also point out that this new regime will apply only to major audits of issuers and large companies. It will not impact on small and medium sized companies and non-profit entities. Issuer auditors are targeted, because the investors in those entities are most at risk of losing large amounts of money, which is the point I made earlier about celebrity endorsements of financial products. That is where the unsuspecting investor can get ripped off and rorted. That relates to another issue that I want to again put on the agenda for this Government to deal with, which is how to deal with the issue of truth in
advertising, because that is critical. Not only is it critical in the financial investment side of the equation but also it is absolutely critical in other industries, such as the telecommunications industry. I would like to put that on the record, as well.
Issuer audits are targeted, because investors in those entities are most at risk of losing large amounts of money in the event of auditor failure. In a 2009 report the Registrar of Companies criticised a number of parties for their role in the finance company meltdown, including auditors. The registrar said that the big accounting firms were not particularly interested—
BRENDON BURNS (Labour—Christchurch Central)
: I am very pleased to take a call on the Auditor Regulation and External Reporting Bill, having just spent a couple of days in the company of auditors at a conference of the Australasian Council of Public Accounts Committees—or ACPAC—in Perth, Western Australia. I must say that it was an interesting couple of days. I had never thought that spending a couple of days with auditors would be one of my life-changing experiences. There were a couple of very good sessions about managing key performance indicators and getting the best performance out of them. There was a very good session from a demographer.
Lynne Pillay: What about the socialising?
BRENDON BURNS: The socialising was pretty good, too, and auditors do know how to party—I have to say that. They are not just grey men in grey suits, like some members opposite. They are interesting individuals with a commitment to their profession.
The financial rigour that auditors bring is hugely important to us as a society. We need only look back a couple of years to the report of the Registrar of Companies and the criticism that was made about a number of parties and their roles in the financial company meltdowns that took place in this country and across the planet. We need only think about Enron and the rather dubious role of a major accounting and auditing firm that led to the collapse of Enron and to thousands and thousands of investors being duped of their money.
We have a number of parallels here in New Zealand on a lesser scale. So the role of audit is extraordinarily important. That is why Labour supports this bill as introduced by the Hon Simon Power. We recognise the real importance that is attached to an independent oversight system of audit, making sure that the quality and expertise of the audit profession is right up there, and making sure that our audit law is aligned with overseas practice. This is a good bill, and we obviously want to see that we do everything we can to make sure we restore some of the confidence that New Zealanders lost in their financial markets during the last decade, which saw a number of financial companies collapse—about 20, from memory. So it is good to see this bill coming through.
This bill puts into place some better regulation for registration of individual auditors; they need to be licensed, and firms need to be registered. That underpins the quality that is needed. Auditors are there in a sense as the public’s watchdog on the financial probity, the financial health, of a company. We put a great deal of store upon it.
There are some scoundrels still out there in the market place. I think of one Mr Bernard Whimp, who has announced today that he is pulling out of playing a role in basically rorting the system and duping people into selling shares at below their value. He is boasting of having made $2 million and having now retired. So I know what the Financial Markets Authority will be doing. In fact, it has publicly signalled that it will take a very active stance against such practices in the market. It is good to see that that individual has decided to pull in his horns, but, still, a number of people have been duped.
That is why we need strong financial regulation underpinned by a strong, independent audit system. That is why this bill is important in respect of bringing through a little more strength, a little more clarity, and a little more regulation so people can have more faith in the auditing of our companies—mid-sized companies, smaller-sized companies, and bigger companies.
We need to know as a community when we are making investments that there is something underpinning the process, and that there will be some clarity in respect of statements that are made by auditors. Therefore, people will have more capacity to have faith in their investments in financial markets, in companies, and in balance sheets that are correct and true representations of the true state and financial health of a company.
As we have seen all too often in the last few years, some of those balance sheets were propped up and were not truly representative of the health of a company, and people with large stakes in a company sometimes used it as their personal cash resource, and that was not always signalled by the auditing process. So we do need regulation as a nation. It is important. Sometimes it is referred to as “red tape” and “bureaucracy”, but that is part of the price we pay for living in an ordered society where people can have every belief that the system will work for them and for their investments.
Obviously, a lot of people are not wealthy. They put their nest eggs, their retirement funds, into an investment, and they need some assurance that the investment will be seen through, and that it will not be the subject of a rip-off, which has happened quite a lot over the last few years.
