Auditor Regulation Bill, Financial Reporting Amendment Bill

on behalf of the Minister of Commerce: I move, That the Auditor Regulation Bill and the Financial Reporting Amendment Bill be now read a third time. Members should consider the Auditor Regulation Bill within the broader context of the Government’s package of financial market reforms designed to restore investor confidence in our financial markets. Investors need to know that the practitioners charged with carrying out independent audits of financial statements prepared by banks, listed issuers, and other entities that accept large amounts of money from the public are highly qualified, skilled, and experienced. This is what the Auditor Regulation Bill seeks to do.

The bill will reserve financial sector audits for the top members of the auditing profession within the major accounting firms. Following enactment, there will be a transitional period before the Auditor Regulation Bill comes into force. The New Zealand Institute of Chartered Accountants will need to establish new systems to carry out its new statutory responsibilities. The Financial Markets Authority will need to establish a system for monitoring and reporting on the adequacy and effectiveness of the New Zealand Institute of Chartered Accountants’ regulatory systems and processes. The Registrar of Companies will need to establish a register of licensed auditors and registered auditing firms. I look forward to the Financial Markets Authority, the Registrar of Companies, and the New Zealand Institute of Chartered Accountants working together to bring these much-needed reforms into place in a timely manner.

I turn now to the Financial Reporting Amendment Bill. This bill provides for the reconstitution of the Accounting Standards Review Board as the External Reporting Board from 1 July 2011. It also provides for the consolidation of all financial reporting, auditing, and assurance standard-setting within the External Reporting Board. These responsibilities are currently split between the New Zealand Institute of Chartered Accountants and the Accounting Standards Review Board, with the New Zealand Institute of Chartered Accountants holding most of the responsibilities. The changes are being made for two main reasons: firstly, placing the responsibilities within a single entity will make it easier to develop and implement coordinated strategies and programmes, and secondly, it is essential that the setting of financial reporting standards is seen to be independent of the interests of the profession, as per international best practice.

I pay tribute to the Accounting Standards Review Board and the New Zealand Institute of Chartered Accountants for their significant contributions to these reforms. The Minister was pleased to announce recently that all current members of the Accounting Standards Review Board will become inaugural members of the External Reporting Board, along with two additional members. The Accounting Standards Review Board has been working through the process of moving from a virtual entity that has no staff or premises to an entity that will have both. I also thank the Institute of Chartered Accountants for the thoroughly professional manner in which it has continued its standard-setting activities throughout the transition.

To conclude, the passing of the Auditor Regulation Bill and the Financial Reporting Amendment Bill will contribute to the strengthening of the financial reporting system in New Zealand, and will bring that system within the range of international norms. I commend these bills to the House.

I am pleased to speak in the final readings of the Financial Reporting Amendment Bill and the Auditor Regulation Bill. I have spoken a number of times in the House on this particular issue. There are several issues quite dear to my heart that I will touch on.

The first issue is the widespread collapse of major finance companies in New Zealand, which has badly eroded the confidence of investors in the financial sector. I do not think any of us disagree that that has happened. These two bills will go a long way to ensure that investors have faith in the markets and the businesses they invest in. Labour supports these bills, as the bills continue the work of the previous Labour Government. I put that on the record again. Improving the regulatory environment in the financial sector—improving the regulatory environment in any sector—is quite important, and we are seeing the regulatory environment eroded across many sectors at the moment.

It is also important to put on the record and remember that the Capital Market Development Taskforce, which advised the Government to create the new Financial Markets Authority, was established under the previous Labour Government. It was established by the previous Minister of Commerce, the Hon Lianne Dalziel, and I put that on the record, as well. It is a shame the Government has ignored the work of the officials on the establishment board for the Financial Markets Authority, with only one of those officials being appointed to the current board.

This legislation reconstitutes the Accounting Standards Review Board as the External Reporting Board, with that body setting all standards relating to financial reporting and assurance services. It also requires the Institute of Chartered Accountants to regulate auditors as specialist professionals rather than as general chartered accountants. That provision recognises that the role of auditors is crucial in ensuring confidence in financial markets, and makes sure that auditors are held to a high standard and have the skills to competently do their jobs. It is essential that that happens if we are to avoid the disasters that struck mum and dad investors during the collapse of Hanover Finance, Bridgecorp, and numerous other finance companies.

