Auditor Regulation and External Reporting Bill

Hon ANNE TOLLEY (Minister of Education) Link to this

I move, That the Auditor Regulation and External Reporting Bill be now read a second time.

The bill proposes two major changes. First, it will consolidate all financial reporting and auditing and assurance standards setting within a single Crown entity, to be called the External Reporting Board. The board will replace the Accounting Standards Review Board from 1 July 2011. In consideration of the bill, the Commerce Committee has not recommended any major changes to the Accounting Standards Review Board and the External Reporting Board - related provisions.

Second, the bill will introduce auditor licensing for issuer audits. Specifically, the bill recognises that audits of companies that manage substantial public investments, or otherwise obtain large amounts of money from the public, must be performed by the top members of the auditing profession. The need for this change has been highlighted by finance company audit failures. In 2009 the Registrar of Companies expressed concerns about the capability of some of the auditors and audit firms to carry out finance company audits to the required standard. In the last 6 months the disciplinary tribunal of the New Zealand Institute of Chartered Accountants 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.

The bill 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 the minimum licensing standards, oversee the professional accounting bodies, and be responsible for practice reviews. This reform represents another important part of the Government’s ongoing work programme to restore investor confidence in the financial sector, which also includes, amongst other things, the establishment of the Financial Markets Authority and the review of securities law.

The Commerce Committee recommended a number of amendments to strengthen the bill, the most significant of which is 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. This change reflects the fact that audit quality is reliant on two matters: the competence of the practitioner and the quality of the auditing firm’s systems, processes, and procedures.

Equivalent changes have been made to the bill in relation to overseas auditors, which will operate in accordance with the principles of mutual recognition. The overseas regulatory system will not have to be the same as New Zealand’s, but the Financial Markets Authority must be satisfied that the overseas requirements are equivalent to, or as satisfactory as, the requirements applying to New Zealand firms.

The committee has also recommended changes in relation to the application of the bill to the Auditor-General. It is recognised internationally that Auditors-General in democratic societies must be free from direction or interference from the executive branch of Government in carrying out their core audit responsibilities. On the other hand, the New Zealand Auditor-General is responsible for carrying out several major issuer audits, including the Crown, Kiwibank, Air New Zealand, and the Port of Tauranga.

The regime may not be fully credible if the application of the bill to the Auditor-General is seen to be ineffective, so the committee has recommended that it be strengthened in two ways. First, the Auditor-General would need to be satisfied that persons appointed to carry out those audits either meet the minimum licensing standards set by the Financial Markets Authority, or have the competence, qualifications, and experience that are equivalent to, or as satisfactory as, those minimum standards. Second, the committee has recommended the inclusion of a provision that would allow the Auditor-General to invite the Financial Markets Authority to carry out practice reviews and require him or her to take reasonable steps to ensure that the period between reviews does not exceed 4 years.

The final change to the bill I wish to comment on is the removal of a clause that would have made it an offence for auditors to not comply with auditing and assurance standards. That clause is not needed, because it is unlikely to contribute to audit quality. Auditors already have strong incentives to comply with ethical, professional, and auditing and assurance standards; they can be sued for negligence or face disciplinary action. The threat of substantial damages awards and losing one’s livelihood, and the resultant harm to firms’ and practitioners’ reputations, should be enough to focus the mind.

In short, this bill will reserve issuer audits to experts, and will substantially reduce the future risk of issuer audit failure. I conclude by thanking members of the Commerce Committee for their work in considering the bill, and acknowledging the contributions of those who provided submissions on the bill. I commend this bill to the House.

Hon DAVID PARKER (Labour) Link to this

I also congratulate you, Mr Assistant Speaker Robertson, on your reappointment to your role as a presiding officer. It is not quite the same role, but it is similar to the role you had in the last Parliament, and I congratulate you.

I will refer to the issue of compliance costs in respect of audits. The Labour Party supports the Auditor Regulation and External Reporting Bill, but I still harbour a concern, which I discussed the other day in relation to some of the securities legislation, about the cost of raising money for new ventures. This bill applies, amongst other things, in situations where the entity that is being audited is an issuer. An issuer is, at law, someone who is issuing securities to the public. They might be raising money through selling shares or they might be issuing debenture stock. Those are important things that we need in order to expand our economy.

