Key points |
Global environment: Domestic regulation must be developed in the context of the international environment. |
Government initiatives which will assist companies to operate in a global environmentinclude: IFRS, aligning regulatory frameworks, facilitating cooperation between regulators, and establishing a Single Economic Market with New Zealand. |
Reducing the regulatory burden: I am committed to reducing the regulatory burden to allow Australian companies to be more competitive in the global market. Accountants have an important role to play in providing advice to the Government. |
6 April 2006
Good evening, and thank you for the opportunity to talk with you today.
Tonight, I’d like to talk about domestic regulation in a global environment. And in particular, about the ways in which the international environment influences corporate regulation here in Australia.
But first, I’d like to make a brief point about the success of the Australian economy. We are now in our 15 th successive year of economic expansion.
In other words, this current growth period is already significantly longer than its predecessors in the 1960s, 70s and 80s. This expansion has been marked by good growth in many parameters including of course, GDP.
Last month, the Governor of the Reserve Bank, Ian Macfarlane, described this as “one of the best performances in the developed world.”
Back in the 1960s, Marshall McLuhan coined the term “global village”. That description has never been more apt than it is today.
Countries are becoming more interdependent. And inevitably, their economies are becoming more intertwined.
For Australia, this means that our growing economy is increasingly outward-focused. This applies to both our capital markets, and our trade with other countries.
This generates significant benefits for the Australian economy. For example, the involvement of foreign investors in Australia’s capital markets can reduce the cost of capital for Australian businesses.
Likewise, the entry of foreign businesses can stimulate domestic competition and increase productivity.
These trends also have major implications for the Australian regulatory environment.
While any regulatory framework is always developed with the best interests of the Australian economy at heart, policy makers must now also take into account the wider context – the ‘global village’.
A failure to do this would risk creating unnecessary barriers to cross-border activity, and possibly contradict our policy in other areas – such as foreign policy – of openness.
This evening, I would like to outline several recent policy initiatives where the international environment is helping to influence the design and form of domestic regulation.
This includes the adoption of international standards and alignment of regulatory frameworks… and the establishment of cooperative arrangements between regulators.
And last, but by no means least, I will discuss the need to reduce the regulatory burden, to ensure that Australian firms are not placed at a competitive disadvantage in the global marketplace.
International Financial Reporting Standards
One of the most significant examples of how the global environment bears influence on our domestic regulatory framework is Australia’s decision to adopt International Financial Reporting Standards — or IFRS for short.
I’m sure many of you are very familiar with this topic!
Most Australian listed companies have now released their first set of IFRS-compliant financial statements. In other words, Australian firms are now reporting in a way that’s consistent with their overseas counterparts.
This will help Australian companies to compete in the international marketplace for capital. It will also reduce the financial reporting burden for Australian companies with off-shore operations.
And, perhaps just as importantly, the adoption of IFRS filled several gaps in Australia’s accounting standards - most notably in the areas of financial instruments and share-based payments.
The Government is monitoring the IFRS implementation process through agencies like the Australian Securities and Investments Commission and the Financial Reporting Council.
Feedback to date indicates that most companies are making the transition pretty smoothly.
Recently, CPA Australia released the results of a survey which found that over 80 per cent of their members believe their organisation would adjust to the new standards in the first reporting period.
Commenting on the survey, CPA President Mark Coughlin said:
“With the first full-year reports due this year, it’s crunch time. It’s good to see Australian business entering this period with confidence.”
No doubt, this vote of confidence is due to the hard work of accountants like yourselves.
Of course, any change of this magnitude will inevitably raise transitional issues.
I’m aware that some companies have expressed concerns about IFRS, particularly in the areas of interpretation and complexity of the standards.
We can expect some of these problems to settle down as companies and investors adjust to the new regime.
I would encourage companies and accounting firms to continue to raise any concerns about the new standards with me, so that we can continue to monitor this process.
IFRS: Looking ahead
The future of IFRS is assured.
It is now the definitive global financial reporting language. Almost 100 jurisdictions, including the European Union, use IFRS for the financial statements of companies.
Our next task is to get the major capital markets that aren’t currently using IFRS to come on board — in particular, the US, China, India and Japan.
We’re already making good progress in helping to encourage these economies to further enter the ‘global village’.
In February this year, the Chairman of the US Securities and Exchange Commission, Christopher Cox, reaffirmed his commitment to eliminating the need for foreign companies using IFRS to reconcile their results to US GAAP by 2009 at the latest.
This move will reduce the financial reporting burden for Australian companies that are also listed in the US.
In other parts of the globe, work is underway in Japan, China and India to reduce the differences between the accounting standards of those countries and IFRS.
When I met with Sir David Tweedie, Chairman of the International Accounting Standards Board, I expressed my willingness to assist in any way possible in the promotion of convergence as soon as possible.
Closer to home, the Australian Government is working to facilitate the implementation of IFRS in the region.
Late last year, Australia co-hosted a regional forum that brought together accounting representatives from 11 Asia-Pacific countries including China, Japan, Korea and Indonesia.
The primary objective of the forum was to create dialogue between relevant parties in the region on issues associated with the adoption of IFRS.
Dialogue with our neighbours – the ones who reside closest to us in the new global village - is a critical first step in any serious move to promote the benefits to them of IFRS.
In particular, the widespread adoption of IFRS in the region will also benefit Australian companies with operations in neighbouring countries.
