Ladies and Gentlemen.
Firstly, let me extend my thanks to CPA Australia for the invitation to be here today.
As the Minister for Revenue and Assistant Treasurer, just about everything within my portfolio is of direct interest to accountants.
CPA Australia is a valuable contributor to the process of Government policy, particularly with respect to superannuation and taxation.
While very often there is a view that it is the squeaky wheel that gets the attention, I can assure you that intelligent, considered and constructive views such as those put forward by CPA Australia, very often have greater capacity to shape Government policy making.
At the outset, let me say that the past year has been a difficult one for accountants.
Stories about accounting and auditing practice coming out of the US have tainted the image of accountants. Once thought of as the reliable gatekeeper of honesty, public perception increasingly associates accountants as the compliant co-conspirator of corporate greed.
In Australia, by and large, we have not seen the type of practices which have occurred in the US. However, it is important that, as accountants, you recognise that you have an obligation to meet the reasonable expectations of the community in the proper carriage of your duties.
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.
Governments are cognisant of the difficulties for professionals in obtaining insurance at affordable rates.
The accounting profession has for some years been saying that the system of joint and several liability coupled with unlimited damages awards is fundamentally unfair. In spite of the good economic conditions in Australia, the spate of recent corporate failures has thrown these issues once again, into sharp relief.
It seems as if community opinion has finally caught up with that of the professions. The current climate provides considerable momentum for reform.
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.
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 damages awards are frequently too high.
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 the community. The rights of plaintiffs should not be so great so as to prevent ordinary economic activity from continuing and payouts should not be so large as to drive insurers' scarce capital to more profitable lines or foreign jurisdictions.
I want to spend a few minutes discussing the regulatory framework for accountants and auditors, to consider the existing law of liability for negligence and whether as a result of the insurance crisis that has been sweeping Australia, there is a case for reform to address problems associated with professional indemnity.
Meeting community expectations
Australia's accounting profession on the whole is highly skilled and competent.
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.
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.
These are high expectations and serious reputational risks exist if these expectations are not met.
The concern of the community in respect of auditors has resulted in a sweeping legislative response in the United States. The Sarbanes-Oxley Act, significantly strengthens auditor independence and wider corporate governance requirements in that jurisdiction.
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.
In the words of Plato "Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws".
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.
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.
Australia has an effective continuous disclosure regime whereas the US relies more on the frequency of formal reporting requiring quarterly financial statements.
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.
As part of the Government's ongoing commitment to improving corporate governance arrangements in Australia, the Government recently released a further phase of the Government's Corporate Law Economic Reform Program (CLERP).
The CLERP 9 proposal paper released by Government on 18 September contains 41 proposals to ensure that Australia enhances its effective disclosure framework, helps to define world's best practice and provides the structures and incentives for a fully informed market.
In addition, the paper includes proposals to address issues of auditor independence.
I am pleased to note that as a professional body, CPA Australia has taken the opportunity to review its own professional standards to ensure that your body remains in step with best practice.
In May of this year the two main professional bodies for accountants announced the approval of a new professional standard for audit independence.
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.
Ultimately, anything that reduces litigation is good for containing insurance premiums for professional negligence.
Ensuring the legal system meets expectations
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.
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.
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".
Certainly there is a clear view in our community 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.
Government has a role in ensuring that the law strikes the right balance between the rights of plaintiffs and defendants. If it does not, the law itself falls in to disrepute.
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.
I have chaired three meetings with my State and Territory counterparts to thrash out some practical solutions to the current problems.
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.
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.
At the last meeting on public liability insurance, held on 2 October in Sydney, an historic in-principle agreement was reached to move to a nationally consistent law of negligence for bodily injury.
At that meeting, it was also agreed that the terms of reference for our Ministerial considerations should be extended specifically to address the rising costs of professional indemnity insurance.
Not surprisingly, Professions Australia, a peak body representing some 200,000 professionals including engineers, accountants, architects, pharmacists, dentists and surveyors mostly employed in small business are clamouring, not only for a national approach to professional indemnity insurance problems but also a national approach to the principle of proportionate liability.
The drivers of premiums in respect of professional indemnity are very similar to those in public liability insurance.
Of particular note in this regard are the recommendations of the Ipp report.
An expert Panel, chaired by Justice David Ipp, was established to review the law of negligence and make recommendations to Government for reform.
In its final report to Government released earlier this month and considered in detail at the last Ministerial meeting, 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.
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.
Standard of Care
In the area of professional negligence, the primary issue identified by the Panel as requiring attention is the standard of care to be applied when assessing whether a professional has been negligent.
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.
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.
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.
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.
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.