In particular, the issue that vexes me in New Zealand is the cost of raising private capital for equity ventures. Small businesses in New Zealand face very large costs relative to their size when they take the step of expanding beyond the shores of New Zealand into overseas markets. That step is often taken at a time when those New Zealand organisations are quite small by international standards. The specialised good or service that they are selling might be quite small, in market terms, in a little place such as New Zealand.

If the company was based in a country such as Australia, the United States, or an Asian country, where there are many more millions of people, they could expand gradually in their home market before having to expand offshore. In New Zealand companies that want to take their businesses further have to expand into export markets at an early stage, and that is an expensive and risky thing to do. In order for them to achieve that expansion and not put all of their own personal assets at risk, they normally have to get more money into their company. In order to do that they have to comply with our securities legislation, which includes compliance with the rules relating to audits.

The financial reporting standards in New Zealand and around the world have become hideously complex in recent years.

PESETA SAM LOTU-IIGA (National—Maungakiekie) Link to this

Thank you for the opportunity to speak to this second reading of the Auditor Regulation and External Reporting Bill. I note that the presiding officer has changed in appearance in the last 5 minutes, but I also congratulate Assistant Speaker H V Ross Robertson on his appointment. He is a good man from South Auckland, he has worked hard in this House over 24 years, and he has served his local community. I wish to acknowledge his ascendance to the role of Assistant Speaker, a prestigious role.

I will talk quickly about this bill. Minister Tolley, quite clearly in her representations this morning, talked about the nature of the bill. The bill is overdue. It is overdue because we have had a period when the non-regulation or self-regulation of auditors for financial issues has not worked, and it has not worked for several reasons. This bill will address some issues around the licensing of auditors, and the registration of audit firms, in order to get quality people behind audits. After all, it is really not about the regulation; it is about the people who are involved in auditing financial accounts. I take the point also of the previous speaker, Mr Parker, who talked about compliance costs. But I say that the cost of finance company failures over the last 7 to 10 years has been great, and that cost needs to be mitigated through oversight and through the regulation of this industry. This bill comes at a vital time to restore confidence in our financial markets, and to restore confidence in capital markets, in order for firms to raise capital easily and to build on the economic growth that this country certainly deserves.

This bill brings about two things. It is about establishing a licensing regime, but it also establishes and consolidates the accounting and auditing standards setting, set by the Accounting Standards Review Board, which will of course become the external reporting board. All I ask is that when these rules are set in place, the relevant regulators do their job and are well-resourced, and they enforce the laws that we as a Parliament set out. I think that is the critical part of this legislation. There is no point in having laws around regulating financial markets if those laws are then not enforced and the resources not put in place.

This legislation, may I say, is part of a wider, broader scheme of laws we have brought to the House, which have had multiparty support in relation to the set-up of the Financial Markets Authority and the regulations of securities trustees. This is just another building block in securities regulations that we as a National Government have brought to this House. We are very proud of this bill, and of the work that members on all sides of our Commerce Committee have put into it.

I will make just a final point about the limitation of auditors’ liability; I think the last speaker actually summed it up quite well. It is a complex issue, and it does add to compliance costs, which we as parliamentarians are aware that we want to avoid and reduce. But at some point we need to do this. I look forward to the Securities Act review—which will certainly be proceeded with later this year—in addressing that matter; members of our committee found it to be a little bit of an issue. I support this bill and commend it to the House.

CLARE CURRAN (Labour—Dunedin South) Link to this

Much as it is a great honour to speak in front of you, Mr Assistant Speaker Roy, in the House today, I was looking forward to the opportunity to add my congratulations to the new Assistant Speaker, Ross Robertson. I will hold those congratulations, because I have a particularly important message to pass on to him, in his role as the new Assistant Speaker.

DAVID CLENDON (Green) Link to this

Kia ora koutou. I am pleased to take a short call on the Auditor Regulation and External Reporting Bill. We will indeed be continuing to support this bill, as we have supported related bills, in large part because they seek to remedy the damage done by many years of the wholly inadequate regulation of our economy. The lack of regulation has caused considerable harm to individuals, to companies, and indeed to the reputation of New Zealand as a safe and good place to do business.