Further, the Financial Markets Authority will be given oversight of auditors to ensure that they are capable of carrying out a large issuer audit. Self-regulation by the Institute of Chartered Accountants was found to be failing in that area. By ensuring that we have an independent regulatory body for auditors, we are bringing our regulation up to international standards. The new Financial Markets Authority—a new and, as I have said several times in this House, as yet untested authority—will be able to prescribe standards for the licensing of auditors and the registration of audit firms, and will be able to promote the principles relating to the quality and integrity of New Zealand auditors. Without that oversight, New Zealand auditors would not be able to practise in Australia, the European Union, and other jurisdictions.

To be clear, these bills will apply only to major audits of large companies or issuers of securities; it is important to acknowledge that. It will not impact on small and medium sized companies or not-for-profits. I think there has been a little bit of misunderstanding around that issue during some of the discussion in the House, and it is important to put that on the record, as well. It is important because we do not want to increase compliance costs for small businesses in tough economic times, but we do want to make sure that big businesses and those issuing securities are being honest and upfront with investors.

The Commerce Committee thoroughly scrutinised the Auditor Regulation and External Reporting Bill. We believe that the changes made will ensure more effective and fair laws. The requirement that both individual auditors and firms be licensed and registered, respectively, recognises that both the firm and the individual auditor need to meet high-quality auditing standards. Also, under the original bill, all partners of an audit firm would be liable for a breach of regulation. That provision has been adjusted so that only partners who were aware of the breach and did not act to prevent it would be committing an offence. There was quite a lot of discussion about that during the Committee stage, and it is a fair adjustment that avoids punishing innocent parties.

There is no escaping that this is complex and detailed legislation. I know that my colleague the Hon David Parker has talked about that several times. That complexity comes at a cost to the auditors, who face compliance costs, and to the average investor, who has to wade through reams of information simply to understand a basic balance sheet. This legislation is about restoring confidence in financial markets and bringing them into line with international standards.

I will touch on another important point that is lacking in this legislation, which was also raised in the Committee of the whole House, and that is financial literacy. Although I am not ignoring the good work this legislation does in ensuring that there is that important confidence in financial markets, it will be undermined if there is no strategy from the Government to ensure that financial literacy is a priority for every New Zealander. I heard what was said during the Committee stage, and we need both sides of the transaction to be fully informed about financial literacy.

💬 Jo Goodhew: It happened tonight. There was an announcement tonight, you’ll be pleased to hear.

My apologies for not hearing the previous speaker, Hekia Parata, if that issue was mentioned. The important work done by the Capital Market Development Taskforce, set up under the previous Government by the Hon Lianne Dalziel, identified financial literacy as a key issue. A lot of work was put in under the previous Government in relation to that issue, and that work has largely sat on the table and has not been acted upon. I touch on that because it has been raised so many times in the House as an issue we are going backwards on. A number of issues were raised in a report produced by the task force, particularly on financial literacy, that could form an important part of the Government’s strategy going forward. I hope the Government will actually do that.

The task force identified financial literacy as a key issue, and identified that New Zealand’s capital markets are small relative to the size of its economy when compared with other OECD economies. New Zealanders’ savings practices, which included the limited extent of direct investment in capital market products, might suggest that New Zealanders have a limited understanding of these products. The effectiveness of disclosure by issuers also depends in part on investors’ financial literacy. The task force at that time was interested in looking at the current state of financial literacy in New Zealand and the ways it could be improved.

The task force identified that financial literacy could be improved by more strongly promoting it in schools as part of the curriculum, or by making it mandatory. The task force looked at a process of how it could make that happen. It also looked at financial education outside schools, which could be stepped up in a number of ways if additional funding was available for more frequent marketing campaigns. I think we have seen the importance of this issue during the investigations the Commerce Committee has done, with the truth-in-advertising issue and the way that people in the community can be sucked in by prominent celebrity figures fronting for organisations that turn out to be crooked. It also looked at a campaign that could be run purely on investing and how to invest properly. I hope the Government will look at this.

Although Labour supports these bills, we know that many other issues need to be addressed around them.

