Auditor Regulation and External Reporting Bill

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—

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.

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.

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.

Amendments agreed to.

Part 1 as amended agreed to.

Part 2 Licences, registration, accreditation, and role of FMA