Ladies and Gentlemen.
1. Firstly, let me say thank you to the Institute for the invitation to be here with you today.
2. The question posed by the Institute is whether or not professional indemnity has been overlooked in the maelstrom of activity and public comment on the issues surrounding the current state of the public liability insurance market.
3. It is a question that accountants quite rightly might be expected to ask.
4. The reality of the situation is that issues of affordability in professional indemnity insurance are unlikely, except in the case of medical practitioners, to evoke popular support in the media.
5. It is hard to imagine riots in the streets if professionals such as lawyers and accountants face rising premiums!
6. However, the lack of public comment on professional indemnity issues should not be taken as an indication that Governments are not cognisant of the difficulties for professionals in obtaining insurance at affordable rates.
7. There is a widely held view in the Australian community that insurance has become unaffordable and unobtainable and that this is due in large part to the operation of the legal system.
8. The perception is that the law of negligence, as applied by the courts, is unclear and unpredictable. It has become too easy for plaintiffs to establish liability for negligence on the part of defendants and that damages awards are frequently too high.
9. In this context, it is the appropriate role of Government to intervene to ensure that the balance between competing interests has not strayed too far in favour of one group in community. The rights of plaintiffs should not be so great so as to prevent ordinary activity from continuing.
10. However, it is essential that all parties to this debate carry their fair share of the burden in finding solutions to the current problems. This should not be seen as the one-sided responsibility of Governments.
11. Accountants have a particular role to play, particularly in light of the adverse attention that has befallen your profession over recent times.
12. An extreme view might say that in light of stories about accounting and auditing practice coming out of the US, accountants in some respects hold the key to their own destiny in potential suits for professional negligence.
13. A more reasonable proposition is that accountants have an obligation to meet the reasonable expectations of the community in the proper carriage of their duties.
14. But that it is equally important that pay outs in cases of professional negligence and premiums for professional indemnity insurance meet reasonable community expectations of what is fair.
15. In the time I have with you today, I would like to explore the responsibilities of the accounting profession and Governments to work together to find a way through the issues confronting the accounting profession with regard to negligence and liability insurance.
16. In thinking about these issues, the first question that I would pose to you is:
Are accountants meeting reasonable community expectations of probity?
17. At the outset, let me say that in my view, Australia's accounting profession is highly skilled and competent.
18. However, recent high profile corporate failures, both here and in the United States, have led to widespread questioning of the quality of financial reporting and whether supporting regulatory frameworks are sufficiently robust.
19. Governments and the wider community expect auditors and accountants to take their duties at law seriously and exhibit due care and diligence in the discharge of their duties.
20. These are high expectations and serious reputational risks exist if these expectations are not met.
21. The concern of the community in respect of auditors has resulted in new legislation being enacted in the United States on 30 July 2002. This legislation, the Sarbanes-Oxley Act, significantly strengthens auditor independence and wider corporate governance requirements in that jurisdiction.
22. The Australian Government is watching these developments closely, however it is important to recognise that the Australian system of corporate governance and accounting differs substantially to that of the US and in many ways the Australian system is ahead of that operating in America.
23. It is possible to place too much reliance on prescriptive black letter law to solve corporate governance problems. Black letter `tick a box' approaches have limited use when addressing very complex issues. It is not possible to draft rules that will apply sensibly in every conceivable situation.
24. Australia's accounting standards promote substance over form whereas US standards, while based on broad concepts, also rely on detailed provisions that can encourage circumvention.
25. Australia has an effective continuous disclosure regime whereas the US relies more on the frequency of formal reporting requiring quarterly financial statements.
26. Notwithstanding our head start, neither the Government nor the profession in Australia should be complacent. We have a joint responsibility to ensure that reasonable expectations of probity continue to be upheld.
27. As part of the Government's ongoing commitment to improving corporate governance arrangements in Australia, the Government is currently considering the Ramsay Report. This consideration will form part of a process which will review audit regulation and the wider corporate disclosure framework in the next phase in the Government's Corporate Law Economic Reform Program (CLERP).
28. The CLERP 9 proposal paper will be released by Government in the very near future and will include proposals in respect of auditor independence together with a number of other issues on financial disclosure.
29. I am pleased to note that as a professional body, the Institute has also grasped the nettle by taking this opportunity to review its own professional standards to ensure that they remain in step with best practice.
30. In May of this year the two main professional bodies for accountants announced the approval of a new professional standard for audit independence.
31. The new standard recommends among other things:
- a seven year mandatory rotation of audit partners for listed companies;
- a mandatory two year period before a retired auditor can become a director of a former client; and
- a ban on providing non-audit services where, in the course of conducting an audit, a firm would be required to check its own work.
32. These sorts of reforms are essential not only to ensure that accountants maintain the confidence of the community in their work, but also, to the extent that they are effective in reducing inappropriate activities, they should over time reduce the level of litigation against accountants and auditors.
33. Ultimately, anything that reduces litigation is good for containing insurance premiums for professional negligence.
34. A second question for consideration is:
Does our legal system meet the reasonable expectations of consumers and business?
35. The existing system of compensation for negligence through the courts relies on the proposition that generous court awards are ultimately paid for by insurance companies with deep pockets.
36. This proposition comes unstuck when we realise that the deep pockets of insurers are in fact funded through our insurance premiums. Large payouts flow through to all policyholders in the form of higher premiums.
37. Perhaps the state of the current law is evidence of what Bismark meant when he said "Laws are like sausages, it is better not to see them being made".