It is my honour to stand and speak to the third readings of the Auditor Regulation Bill and the Financial Reporting Amendment Bill.

As has already been stated, there are basically two major changes in these bills. First, they consolidate all financial reporting, auditing, and assurance standards within a single Crown entity. It will be called the External Reporting Board and will be in full operation by 1 July this year. Secondly—and, I think, more important—the legislation introduces auditor licensing for issuer audits. More specifically, it recognises that audits of companies that manage substantial public investments, or where large amounts of money are obtained from the public, must be performed by the top members of the auditing profession. We saw that, as has already been outlined by previous speakers, in 2009 when the Registrar of Companies expressed grave concerns about the capability of some of the auditors and audit firms to carry out finance company audits to the required or minimum standard.

This legislation provides that the licensing of auditors will be carried out by the Institute of Chartered Accountants and by any other professional accounting body that may be accredited by the newly formed Financial Markets Authority. The authority will set the minimum licensing standards, and this reform, as was stated by the Minister of Commerce, is another step in this Government’s ongoing work programme to restore investor confidence in our financial sector, to restore confidence among mum and dad investors, and to bring about the more effective and more efficient running of our capital markets.

Of course, the previous speaker, Clare Curran, said that not much had been done, but let me outline some of the things that this Government has done in 2½ years: the Financial Service Providers (Pre-Implementation Adjustments) Bill, the Financial Advisers Amendment Bill, the Insolvency Practitioners Bill, and the Insurance (Prudential Supervision) Bill, as well as the regulation of exchanges and settlement systems. That is a record of achievement, it is a record that this Government is proud to take into the upcoming election, and it is a record that far exceeds anything that Labour did in the last 9 years of its administration.

The Commerce Committee recommended a number of amendments to strengthen the legislation, and the most significant of those was to provide for auditing firms to be registered. Firm registration will be permitted if the firm includes at least one licensed auditor, and meets any other requirements imposed by the Financial Markets Authority. That change, which is particularly important and was discussed round the committee table—and there seemed to be some consensus on it—reflected the fact that audit quality, which is paramount within this legislation, is reliant on two specific matters. The first is the competence of the practitioner, or the individual who takes the audit. The second is the quality of the auditing firm’s systems, processes, and procedures. At firm level it is about quality of assurance of the firm that undertakes the audit.

I support this legislation, obviously. It is legislation that reserves issuer audits to experts, and it substantially reduces the future risk of audit-issuer failure. I commend these bills to the House. Thank you.

I begin by referring to the Financial Reporting Amendment Bill, which is one of the two bills that we are considering at the moment. This bill sets up a new organisation called the External Reporting Board, which takes over from the Accounting Standards Review Board and sets accounting standards.

The functions of the board are described in new section 24, which is being inserted into the principal Act. Its functions are “to prepare and … issue financial reporting standards for the purposes of” various Government and private institutions. The board can, according to new section 27, express standards that apply to “(a) all reporting entities or groups; or (b) specified reporting entities or groups;”, and that is an issue that I will discuss, developing a theme that Labour members have mentioned on a number of occasions in earlier readings on this bill.

We need to be very careful not to over-regulate here. I agree that we need to have someone who sets standards, and that financial reporting standards are important, and I have no particular gripe with the structure that is being proposed—indeed, Labour members are voting for it. But I will be keeping an eye out in the future as to whether the standards that are produced are practical, and to see that we are not over-regulating for all. As a consequence of the need to have very precise and detailed standards in respect of a few entities, we ought not to require that same level of detail and prescription in respect of all the other entities. Otherwise we are over-regulating them, and putting them to great cost. I know we in this House and the accounting profession often get up and say compliance costs are a terrible thing and we must limit compliance costs—and we must. Overly onerous and expensive compliance costs are a bad thing, and they are a curb upon the success of our businesses. They give an advantage to larger institutions over smaller institutions, because for them those costs are a lower proportion of their turnover and profit. Just because we need those higher standards for some, it does not mean we need for them all.