It is clear that the wholly excessive deregulation of our financial markets, our business sector, and so much else in the late 1980s and 1990s is a failed experiment. It has done serious harm, and few people in the House would not have a personal or family relationship or a friendship with someone who has suffered the consequences of this lack of regulation or some sort of financial misadventure caused by the inadequate oversight of the financial and business sector generally. Deregulation and the abandonment of adequate and appropriate oversight of the sector caused serious harm. It opened up the opportunities for greed. The whole mantra “Greed is good” suddenly became a good thing. It created opportunities for people to be exploited by the unscrupulous. It made those who were trusting vulnerable to being exploited, and often, unfortunately, such things as celebrity endorsements led people astray. There was a general lack of financial literacy, which has been referred to by previous speakers, even on the part of those who were active participants in the market. So it is good to see that some serious attention and efforts are being made to put back into place some appropriate regulation.

In the bigger picture, clearly, New Zealand is not alone in this. There is an international acknowledgment that lack of regulation, or an unregulated free market, is actually a recipe for financial, social, and environmental disaster, and steps are being taken to remedy that. There will not be a substantial return of confidence in the financial markets until such time as people see a sensible and coherent regulatory framework in place, to ensure there is transparency and a degree of comfort in investing and being in business. Although I am not denying there will always be risk, and that that is simply a matter of business reality, I believe that unregulated markets put the risk beyond what is acceptable, or normal, or reasonable.

We acknowledge that this bill is one of a series of interrelated bills that are making their journey through the House in a series of fits and starts. It is to the credit of this Government, in fact, that it is engaging positively with this issue, and indeed it is also a credit to the previous Government, who initiated some of these measures that are now coming towards some fruition.

A particular example of one amendment in this bill recommended by the select committee is the amendment to strike more of a balance between the responsibility of individual practitioners and that of firms within which they work, and this was commented on by the previous speaker. Clearly, financial competency and integrity of the individual is critical, and there is a personal responsibility—an absolute responsibility—on practitioners to operate and exercise competence and integrity in an ethical approach. It is equally important that the policies, and, more critically indeed, the practices of firms are equally in line with establishing regulation and transparency, because not only the policies but the embedded practice affect behaviours in the market, and that is as important as policy and legislation. The step to achieve that better balance is important, and it is a useful element of this bill.

Clearly, progress is being made but we are still a long way short of exploiting and capturing a much broader opportunity to invest in change, to get beyond short-term and quite limited thinking about how to make our economic prospects better, to look for means and practices where we can survive and flourish economically, and, at the same time, to reduce any adverse social and environmental effect of business and practice in business. What is really required here, and what is actually emerging internationally—an area that I think we are a little slow in following—is a debate, starting from first principles, on the purpose and form of our economy, and on some of the base assumptions underpinning it. That debate needs to occur here and as a matter of urgency if we are not soon to discover that the remedial measures we are seeing in this and other bills, as beneficial as they are, are really inadequate. They are far from sufficient, other than as interim provisions.

There is a very real and very positive opportunity for the Government to show some leadership: to take the opportunity to encourage and, over time, even oblige practitioners to adopt what is emerging as best practice internationally; to bring together, alongside and as part of financial reporting, the reporting on environmental and social information; and to bring those into accounting standards and practice. Globally, a major thrust in accounting standards and practice is to bring those financial, environmental, social, and governance strands of good management into one integrated reporting system. Although I acknowledge Mr Parker’s commentary about complexity in reporting, this system does not need to add layers of complexity. It is about adding integrity; it is about a more integrated and much more rational approach to the financial and more expansive reporting of business activity.

The accounting and auditing profession has always measured, and continues to measure, and to report upon, the flow of money through a business, an organisation, or an economy. The New Zealand Institute of Chartered Accountants, among others, over time has also looked at expanding the role of financial reporting. It has looked at, and had some hand in, developing various mechanisms and models for extending accounting and auditing practice to report on the whole of a business’s activity and the effect of that activity when looking at environmental and social cost and benefit alongside the purely financial matters generated by business. That gives us a much clearer and a more complete picture of the real value, the real influence, and the impact of the business sector.