38. Certainly there is a clear view in our community that that the law of negligence, as applied by the courts, makes it too easy for plaintiffs to establish liability for negligence on the part of defendants and that damages awards are inappropriate.
39. Government has a role in ensuring that the law reflects the reasonable views of society about what is fair and equitable.
40. In recognition of this role, the Federal Government, in close cooperation with State and Territory Governments, has worked to develop a nationally consistent solution to the current crisis in Public Liability Insurance.
41. So far, I have convened two meetings with my State and Territory counterparts to thrash out some practical solutions to the current problems.
42. Reforms to the common law (or tort law) to reduce the uncertainty surrounding court awards and settlements and reforms to streamline the legal system are essential to stabilise the insurance market.
43. The States have responsibility for the common law and the courts. So it is essential to this process that State Governments sign on to a process of appropriate law reform.
44. The States have agreed to take action to reform the laws and court procedures in their jurisdictions, however, the pace of and commitment to reform varies significantly between State and Territory Governments.
45. What relevance does this have to professional indemnity, I hear you ask?
46. The drivers of premiums in respect of professional indemnity are very similar to those in public liability insurance.
47. The Government believes that the types of reforms put forward through the process already established for public liability have direct relevance to the professional indemnity market.
48. Of particular note in this regard are the recommendations of the Ipp report.
49. An expert Panel, chaired by Justice David Ipp, has been established to review the law of negligence and make recommendations to Government for reform. The Panel's advice to Government will be delivered over two reports.
50. In its first report to Government released on Monday of this week, the Panel reported, among other things, specifically on matters relating to professional negligence. While the Panel's recommendations were directed in the first instance to medical negligence, the Panel recognised that the reforms suggested could also be applied to a broader range of trades and professions.
51. In making recommendations to Government, the Panel has sought to strike a balance between the interests of plaintiffs and defendants that seems to be fair and likely to be widely accepted by the community at large.
52. In the area of professional negligence, the primary issue identified by the Panel as requiring attention is what standard of care should be applied when assessing whether a professional has been negligent.
53. The Panel has recommended tests for the standard of care that could be applied to a professional in the provision of, or failure to provide, a service.
54. The Panel has recommended the reinstatement of a modified version of the Bolam test for determining the standard of care in cases in which a medical practitioner is alleged to have been negligent in providing treatment to a patient.
55. Up until the decision of the High Court in 1992 in the case Rogers v Whitaker in which it was overturned, it was thought that the `Bolam rule' applied in Australia.
56. The Bolam rule means that a defendant will be held to have exercised reasonable care if what was done was in accordance with `a responsible body of medical opinion'. Under the Bolam rule, a court cannot decide that a defendant acted without reasonable care if that defendant acted in accordance with a reasonable body of medical opinion.
57. The modified Bolam test recommended by the Ipp Panel for reinstatement would mean that a medical practitioner would not be negligent if treatment were provided in accordance with an opinion widely held by a significant number of respected practitioners in the field, unless a court considers that the opinion was irrational.
58. This requires a court to defer to widely held medical opinion unless in an exceptional case, the expert opinion were both widely held and irrational.
59. The Panel has concluded that this same test could be applied to any profession or trade.
60. If instated into the law, this test would provide significant protection for professionals acting in accordance with accepted practice.
61. Ultimately, it will be a matter for Governments to decide how broadly and to which professions the test should apply.
62. The Panel will make a range of further recommendations in its second report to Government due at the end of this month. The suite of recommendations of the Panel, if implemented, should provide a platform to bring claims for negligence more into line with community expectations.
63. As States and Territories have responsibility for laws in respect of claims for negligence, it will be largely a matter for State and Territory Governments to decide whether they intend to implement the recommendations of the Ipp report.
64. On 27 September, I will again meet with my State and Territory colleagues to discuss how the measures contained in the Panel's report might be progressed.
65. You can be assured that I am keen to maintain the momentum for reform and I would encourage those of you with an interest in this issue to make your views known to State and Territory Governments.
66. In particular, it will be important to make a case for the application of the test proposed for professional negligence to be applied to broad range of professions, including accountants.
67. In addition, to the work of the Panel, the soon to be released CLERP 9 paper will contain a discussion on the liability of auditors.
68. By this time, the question you no doubt would like to pose of me is:
How can we be sure that law reform will be effective in reducing premiums?
69. If Governments and professions work together to implement these reforms, we all have a reasonable expectation that this should result in premium stabilisation or reduction.
70. The Government is as concerned as the community to see that this occurs.
71. With this aim in mind, the Government has provided the ACCC with an ongoing monitoring role over the insurance industry to ensure that premiums are being adjusted to take into account cost savings generated through law reform.
72. The Government's brief requires the ACCC to monitor the situation for premiums in both the public liability and professional indemnity markets over two years.
73. I am confident that sensible tort law reform on a national basis will deliver the outcomes that we expect.
Conclusion
74. German psychoanalyst Fritz Perls was quoted as saying "I am not in this world to live up to other people's expectations, nor do I feel that the world must live up to mine".
75. Unfortunately, most of us do not have the option of being quite so relaxed about how others in the community perceive us.
76. As community attitudes continue to evolve and change, the accounting profession must work to ensure that the service that you deliver is attuned to the needs of society.
77. Similarly, Governments need to ensure that the laws of our country strike an appropriate balance between the best interests of all parties and that the settings are right to enable people to get on with business.
78. I trust that I have provided you with some food for thought. I look forward to a strong and positive ongoing relationship with the Institute and its members into the future.
Thank you.