We must take care, as we have ever-improving financial reporting standards for the most difficult of situations, that we are not making them so complex that people find them impractical and too many people cannot understand them, nor should we be driving people to have to always use expensive professionals in order to meet their financial reporting obligations, when simpler standards could be complied with by people working within their own businesses at less cost. I for one am looking forward to the External Reporting Board taking advantage of its breadth of powers to bring forward standards that are fit for purpose and that do not apply the same minimum standard to all sorts of entities.

That leads me to a related concern in respect of the Auditor Regulation Bill. We have heard prior contributions from both sides of the House—and we agree—that there is a need to have an appropriately qualified audit profession, and that its members have, on occasion, different skills from accountants, and need to have their own standards of regulation. But we are in the process again of increasing compliance costs for businesses. Yes, in respect of the compliance costs for large finance companies and the like, I do not mind them being a bit higher in order for them to have proper scrutiny of their business, so as to avoid repetition of some of the poor practice that we have had of late. I do not think that all of those who are responsible can escape their share of responsibility for what went wrong by saying they were not told to do it properly. I would have thought that the existing rules gave plenty of latitude to good auditors to go in there and expose some of the related party lending that was problematic in those organisations, and to check whether some of the wide boys from the last time there was a clean out in the New Zealand financial system were doing it again during the last property bubble that we had.

Having said that, I do not mind seeing an increasing standard, but it does worry me that this will apply to the regulation of all issuers, because not all issuers are the same as finance companies. Although some finance companies have tens of millions of dollars on their books, an issuer can be anyone who issues securities to the public, and that includes an innovative small business trying to raise a bit of growth money. That small business might have been, until this point of growth, a husband and wife, a family, or a couple of partners in a small business that was growing and developing an innovative idea it wanted to take to the next stage of development, which required them to take it offshore. For them to take it offshore they will need to get some more capital, and they will not be able to get more capital from the banks in New Zealand, so they will have to raise it, and we want them to be able to raise it through capital markets. We do not want the only people able to invest money in these companies to be people who are already wealthy and therefore fit the exclusions of the Securities Act—although I do not know whether they would be an issuer, then; maybe an issue is an offer of securities to the public rather than to the big end of town. But the point is that we do not want businesses that are expanding to be unable to do so because of the cost of raising money because they are all of a sudden determined to be an issuer, and are then caught by overly onerous rules relating to the costs of audits and the complexity of the audit rules that they have to comply with. This is a serious problem in New Zealand, and we risk making it worse through this legislation.

Again, Labour members are not saying that has to be the outcome here, but the propensity of those who are in control of these rules is to try to drive things to an ever-higher standard. We know that that is the propensity of people who are in charge of setting these regulations. That seems to be the natural way of it. The sorts of people who are attracted to sitting on these boards are of a mind to do things ever better, but the cost of perfection is sometimes too high. I do not want to eliminate risk. I just want to appropriately guard against improper levels of risk being taken by people who are either misleading people or not properly making disclosure to the public.

I think we have to be very careful, on the implementation of this legislation, that we are not allowing these new regulators to over-regulate—not the finance company end of town, which is where the problem has been, but the small innovative company that wants to raise relatively small amounts of money. When I say “relatively small amounts of money” we are talking about $250,000, half a million dollars, or a million dollars, which when raised from 20 people is not a large amount of money each. We do not want to over-regulate that space. The key to that is who goes on these boards and the skills that they bring, and that those people themselves are focused on appropriately minimising cost, just as they are focused on appropriately ensuring minimum standards. That lies largely within the control of the Government. I have been in this role. On a lot of these specialist boards we normally accept the recommendation that comes from the professional bodies—the accountants and the solicitors. I think we are reaching a point in our experience of how regulations forever grow, where it is appropriate for Governments of the day to say: “OK, we actually accept your competence to do this job, but we want some assurance that you’re not going add to complexity, and therefore to costs, for our businesses in a way that threatens their competitiveness.”

Labour backs both of these bills. It is necessary that we tighten up the control of audits. I do not accept the proposition that some of the things that went wrong ought not to have been able to be picked up under existing laws. I think there have been some failures in that regard, and I am hopeful that some of that will be brought into the open in some of the litigation that will go through the courts in the years that come, as a consequence of the failures of the finance companies. None the less these are good bills and I support them.