The Panel has concluded that this same test could be applied to any profession or trade.
If instated into the law, this test would provide significant protection for professionals acting in accordance with accepted practice.
Ultimately, it will be a matter for Governments to decide how broadly and to which professions the test should apply.
Ministers considered this question at our last meeting and I will return to this point shortly.
Proportionate Liability
In addition to the standard of care to be applied is the question of proportionate liability. Ministers considered whether the existing system of joint and several liability should be replaced by proportionate liability.
In considering whether proportionate liability is an acceptable alternative principle, one of the most difficult issues is whether an innocent plaintiff injured through no fault of their own should bear the cost of a bankrupt or absconding defendant. Alternatively, should a defendant who is only partly to blame bear that cost? This is a difficult issue of public policy.
While the Ipp report recommended against proportionate liability for cases involving personal injury, the report did not put forward a position on proportionate liability for economic loss.
NSW is already proposing proportionate liability for economic loss. Other States and Territories are considering whether this concept should be adopted on a national basis.
In addition to this, CLERP 9 proposes to reform areas of auditor liability. The Government has stated that it will seek the agreement of the States to introduce proportionate liability for auditors. The Government believes that the market for audit services will be improved if the arbitrary consequences of the present rules relating to joint and several liability in relation to economic loss and property damage are reformed.
A fundamental issue here is if professionals are given the benefit of proportionate liability and only required to meet their respective share of liability, is there also a case for capped liability?
At the forefront of the argument for a national system of capped liability for lawyers and other professionals is the Law Council of Australia.
These arguments are based on the adoption of a national professional standards legislation. Professional standards legislation provides a means to limit occupational liability as well as benefiting consumers through improved risk management procedures.
In essence, limited liability is given in exchange for commitments to reduce the severity and frequency of risk for consumers of professional services. This is achieved through strategies that improve occupational standards.
The effectiveness of professional standards legislation in controlling insurance costs will depend on how widespread such schemes are. At present, schemes only apply to professionals operating in New South Wales and Western Australia. The limitation of liability does not extend to actions brought in courts of other jurisdictions.
Where an occupational group operates in a localised market they avoid jurisdictional issues. However, it is an increasing feature of the professional services market that services are provided nationally. The capacity of professional standards legislation to control insurance costs would be improved with the introduction of a national system of legislation.
A further wrinkle to the development of national professional standards legislation is the overarching recommendation of the Ipp report that any claim for damages must be consistently addressed regardless of whether the claim is brought in tort, contract, under a statute or any other cause of action.
This in turn has led to calls for further changes to the Trade Practices Act so that legislative restrictions at the State level are not rendered irrelevant by creative use of the TPA.
Whilst the commitment in principle to a national approach is to be supported, legislators are likely to baulk if the reforms that may include capping of liability are not clearly seen to be delivering the necessary level of protection to consumers. A rigorous approach to risk management will need to be demonstrated in order to justify limited liability for professional negligence.
It is important to understand that notwithstanding the momentum for reform gathering pace, attempts to bring about less than a balanced approach may result in much needed reform being lost.
At the last meeting of Ministers, it was thought that the national adoption of professional standards legislation and risk management could hold the key to determining which professions should receive the benefits of the modified standard of care and limited liability.
I will be meeting with my State and Territory counterparts once again on 15 November in Brisbane to move from our in-principle agreement to a formalised position to move all States and Territories toward a national scheme of negligence law.
This position will be put to the meeting of the Council of Australian Governments (CoAG) for endorsement in late November.
You can be assured that I am keen to maintain the Commonwealth Government's leadership role in promoting reform and I would encourage those of you with an interest in this issue to make your views known to State and Territory Governments.
In particular, it will be important to make a case for the application of the test proposed for professional negligence to be applied to a broad range of professions, including accountants, to make a case for proportionate liability and to consider whether a national system of professional standards and capped liability will adequately meet the communities expectations for a fair system of compensation for economic loss.
Ensuring reform delivers results
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.
The Government is as concerned as the community to see that this occurs.
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.
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.
I am confident that sensible tort law reform on a national basis will deliver the outcomes that we expect.
Conclusion
There is an old Danish saying that lawyers and painters can soon change white to black.
In the context of the past year, many would say that accountant and painters are equally able to change red to black.
As community attitudes continue to evolve and change, the accounting profession must work to ensure that the service that you deliver remains trusted and valued by the community.
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 their business.
I trust that I have provided you with some food for thought. I look forward to a strong and positive ongoing relationship with CPA Australia and its members into the future.
Once again, I would like to thank CPA Australia for its strong involvement in policy making. The input of groups such as yours is invaluable to ensuring quality outcomes for all Australians.
Thank you