There is indeed an International Integrated Reporting Committee that is leading the work globally, headed by one Sir Michael Peat, a former partner in KPMG, and it counts among its members one Sir David Tweedie, who is chair of the International Accounting Standards Board. Tweedie was quoted late last year as saying: “The case for globally consistent financial reporting standards is well understood and accepted. It is appropriate to apply the same global approach to other aspects of corporate reporting. This initiative represents an important step on that journey.” He is referencing there the inclusion of social impact and environmental impact information within regular financial reporting mechanisms. In some instances internationally it is becoming a legal requirement to incorporate social and environmental reporting. Incentives are being provided. It is probably too early for this House to legislate for a broader, more comprehensive integrated form of accounting and reporting, but certainly there is an opportunity to recognise the value of that approach, and to facilitate to provide some leadership and encouragement to the industry and the business sector. Already some of our major companies, like Zespri, are doing this, and so are some unexpected companies. Some of the major roading contractors, like Fulton Hogan and Downer EDI, are now building that sort of reporting into their financial cycle of reporting, and it is to their credit that they are doing that in advance of any requirement. They understand they are being driven in part by the market, but also by an understanding of the ethical, and indeed the practical, value of doing so.

In summary, these financial regulatory bills are useful. They are helpful in repairing some of the shortcomings of the non-regulated approach to finance and the economy. They are enabling us to become more reliable and to improve the integrity of financial reporting. But we need to take bolder moves, and I believe that it would be to the Government’s credit, and that it would gain value from making some moves, to improve the understanding of the social and environmental impacts of business as well as the financial impacts and consequences of business. We could very easily improve our performance across all of those spheres of influence. Kia ora.

RAHUI KATENE (Māori Party—Te Tai Tonga) Link to this

Thank you for this opportunity to speak at the second reading of the Auditor Regulation and External Reporting Bill. This bill strengthens the regulation of practitioners who carry out audits of issuers. It will require the New Zealand Institute of Chartered Accountants to regulate auditors as a specialist profession, rather than as chartered accountants. It also provides for the Financial Markets Authority to be responsible for auditor oversight in monitoring and reporting on the adequacy and effectiveness of the institute’s regulatory systems. This should assist to promote, in respect of issuer audits, quality, expertise, and integrity in the profession of auditors, and to promote the recognition of the professional status of New Zealand auditors in overseas jurisdictions.

We note that a report by the Registrar of Companies identified that audit failure was a contributing factor in the finance company collapses. Without putting too fine a point on it, this whole issue of financial company collapse is of particular concern to us in the south—and to my constituents of Te Tai Tonga. I have spoken out about the concerns we in the Māori Party have with South Canterbury Finance falling into such a position to result in a massive Government bailout, funding that could have been much better spent on reducing poverty. I have challenged the board and management of the company—the people who caused the mess—to take ownership, and work towards creating solutions. But I am also ready to note the widespread issues of ownership and responsibility that we must consider around the finance company collapses—including, as this legislation highlights, the role of the auditor.

Auditor quality is a core element of financial market confidence, and, by logical association, a core element in restoring investor confidence. It is essential that the practitioners who carry out financial sector audits have the necessary skills and experience to carry out the work to a high standard. So we are, of course, supportive of the need to have the means by which to report on the adequacy and effectiveness of those systems, and to take action in respect of those systems that are inadequate or ineffective. The bill is consistent with the party’s emphasis on improving the performance of Government bodies and professional bodies. It also assists to restore the confidence of New Zealand investors in securities. We will support this bill at its second reading.

KATRINA SHANKS (National) Link to this

It is my pleasure to take a call on the second reading of the Auditor Regulation and External Reporting Bill. It was interesting to sit on the Commerce Committee, which dealt with this bill. I am a chartered accountant by trade. Also, I came up through the Audit Office. That was where I started in my profession. So I had a good understanding of the implications of this bill and what people were talking about.