Kia ora koutou. I am pleased to take just a short call, in order to affirm the Green Party’s support for the Auditor Regulation Bill and the Financial Reporting Amendment Bill. This legislation has been some time in coming, and there are reasons for that. But it certainly does meet a need. I am grateful to Lianne Dalziel, the chair of the Commerce Committee, who has led us through the sometimes tortuous path to get to this point. She has a phrase, which brings us back to it. She asks: “What is the mischief? What are we actually trying to achieve here?”. These relatively complex bills do engage and address a range of related complex issues. It is very useful just to be centred in that way, and to ask what the mischief is. We know there has been mischief, largely emerging from the radical and excessive deregulation of the finance sector over a number of years—over several decades.

The previous speaker, Mr Parker, very clearly outlined the danger of over-regulation. It is absolutely true that restricting the availability of capital, of finance, is a serious problem for some of our most innovative and potentially productive industries. We have some very smart people in business in this country who are able to come up with ideas and processes that can, in time, return significant value in all sorts of ways. We do not want to overly regulate or restrict the availability of venture capital, of expansion money, needed in order to allow those small businesses to grow and to make a really positive contribution for the benefit of all of us. Having said that, I say the need for more regulation is undeniable, and for that reason the Green Party supports this legislation.

It was often remarked, in the course of the select committee process, that people have questioned why, in the failures of the finance sector, there was so much incompetence. There was a degree of incompetence, undoubtedly. People simply got things wrong. This legislation will serve, in part, to shine a light on that level of incompetence, and, hopefully, to drive it out of the sector. But much more than that, I think there has been a failure of integrity. The deregulation, combined with a prevailing attitude of “if you can get away with it, you should”, has led us to a situation where large numbers of people lost money. The problems in the sector did have very unfortunate consequences, and this legislation will enable a tighter rein, a closer eye, to be kept on what is happening in the sector.

We cannot legislate, ultimately, against dishonesty or foolishness; nor should we endeavour to. But what we can do is endeavour to ensure that people can have a reasonable expectation of integrity, of competence, and of adequate regulation, and that the dealings of finance companies, of the finance sector more generally, and of financial transactions will be openly, transparently, and appropriately reported. Again, this legislation takes us some way down that path.

I heard earlier a reference to financial literacy. We know that New Zealanders, perhaps not uniquely, certainly do not have a high level of financial literacy. I suspect again that that is a hangover from an earlier time, when there was a great deal more trust. People who found that they were in possession of a lump of capital, for whatever reason, could and would invest it with a trusted professional, with a reasonable expectation that their trust would be rewarded and well founded. I think we have gone beyond that. I think we have entered a time when the industry did not in its entirety reflect such integrity. There were not good grounds for trust within that industry. We have, in that situation, needed to return to a regulatory response—a mechanism to ensure that there is more protection for investors, and that people will have a much clearer view of what has been carried out and done in their name.

In terms of financial reporting, I have made the point before that we look forward to a time when not only is the monetary flow through a business reported on but auditors go beyond simply reporting on financial transactions. We look forward to a time when auditors and financial reports generally also engage with, and report on, the broader effect of business activities: the environmental effect, the social effect, the costs and benefits—not only economic matters but also environmental and social costs and benefits. That is not something we need to invent; it is becoming increasingly commonplace internationally. There are well-established and well-respected international bodies capable of modelling good reporting that engages social and environmental costs and benefits, as well as the economic and financial aspects. Again, in time we may see value in developing a light-handed regulatory framework to require that. But I think more and more that will come from the business and finance sector itself, as people require a better, clearer, and more comprehensive picture of what is being done in their names, with their money, and of what the social and environmental impact is of business and finance transactions generally.

To return to the general theme of the integrity and trustworthiness of our professionals, whom we expect to perform on our behalf, I think there is a returning, or certainly an emerging, sense in our education and training institutions that alongside competence we need also to teach ethical models. We need to challenge young professionals, in particular—and, indeed, not-so-young professionals—who are responsible for both managing and reporting on financial activity. We need to challenge them to investigate their own value systems and their own belief systems, in order that they will behave in ways that people can reasonably expect to return honest and open transparency to the sector.

In summary, as I said, in some ways we regret the need for this regulation, but that need is undeniable. We need to put in more reins and demand greater transparency and more authority within the sector. We are very happy to support that, and we will continue to do so. Kia ora.