This is a good bill. What we will see from it is the newly created—it is just coming into being now—Financial Markets Authority, with a role in the licensing of auditors and in making sure there is oversight of that. I was pleased to see a profile piece in the
New Zealand Herald at the weekend of the new chief executive of the Financial Markets Authority. I think he was on
Morning Report only this morning, or yesterday morning, talking about recruiting and bringing through people from other Government departments and from the private sector, and trying to make sure there is a good weight of people in that authority.
Part of the role the Financial Markets Authority will take up will be to ensure that the audit profession is underscored by high professional standards and by the requirement that people are licensed, that firms are registered, and that people can have an absolute assurance that when they make an investment in this country, it is underpinned by the appropriate regulation and the appropriate audit system. Thank you.
- The question was put that the amendments set out on Supplementary Order Paper 239 in the name of the Hon Simon Power to Part 3 be agreed to.
- Part 3 as amended agreed to.
Part 4 Amendments to Financial Reporting Act 1993
The CHAIRPERSON (H V Ross Robertson): The debate on this part includes schedule 2.
Hon GEORGINA TE HEUHEU (Minister for Courts)
: Part 4 of the Auditor Regulation and External Reporting Bill amends the Financial Reporting Act 1993. The bill provides that the issue of financial statements must be audited by a licensed auditor or a registered audit firm.
Part 4 also regenerates the Accounting Standards Review Board as the new External Reporting Board. The External Reporting Board, consisting of between four and nine members, is responsible for preparing and issuing financial reporting standards; preparing and issuing auditing and assurance standards, including professional and
ethical standards; developing and implementing a strategy for tiers of financial reporting from different classes of reporting entities; and giving directions or guidance on accounting policies that have authoritative support. As is already the case under the principal Act, financial reporting standards issued by the board are given the force of law. The board must not issue a standard unless it has taken steps to consult persons who would be affected by the issue of the standard.
Part 4 also provides for levying licensed auditors and accounting and auditing service providers in order to partially fund the work of the board. The Commerce Committee recommended that the levy-setting powers be widened to levy registered audit firms and every person registered or incorporated under a range of statutes, including the Building Societies Act 1965, the Companies Act 1993, and the Limited Partnerships Act 2008. Part 4 also provides that the chairperson of the Accounting Standards Review Board continues in office as the chairperson of the External Reporting Board. Thank you.
STUART NASH (Labour)
: As the Minister in the chair, the Hon Georgina te Heuheu, has outlined in her speech, Part 4 of the Auditor Regulation and External Reporting Bill talks about amendments to the Financial Reporting Act. More specifically, the major grunt of this part is the External Reporting Board. There are a couple of things. Obviously, as I mentioned before, such a large piece of legislation has a number of implications for other Acts of Parliament, especially those that have a financial basis or a commerce base. But this is quite a big change, because we are talking about the External Reporting Board, and we are talking about Part 3 here of the Act.
In terms of this bill, clause 88 inserts new section 22, “Continuation of External Reporting Board”, in the principal Act. The External Reporting Board is a Crown entity for the purposes of section 7 of the Crown Entities Act. As the Minister outlined, this is the same body—as everyone will know—as the Accounting Standards Review Board.
Hon Clayton Cosgrove: Oh!
STUART NASH: Yes, the Accounting Standards Review Board. In fact, it might have been set up by Aaron Gilmore—I am not too sure; maybe I am wrong there.
Hon Clayton Cosgrove: He conquered Everest, as well.
STUART NASH: Ha, ha! But just so that people understand what this board is about, I say it has no fewer than four people and no more than nine members. According to the Act, “The Minister must not recommend a person for appointment as a member of the Board unless, in the opinion of the Minister, that person is qualified for appointment by reason of his or her knowledge of, or experience in, business, accounting, auditing, finance, economics … ”. I assume, of course, that the Minister will seek advice and will be given advice. The word “qualified” is quite a subjective word, but again I assume that the Minister will seek advice and that the people who will be appointed will be incredibly competent, independent, and absolutely know what they are doing. There are a number of them around this country, and I am sure they will be lining up to go on this board.
New section 24, “Functions of Board”, states: “The Board has the following functions”, which are basically “(a) to prepare and, if it thinks fit, issue financial reporting standards …”. Again, I have a little concern over that language, especially the expression “if it thinks fit”. I do not even know why that is there. I do not know why the bill does not just state “to prepare and issue financial reporting standards”. “If it thinks fit” is reasonably subjective. I ask what the test is there, and whether board members are to have a meeting around the coffee table and say they think that they should do this. I think it is probably wise that we take out some of the subjective language and just state: “The board has the following functions: to prepare and issue financial reporting standards for the purposes of the Act, the Crown Entities Act, the Public Finance Act,
the Local Government Act, and any Act that requires a person to comply with this Act as if that person were a reporting entity.” Paragraph (b) states “to prepare, and,”—it uses this term again—“if it thinks fit, issue auditing and assurance standards for—(i) the purposes of this Act;” or of another Act.