We talked about capital markets. This bill will influence capital markets, because it is addressed to audits of public issuers. It has a very narrow focus. We have a problem with confidence in our capital markets, especially among our mum and dad investors. I know that in the Ōhariu electorate a lot of mum and dad investors come into my office and tell me stories about how they lost their money. They are concerned about what they can do in the future. They want to know what the Government can do to help them find somewhere to invest that gives slightly higher returns than a bank does. But, of course, we know that when we get into that situation we take on additional risk. In effect, this measure has been partly brought about by the finance company failures. It is acknowledgment that the role of auditors did play a small part in terms of validating accounts and financial information to people who most probably did not quite understand what they were reading.

It is interesting that the Greens have raised the issue of social reporting and financial reporting. The more reporting that is put in, the more complex it gets, because for every report that is produced there is an opinion on it, especially if we are talking about a public issuer. If we want to have social reporting and all the other tiers of reporting, which are really great to have, we should consider that someone has to give an opinion on it, on whether it is true and fair. That is where it gets more complex. That is where the accounting standards get more complex. I know that Mr David “Perfect” Parker, which is what we call him in our select committee, asked why it is getting so complex. It is getting so complex because there are more requirements in relation to those accounts, and the more requirements there are, the more standards and procedures we need in place to ensure that the reporting is correct. It is never-ending. It gets more and more complex. As the financial vehicles out there get more complex, we need more rules in place, more standards and procedures, to understand what is happening when we invest in financial vehicles that have never been in place before.

I would like to touch on two areas of this bill during this second reading. One is the liability of partners. There was concern that under the bill as introduced every partner of an audit firm would commit an offence if there was a breach of any restriction or standard. The committee thought that was far too wide, so we narrowed it down to say that a partner was liable only if he or she had given his or her authority, permission, or consent, or could reasonably have known that the breach was going to be committed and failed to take reasonable steps to prevent it. We narrowed that provision down significantly; otherwise, I think we would find that there were no auditors out there to audit anything at all.

The other thing I was really passionate about in our committee was the issue of limitations on liability. Currently in New Zealand we have what is known as joint and several liability for auditors. I think it is time we addressed the whole issue of liability and limitations on liability. I pushed very hard at our select committee for this issue to be addressed. We got advice on several occasions—because we kept on pushing it—only to be told it was out of scope. The committee has stated in the bill’s commentary that we would like this matter to be addressed later on, and that a broader review of the securities law should be looked at, especially in relation to exposure to joint and several liability and the alternative systems of proportionate or capped liability that other countries are using very successfully.

I am taking just a short call on this bill and I look forward to debating it further in the House. Thank you.

STUART NASH (Labour) Link to this

It is with interest that I hear Government members say that these bills are so important for our capital markets and our financial markets, yet they have very little to say on them. I should have thought that if this bill was such an important bill, which I personally think it is, then Government members would stand up and put forward the case for why this legislation should go through, and would be selling it, etc. But they do not seem to be doing that, and I wonder why. I wonder whether it is because Government members do not understand what the legislation is about or how it impacts on New Zealanders, the economy, or the financial market. There does not seem to be any coordinated plan at all. But I stand in support of this bill, the Auditor Regulation and External Reporting Bill.

I note that it is another bill sponsored by the Hon Simon Power. As Simon Bridges informed us a week or so ago, Simon Power is the hardest-working National Minister. In fact, I think Simon Bridges told us that 40 percent of all legislation before the House this term has been brought forward by Simon Power. I had a look at the Order Paper today and five of the bills on the Order Paper are in the name of Simon Power. The Statutes Amendment Bill (No 2) is in the name of Nathan Guy. I assume that Simon Power handed that bill over to Nathan because Nathan Guy actually has not done anything while he has been a Minister. But it is with concern that I note—

JONATHAN YOUNG (National—New Plymouth) Link to this

I am very pleased to stand in support of the Auditor Regulation and External Reporting Bill, and I am pleased to hear members on the other side of the House likewise doing so. I must admit that Mr Nash’s speech improved until he came to the last couple of sentences. The first half of his speech, of course, was full of what is now becoming a predictable knocking of some of our hard-working Ministers.