It is my pleasure to take a call on the Auditor Regulation Bill and the Financial Reporting Amendment Bill at their third readings. The National-led Government is absolutely committed to improving the integrity of our financial system.

In 2008 Business Week named New Zealand as one of 13 nations at most risk from the global financial crisis. On too many occasions during the finance company collapses we heard of investors losing money and of there being limited recourse for them to find assistance to reclaim it, or any way for them to claim against their losses. That has damaged investor confidence, and if we are to restore that confidence we need to make changes. Our Government wants to assure investors that we are committed to ensuring that the Financial Markets Authority has the powers it needs and is encouraged to use them.

The Financial Markets Authority opened for business on 1 May and takes over the functions of the Securities Commission and the Government Actuary. This new authority will lift the bar in terms of market behaviour, and will have the tools it needs to help to restore investor confidence in our financial markets, which has taken a battering in recent years. It is clear that if we are to broaden and deepen our financial markets to benefit companies looking to raise capital, our financial sector must be subject to clear rules and visible, proactive, and timely enforcement. I believe we have worked hard to create legislation that will strengthen the regulation of practitioners who carry out issuer audits, and that consolidates the setting of accounting and auditing standards within the new External Reporting Board.

When the Commerce Committee met to discuss the legislation, one of the main issues raised was the importance of providing a high level of assurance that financial statements are free from error and can be relied upon. We know that the quality of information is absolutely vital for sound business and economic decisions, and this legislation address that harm. By targeting the class of audits where investors are most at risk of losing substantial amounts of money in the event of audit failure, we can begin to bring back some confidence for investors. The establishment of a single Crown entity, the External Reporting Board, will consolidate financial reporting, auditing, and assurance standards.

We also looked closely at licensing regulations, and, in particular, we made the recommendation that auditing firms be registered. We see that as fundamental to ensuring the competence of practitioners and the quality of auditing firms’ systems, processes, and procedures. The legislation will bring New Zealand’s auditor regulation system up to internationally acceptable standards, ensuring that New Zealanders can work overseas, and can continue to carry out audits of overseas-owned New Zealand entities.

This legislation has substantially reduced the future risk of issuer audit failure, and will ensure that investors once again have the confidence to invest. I commend this legislation to the House.

It is interesting to listen to National members speak on the Auditor Regulation Bill and the Financial Reporting Amendment Bill, because they herald them as major legislation, yet they cannot even speak for 10 minutes on them. I am not sure whether that shows their lack of knowledge in relation to the details of the bills or their lack of enthusiasm for the bills. But whatever it is, I think it is quite poor form.

I stand in support of these two bills, because they do most important work in restoring the confidence of New Zealanders in our financial markets and our capital markets. But before I continue, if Mr Deputy Speaker may indulge me, I would like to correct or comment on something a member said recently. I think Sandra Goudie may have given out some Budget secrets a week too early. When she was speaking on the last bill that we debated, she thanked the dairy industry because it provided all the money. She thanked the people in the industry for all their hard work and all the money, because, she said, they paid for our health, education, and social welfare systems. Those people paid out $26 million in tax last year, so I am wondering whether the budgets for health, social welfare, and education will be slashed to $26 million.

💬 Mr DEPUTY SPEAKER: We are on the third reading.

I digress.

I thank the Hon Simon Power, the Minister of Commerce, who brought this legislation to the House. It is very good legislation; he is a very hard-working Minister. In fact, I think it was Simon Bridges who told the House that Mr Power has been responsible for over 40 percent of the bills brought before the House—40 percent of the bills brought before this House. Simon Power is certainly a hard-working Minister. I suspect that is the reason that he has decided to resign. He is sick to death of carrying National. Having said that, Mr Power’s plan for getting the country out of its problems is to sell State assets. He is the man who has been put out with a policy to sell State assets. I wonder whether that is a bit of a poisoned chalice.

💬 Mr DEPUTY SPEAKER: I brought it to the attention of the member earlier that this is a third reading speech. Speakers can comment only on what is in the legislation. I refer the member to Speakers’ Rulings; there are a number of rulings on page 117. I ask the member to come back to the content of the bill.