The board must act independently. That is most important. We have said time and time again that the purpose of this Act—as is the purpose of a number of bills that have passed through this House recently—is to restore the confidence of the investing public. This bill is slightly different from the other bills because we are talking about Crown entities here, but in a way it is just as important, because taxpayers absolutely need to know that about the companies they own and, if we listen to that Government over there, the companies that it is going to sell down. In fact, one may find that this part of the Act is not necessary, because when the Government sells down all the State-owned assets, there will not be any need to report on assets owned by the Crown or on State-owned enterprises, as there will not be any left. Who knows—I suspect that might be the case. We do know that that Government is to sell down State assets, and we do know that it has committed to selling down State assets, just as we know that the Prime Minister said today in question time that he is not ruling out appointing Don Brash as finance Minister in this term. Did members see Mr English’s face when he said that? Mr English’s face just dropped. He thought: “Oh my God! Am I going to be stabbed in the back by Don Brash again?”.
But anyway, I will go back to the bill. The board must act independently, which I think is absolutely vital, as does the Committee, obviously, and as does every member in this House, because we are all voting for this provision. I will just outline new section 25, which is to be substituted in the Financial Reporting Act by clause 88: “Except as expressly provided otherwise in this or another Act, the Board must act independently in performing its statutory functions and duties, and exercising its statutory powers, under—(a) this Act; and (b) any other Act …”.
New section 26, “Consultation”, which is also to be substituted in the Act by clause 88, states: “(1) The Board must not issue a specified standard, or an amendment to a specified standard, unless the Board has taken reasonable steps to consult with persons or organisations or representatives … who, in the opinion of the Board, would be affected by … the standard …”.
CLARE CURRAN (Labour—Dunedin South)
: I will take a call on Part 4 of the Auditor Regulation and External Reporting Bill, regarding amendments to the Financial Reporting Act 1993. I will take up just some of the important issues that my learned colleague Stuart Nash has mentioned with regard to independence.
The independence issue is really important. It is about the arm’s-length issue of the authority. I remind members in the Chamber today and the public who are watching why we have this important legislation and what it underpins, which is the as yet untested body called the Financial Markets Authority. The authority is a new, consolidated market conduct regulator. It is a regulator. In this environment—in the context of the global financial crisis, the collapse of financial companies in New Zealand, and the issues that we are seeing in terms of anti-competitive behaviour in the market places right now, particularly within the telecommunications market—we need regulation. There is an important place for regulation in New Zealand, and a regulator around financial markets is absolutely critical. The independence of that regulator is also really critical and absolutely essential for a vibrant, thriving, and healthy democracy.
The Financial Markets Authority is new. It started on 1 May 2011. In fact, I was just looking for a website and there is a website for the Financial Markets Authority. The website is looking quite cool—one is allowed to say that in Parliament. The authority
will perform the regulatory functions currently undertaken by the Securities Commission and some of those undertaken by the Government Actuary and the Companies Office.
I will also say tonight, while we are talking about the importance of the auditing profession, that the actuary profession, which always seemed a little bit obscure to me—as I am sure it does for many people in the community—is also an important profession. The Financial Markets Authority Act, which was formerly part of the Financial Markets (Regulators and KiwiSaver) Bill, established the Financial Markets Authority. One of the important things to stress again tonight is that Labour did much of the preliminary groundwork around the bill that is before us today and around the establishment of the Financial Markets Authority, in terms of its importance and the principles that underline it. Although it is important to put on record that the Commerce Committee has done a lot of good work and that the Minister of Commerce, Simon Power, has done a lot of good work, essentially Labour kicked off this process.
With regard to Part 4 and the functions of the External Reporting Board, which goes back to the core principle of independence, the select committee recommended that clause 88, which inserts a new section into the Financial Reporting Act, be amended in three ways. Firstly, the External Reporting Board should be allowed to issue auditing and assurance standards for purposes approved by the responsible Minister. That would allow standard setting to be comprehensively consolidated within one body. Secondly, the board should be allowed to give guidance on accounting policies that have authoritative support. Thirdly, the committee recommended removing references to professional and ethical standards as a separate type of standard. Instead, auditing and assurance standards would include professional and ethical standards.