The reason this bill is very important is simply that trading, which is what this is all about, requires an accurate quantifying of weights and measures, and our auditors are our measurers. It is incredibly important that what they do is accurate, transparent, robust, and independent, and this bill will ensure that. As the previous speaker and other speakers have alluded to, I think that the numbers of financial companies who have experienced demise at the tremendous expense of New Zealand investors were not strongly serviced by a robust auditing regime. This bill will ensure that in terms of our future we are robust.

It is very important to understand that the $4 billion to $6 billion that has been lost out of our economy has been lost by people who tremendously relied upon it, such as the many people who have entered retirement. It is very important to understand that in this nation in the next 20 years more of those people will be in retirement. In fact, our retirement numbers will double. It is imperative that we have financial systems in place that will never ever allow what has happened to happen again. Our future depends on a robustness of transparency and accountability, and it depends upon the ability to have internationalisation of standards because so many of our opportunities are global. It is important to realise that currently six people are supporting one elderly person, but in a very short time there will be just three people providing that support. Therefore, having a robust financial system and having strong capital markets will be incredibly important. It is not just a matter of increasing taxation to care for our increasing ageing population. We need to have an incredibly robust economy that is growing strongly, and this Government is focusing strongly on that in order to have the wealth in our nation to enable young and old to experience the lifestyle they aspire to.

I am very happy to support this bill, as are other members of the House. The Commerce Committee has worked incredibly hard over this last year. We have worked through a whole suite of legislation that will bring stronger and more robust support to our economy. I am very happy to commend this bill to the House. Thank you.

Dr RAJEN PRASAD (Labour) Link to this

What the Auditor Regulation and External Reporting Bill does for somebody like me, whose field this is not, is make me ask why the regulation of auditors needs to be reformed. Indeed, just a quick reflection on what has happened over the past few years in relation to the failure of large firms, and the loss by so many people of so much money, has led to this piece of the framework, which really ought to avoid those kinds of failures in the future. Financial reporting is hugely important to investors, to regulators, and to other financial market participants in their resource allocation decisions.

So how are people to make their investments, etc., and how are regulators to operate? There needs to be confidence that the general purpose financial reports, the GPFR, provide unbiased, transparent, and relevant information about the economic performance and position of businesses. This bill is an important piece of the framework that provides that kind of information, and we would expect that to be the case. But in New Zealand, over some period of time, there have been strong indications that the auditors of some failed finance companies have lacked the necessary competence to carry out those audits, or have not had a sufficient degree of independence. Whatever the reasons have been, there clearly was a problem with our auditors that needed to be fixed. New Zealanders have relied so far on a self-regulatory model, and in many areas that works quite well, but in something as important as this, where the effects of things going wrong are so devastating on a large sector of our communities, something as important as this cannot be left to self-regulation. This bill has begun to address that issue.

New Zealand needs to change in order to obtain the right to practise in Australia as well, and in other jurisdictions such as the European Union, so in a sense we have to make our rules and regulations consistent with best practice elsewhere. The 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, because business decisions are made on the basis of those statements. With that being the background, and with that being the case, then what are we doing?

This bill, which has been to a select committee, and come back, strengthens the regulation of practitioners who carry out audits of issuers. It also reconstitutes the Accounting Standards Review Board as the external reporting board, and requires the Institute of Chartered Accountants to regulate auditors as a specialist profession rather than as chartered accountants; this is a major move. Labour clearly supports the bill and has been involved in the reform of this area for some time. We started the financial markets reform process, so we are pleased that this Government is continuing that good work, and that this piece of it is coming back and we are about to go into the Committee of the whole House stage on it.

The recurring theme that we hear in this particular area is the need to strengthen investor protection, and that is an important aspect of what this bill is designed to do. The bill creates an independent oversight system for issuer audits, with the aim of promoting the quality and expertise of the auditing profession, and of ensuring that New Zealand and overseas laws are aligned. That is very clear. Once it is passed, the bill ought to restore confidence in New Zealand’s financial markets. As others have said, this is a complex bill. This is a detailed bill; I will not pretend to understand every aspect of it but I do understand what it is designed to do and what some of its key elements are, which have not worked in the past. When I myself ran commissions, we relied on our auditors to tell us that everything was indeed in the right place. At least that guarantee is strengthened by the provisions of this particular bill.