As I was saying, Simon Power, the hard-working Minister, has done a good job of continuing the work that the Hon Lianne Dalziel started and heralded through the Commerce Committee.

Specifically, the Auditor Regulation Bill recognises that the audits of companies that manage public investments, or that otherwise obtain large amounts of money from the public, must be performed by registered members of the auditing profession. A very good question is why the regulation of auditors needs to be reformed. It is a very good question. The answer is that 69 finance companies have gone broke since the global financial crisis. I understand that that has taken out about $6 billion of savings from good, hard-working New Zealanders. These are people who wanted to retire or who put money away for their grandchildren’s education, and it was ripped out. What has happened has made financial reporting hugely important to investors.

My colleague David Parker talked earlier about the need for investors to have confidence in the professionals who are charged with ensuring that these documents meet the required standard. As Mr Clendon mentioned in his short 10-minute speech, we cannot legislate against incompetence, but I would say, and it is my contention, that when investors are making an investment decision, incompetence is not one of the variables that they should have to take it into account when assessing risk. In fact, what happened is that in a lot of the 69 finance companies that failed, incompetent people were undertaking to provide professional advice. That is one of the reasons why those companies fell over.

I do not want to taint every single auditor. There were a lot of good auditors out there. In fact, there are a lot of very good auditors. They welcome this bill. They welcome this bill because it removes a lot of those sorts of charlatans from the profession. The bill gets rid of people who call themselves professionals but who act in everything but a professional way.

💬 Hon Clayton Cosgrove: A bit ironic.

Yes. New Zealand’s self-regulatory model was no longer within the range of acceptable auditor regulation systems. New Zealand needed to change in order for auditors to obtain the right to practise in Australia and other jurisdictions, such as the European Union. My colleague David Parker elaborated on that, so I will not go into too much detail.

The actual purpose of an audit is to provide assurance to investors, regulators, and other market participants that a set of financial statements is free from material error. That is quite an important consideration, because business decisions will need to be made on the basis of financial statements. So it is important that audit firms have a very strong reputation. I do not think that is doubted by anyone. In the last 6 months the disciplinary tribunal of the Institute of Chartered Accountants of New Zealand has made orders against four members who, between them, led five failed finance company audits. The tribunal found that those audits were not carried out in accordance with the institute’s ethical, professional, and auditing standards. It is those sorts of people whom this bill will weed out, because the penalty for breaching this legislation is $50,000. For overseas auditors registered in New Zealand, the penalty is $10,000. We discussed the penalty in the Committee stage. It sends a very strong message that every single member of this House recognises that there needed to be a change. This legislation provides that change. It provides that the licensing of auditors will be carried out by the Institute of Chartered Accountants, and by any other professional accounting body that may be accredited by the Financial Markets Authority. The Financial Markets Authority will set a minimum licensing standard to oversee the professional accounting bodies and will be responsible for practice reviews.

What is the Financial Markets Authority? It is a newly constructed market regulator for New Zealand’s financial markets. It is pretty much what the title says it is. It officially started on 1 May this year, so it is very new. The Financial Markets Authority performs the regulatory functions currently undertaken by the Securities Commission—

💬 Peseta Sam Lotu-Iiga: Not currently.

—previously; I am sorry, Mr Lotu-Iiga—and some of those undertaken by the Government Actuary and the Companies Office. The Financial Markets Authority Act established the Financial Markets Authority, which Labour supported of course; in fact, I think every member in this House supported it. The Financial Markets Authority has powers, functions, and duties that its predecessors did not have, including, for example, the power to exercise an investor’s right to take civil action against a financial market participant, the ability to prevent products from being structured so as to avoid their being supervised by the Financial Markets Authority, and enhanced warning powers. It is not the ambulance at the bottom of the cliff. It is at the top of the cliff; it is the overview. If anything looks wrong, if anything does not look right, the Financial Markets Authority can step in at any point in time and say it requires a change to be made, it needs to see what is going on, or it needs to audit a practice. It is a very powerful body, and again, as my colleague David Parker alluded to, Labour hopes that it exercises the powers that it has been granted in a prudent manner.