I just note that the new section 29, as amended, states that those standards may, without limitation—and I know that my learned colleague—
BRENDON BURNS (Labour—Christchurch Central)
: Part 4 of the Auditor Regulation and External Reporting Bill deals with financial reporting issues and setting standards for them under the new regime. A single case that to me underscores the importance of better financial reporting standards is that of Hanover Finance. Hanover Finance was a company that pretended to be a blue-chip company. We saw Hanover Finance advertised on our State television news programme as the company we could trust. Hanover Finance repeated that advertisement hundreds and hundreds of times. That opens up some discussion—as we have had in the Chamber earlier today—about the commercial imperatives that Television New Zealand is following. I will put aside that issue. What did that advertising mean? It meant that hundreds and thousands of New Zealanders believed that Hanover Finance was what it claimed to be: that it was a financial company we could trust. Nothing could have been further from the truth. That company, which was run by Mark Hotchin and Eric Watson, was taking funds and pouring them into its own speculative investments. That is why we need strong financial reporting. That is why, as is provided under the bill, we need strong accounting and auditing standards. Hanover Finance fleeced thousands of mum and dad investors who believed the hype and the advertising and did not have anybody they could turn to, to say to them that they should not believe what was being said. That is why we need strong audits and financial reporting and standards to underpin the operations of financial markets in this country. Hanover Finance is just one of 20-plus examples of finance companies and others that in the last 3 years alone have gone from—
Stuart Nash: Sixty-nine.
BRENDON BURNS: I am thinking of the bigger ones. My learned colleague Stuart Nash informs me it was 69, but I am thinking of some of the bigger companies, of which there were 20-plus, that have gone belly up and taken with them the life-savings
of thousands of New Zealanders. Many of those New Zealanders were not well off. Many of them were putting in their life-savings and retirement savings, thinking they might get an extra couple of percent. They paid an awful price for that investment, because they were never given the financial probity they deserved.
We see under Part 4 a change in respect of who is responsible for the standards. Currently, we see them effectively divided between the New Zealand Institute of Chartered Accountants and the Accounting Standards Review Board. What this part of the bill is doing is establishing a new entity, the External Reporting Board, which commences operations in July this year. The board will have no more than nine members and no fewer than four members. Those members will be drawn from the financial, accounting, and auditing professions and are to be appointed by the Minister of Commerce. I certainly have confidence in the current Minister, Simon Power, that appropriate appointments will be made to the body.
The importance of the appointments is that the board is then charged with acting independently and not at the behest of any appointing Minister. That is how it must be. We cannot have any sense of such a board having any connection with or any requirement to reflect anything other than the absolute truth and probity of the situation. The board will be preparing and issuing financial reporting standards, issuing auditing and assurance standards, and developing a whole series of guidelines and strategies in order to give a framework for the board’s overall direction. That is a great thing to see. The importance I attach to this is that the investment community needs to know that when financial market offers are being made, there is some reasonable capacity to believe they are worth the money that is being invested.
New Zealand has been a bit out of line with some other parts of the world. We have had a self-regulatory model. It has not worked. It is no longer acceptable. As I mentioned earlier, I have just spent a couple of days in the company of auditors and others involved in financial oversight. Australia has a tighter model now. We have to be in line with that model and with the European Union. That is why we are seeing the bill coming through and we are seeing under this part of the bill the establishment of the new board. The board will be independent and will have the responsibility for ensuring that there is a proper set of reporting standards. It is good legislation to see coming through.
- The question was put that the amendments set out on Supplementary Order Paper 239 in the name of the Hon Simon Power to Part 4 be agreed to.
- Part 4 as amended agreed to.
- The question was put that the amendments set out on Supplementary Order Paper 239 in the name of the Hon Simon Power to schedule 1 be agreed to.
- Schedule 1 as amended agreed to.
- The question was put that the amendment set out on Supplementary Order Paper 239 in the name of the Hon Simon Power to schedule 2 be agreed to.
- Schedule 2 as amended agreed to.
Clause 2 Commencement
- The question was put that the amendments set out on Supplementary Order Paper 239 in the name of the Hon Simon Power to clause 2 be agreed to.
- Clause 2 as amended agreed to.
- The Committee divided the bill into the Auditor Regulation Bill and the Financial Reporting Amendment Bill,
- The Chairperson reported the Whanganui Iwi (Whanganui (Kaitoke) Prison and Northern Part of Whanganui Forest) On-account Settlement Bill without amendment,
and the Auditor Regulation and External Reporting Bill with amendment, and that the Committee had divided it into two bills.