The select committee has clearly taken a very good look at this bill, and has made quite a number of changes, as well. In relation to one change, auditors were formerly regulated as chartered accountants, but this bill requires the Institute of Chartered Accountants to regulate auditors as a specialist profession. The Financial Markets Authority will be responsible for auditor oversight in monitoring and reporting on the adequacy and effectiveness of the Institute of Chartered Accountants. The Financial Markets Authority is given oversight of auditors, because with regard to the current self-regulatory system, which places the onus on chartered accountants to assess their own competence to carry out issuer audits, the finance company experience indicates that some practitioners did not make sound decisions. We are moving from the quite liberal position we had in the past, in terms of self-audit, to a firmly regulated one. Further self-regulation is no longer acceptable in other jurisdictions, so I am told; we need, therefore, to move away from that particular model to match best practice. We need to move away from this model for reasons of international recognition and international credibility, as well. Financial markets now operate in the globalised world and therefore those guarantees need to be given. Again, the legislation also aligns New Zealand and Australia.

This new regime will apply to only major audits. It will not impact on small and medium sized companies and non-profit entities, and that is appropriate 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 an audit failure. In a 2009 report, the Registrar of Companies criticised a number of parties, including auditors, for their role in the finance company meltdown. This bill takes a good look at the system, it realigns the system, and it changes the model quite radically from a self-audit to a regulated audit.

The select committee has made a number of changes that further strengthen those moves. One concerned the proposal, I think, as the bill went to the select committee, for all partners in an audit firm to be liable if the firm breached the relevant restrictions. The amendment, I think, is a sensible one, in the sense that it really says that that proposal was going too far. Coming back from the committee, the amendment means that only those people who had authority and gave permission or consent will be the ones who will be caught. That is a good change of the select committee, as well.

The Opposition supports the bill. It looks forward to the detailed discussion about some of the changes that have been made, and it appreciates the sensible amendments the select committee has made. The bill ought to give quite a bit of confidence to investors in the future that at least the audit leg of the bill, the leg that looks after investments, has now been strengthened—once this process goes through—and that there will be a set of rules and regulations, an authority and a process by which those who carry out audits will meet the standards we expect them to meet. On that note, I thank you very much.

MELISSA LEE (National) Link to this

I commend the member opposite, my dear friend Rajen, for his considered contribution to this debate. Considering that he does not sit on the Commerce Committee, I like to think that either he studied the Auditor Regulation and External Reporting Bill or he had really good speaking notes. That is unlike the speech his colleague Stuart Nash delivered for the Opposition. Until his last sentence it looked like Labour had a fan club for the Hon Simon Power. He did so well until the last sentence. I commend him for his positive contribution, recognising the wonderful work that our Ministers are doing.

This bill is about licensing regimes for major audits of the likes of banks, insurance companies, and companies listed on the stock exchange. I will give an example that is non - accounting-related. One of the reasons the Auckland councils amalgamated was to provide standards across the whole city and to have a vision for the whole region, rather than those things being replicated over so many councils across the Auckland region. This bill provides that standard for accounting, just like the Auckland Council is doing for the city.

This bill recognises the fact that with the advent of the financial market failures, audits of companies that manage substantial investments from the public must be performed by people who are the best at what they do, meaning the top echelons of people. It is to protect the moneys of the public. It is to restore confidence in finance companies—confidence that was lost by the mums and pas of New Zealand who had invested a lot of money. With the advent of the financial market failures they lost a lot of money. This bill is part of what the Government is doing to restore that confidence. It is a great bill. I commend it to the House.

Hon RICK BARKER (Labour) Link to this

When people reflect on the progress of human history and look at the important elements of it, they usually start with philosophers like Plato and Socrates. They look at the great mathematicians like Archimedes and Euclid, and also they think about the great physicists, poets, and composers. No one puts on their list an accountant. But the fact is that the Dutchman who devised double entry accounting probably has had more influence on our lives than any of the others who went before.

We are all subject to having sets of accounts and the tyranny of accrual accounting. This place is run on accrual accounting, and every Government establishment is run on accrual accounting.