I will wrap up by saying the reform represents another important part of this Parliament’s ongoing work programme to restore investor confidence in our financial sector, in our capital markets. It includes other things like, for example, the review of securities law started under Lianne Dalziel. The Commerce Committee, chaired very ably by Lianne Dalziel, recommended a number of amendments to improve and strengthen the legislation. We went through those in the Committee stage. In fact, this is quite unusual legislation, because we are now passing two bills, whereas in the Committee stage the provisions were merged into one bill. Because the two bills are very similar in nature, they are being read as one. This is very important legislation. I think it will go a considerable way towards restoring the confidence of the New Zealand public in our capital markets and financial sector. That is one of the main reasons why I support this legislation. Thank you very much.

This is just a comment that we all support the Auditor Regulation Bill and the Financial Reporting Amendment Bill. I support this legislation and give the House a reminder that it was, in fact, the Registrar of Companies who identified that audit failures contributed to the finance company collapses, that self-regulation alone was no longer acceptable as it was not working, and that independent oversight was needed. This is great legislation. I look forward to it becoming law. I support this legislation. Thank you.

I will take the opportunity as, I suppose, the tail-gunner on this important legislation to affirm the importance that the Labour Party attaches to regulation. I once heard regulation described as the necessary price for a civilised society. I have also heard it described as “One man’s chains are another man’s freedom”, and I say these bills, the Auditor Regulation Bill and the Financial Reporting Amendment Bill, will provide financial freedom and security to more New Zealanders than we have seen in the past.

I am pleased that Simon Power was the Minister who brought forward these bills. I shudder to think of the sorts of financial regulations we might have seen if a Minister like Rodney Hide, with a well-known distaste for regulation, had been the Minister chosen to bring through this legislation. We have seen in the past the consequences that ensue from a complete move away from regulation. I think back to the multibillion-dollar issue of leaky homes, which was created by a volatile cocktail of deregulation, leading to poorer building practices and the ensuing results for many thousands of New Zealanders.

These bills are about the oversight of those who have a role in auditing financial companies that are players in financial markets, and those much smaller than that. If I think of an example that I would like to see subject to the sort of scrutiny that these bills embody, I think of the detestable character Bernard Whimp, who, as recently as this week, was still crowing about the money he managed to extract from poor and vulnerable consumers of financial products. He describes this country as being one that wants to wrap everybody in cotton wool. In other words, what he wanted was the opportunity to rape and pillage the financial savings of poor mum and dad investors—not sophisticated people—who presumed that when somebody approached them over purchasing shares, that person was acting in a broad set of interests, not simply the venal self-interest of one Bernard Whimp.

I also think about the two people behind Hanover Finance who used to advertise on our State television news programme with the line: “Hanover, the name you can trust.” In fact, they were taking the mum and dad investors’ money and putting into their highly speculative investments with no accountability, no trail, and no proper audit. That saw thousands of mum and dad investors lose their life savings. That is why we need regulation, as embodied in these two bills. So I am pleased that Labour has supported this legislation through Parliament to this point. I think it makes absolute sense.

I have a final point in support of this legislation. Today we saw the Governor of the Reserve Bank, Dr Alan Bollard, appear before the Finance and Expenditure Committee in an open session. He talked about how we are seeing a more resilient position in the financial system, but it is still subject to volatility and uncertainty. He particularly noted that in the insurance sector, which has come under a lot of stress in New Zealand because of the Christchurch earthquakes, we have already seen one major insurer needing financial reassurance from the Government. He noted that there are new prudential rules for the insurance industry. They do not come into play, unfortunately, until next year, but he is taking a keen interest in how the insurance industry is governing itself prior to it coming into the new regime that takes effect from next year.

Dr Bollard noted that although overall the insurance industry is sound and functioning well, some may fall short of the sorts of standards that are expected under the new licence requirements, and that could lead to some industry consolidation and exits. Already we have seen one company, Western Pacific, go under. I know personally of people who have lost their insurance cover on buildings in Christchurch as a result of that company going under. It clearly was not subject to the sorts of regulations that this legislation is bringing in for another sector of the financial markets. That is why we need this legislation and why we need regulation. We do not want heavy-handed regulation but we do need to see people in this country being able to invest with confidence. I support these bills.

Bills read a third time.