Auditor Regulation and External Reporting Bill

The debate on this part includes schedule 2.

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.

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!

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.

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 …”.

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—

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.

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.

Amendments agreed to.

Part 4 as amended agreed to.

Schedule 1

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.

Amendments agreed to.

Schedule 1 as amended agreed to.

Schedule 2

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.

Amendment agreed to.

Schedule 2 as amended agreed to.

Clause 1 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.

Amendments agreed to.

Clause 2 as amended agreed to.

The Committee divided the bill into the Auditor Regulation Bill and the Financial Reporting Amendment Bill, pursuant to Supplementary Order Paper 238.

House resumed.

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.

Report adopted.