Auditor Regulation and External Reporting Bill

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.

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.

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.

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.”

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.

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.

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.

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.

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.

Amendments agreed to.

Part 2 as amended agreed to.

Part 3 Amendments to other enactments, regulations, transitional provisions, and other miscellaneous matters

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.

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?

Oh, he is not that old, actually.

The CHAIRPERSON (H V Ross Robertson): The member must not refer—

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.

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!

—and that is not in any way meant to put down auditors—it is, and it remains, a critical profession.

💬 Lynne Pillay: And respected.

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.

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—

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?

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.

Amendments agreed to.

Part 3 as amended agreed to.

Part 4 Amendments to Financial Reporting Act 1993