In my address to the forum, I emphasised the importance of cross-border cooperation, particularly at the regional level, as a means of fully realising the benefits of IFRS.
I understand the forum has already produced some positive outcomes. The accounting standard setting bodies represented at the forum have taken steps to encourage greater communication among themselves on IFRS-related matters.
I was very pleased when the Chinese Vice Minister of Finance, Wung Jun, wrote to me to congratulate the Australian Government on the success of the forum.
I look forward to continuing discussions with my ministerial colleagues in the region on ways to promote the convergence of accounting standards.
Audit Regulation
With the expansion of global business, international capital flows and cross-border investments, it’s in the public interest for the national regulators of different jurisdictions to cooperate and coordinate their activities.
To this end as many of you would be aware, we are currently working on a draft Bill to enable ASIC to engage with foreign regulators for mutual recognition of audit inspections regimes.
This issue is particularly relevant for Australian audit firms that have been required by the United States’ Sarbanes-Oxley Act — also known as the SOX Act — to register with the Public Companies Accounting Oversight Board (PCAOB). – We love our acronyms don’t we?
Acronyms aside, it is important to note that we need to legislate to facilitate mutual recognition. What we are working on is striking the right balance between continued audit integrity, less complexity and optimising efficiencies.
At the moment I am directly engaged in open dialogue with the auditing profession and the regulator to ensure we achieve this outcome. I hope to be able to have more to say on this matter very soon.
The proposals which I released for consultation in September last year would see ASIC and the PCAOB conducting one single joint audit inspection of an Australian auditor, rather than two separate inspections.
This is good news for Australian audit firms as it will provide significant savings in all the logistical costs incurred in an audit inspection.
It is a true and live example of a genuine attempt to reduce the regulatory compliance burden on domestic providers, without diminishing the importance of international rules and laws.
It is worth noting that the auditing profession in Australia has undergone significant change, particularly as a result of CLERP 9. But the change has not solely been created by legislation.
The auditing profession itself has taken many proactive measures to enhance the integrity of the audit function. These have primarily been in and around professional standards.
Another means of ensuring the integrity and quality of the Australian audit process is the Audit Quality Review Board, which I had the pleasure of launching in February.
The Board describes itself as “the profession’s own quality improvement initiative”. Its mission is to promote greater robustness and transparency in the quality monitoring processes for audits of publicly-listed entities.
The need for proactive audit surveillance programs recognises that the audit function plays a key role in investor protection and the efficiency of capital markets.
Trans-Tasman Single Economic Market
Closer to home, the Australian Government is making solid progress towards achieving closer economic ties between Australia and New Zealand.
Our ultimate goal is having Australia and New Zealand viewed as a Single Economic Market. I should add that there is tremendous support for this landmark on both sides of the Tasman.
Both nations have actively embraced this agenda because it will bring valuable benefits to both countries.
Work is being progressed on a number of fronts.
In the area of financial reporting, the Governments of Australia and New Zealand have established the
Trans-Tasman Accounting Standards Advisory Group — or TASAG.
The Group comprises accounting standard setters, professional bodies and policy-makers from Australia and New Zealand.
TASAG is currently reviewing the financial reporting frameworks in Australia and New Zealand to see how they can be harmonised.
This follows on from the Group’s work last year which focused on ways to encourage greater communication and cooperation between accounting standard setters in Australia and New Zealand.
Minimising the differences between Australia and New Zealand’s financial reporting frameworks will help to reduce the compliance burden for Australian companies with trans-Tasman operations.
Another major trans-Tasman initiative is the treaty on the mutual recognition of securities offerings that was signed at the most recent trans-Tasman Ministers’ meeting.
In the area of corporate fund-raising, the treaty will enable a prospectus prepared in one country to be recognised across the Tasman.
The scheme also sets out the respective obligations of the securities regulators in Australia and New Zealand relating to the supervision of the offers.
This will reduce the regulatory burden for business, and also allow for increased investment across the Tasman.
The final trans-Tasman initiative I would like to mention is in the area of competition and consumer policy.
Work is underway here to allow the competition and consumer regulators in Australia and New Zealand to share information.
As well, we are promoting greater communication and cooperation between these bodies.
These developments will benefit businesses and consumers in both countries.
A Simpler Regulatory System
Our global village is influencing domestic corporate regulation in yet another way.
Our increasing economic interdependence with other countries highlights the need to reduce the regulatory burden on Australian companies.
This is essential in ensuring that Australian companies can compete on a level playing field with their international competitors.
I should point out that Australia is not the only country that is currently considering ways of reducing its regulatory burden. Similar debates are also taking place in Europe and the US.
Let me start by saying that Australia’s regulatory system is already highly regarded internationally and has the broad support of both the business and wider communities.
My goal is to see if we can achieve the same policy objectives in a simpler way.
As a former businessman, I share the experience of many of you of managing a business in the face of a complex regulatory environment.
I have said many times that a complex regulatory system — whether or not it achieves its goals — will only hinder business innovation and stifle productivity growth.
Since I joined the Treasury ministry 18 months ago, reducing the regulatory burden has been a personal preoccupation.
I like to call my approach: “A Simpler Regulatory System”.
This involves firstly, conducting a rigorous assessment of any calls for new regulation. And secondly, engaging in consultation to ensure we get the regulatory balance right.
The work completed on the financial services regulation refinements last year illustrates the tangible steps I have taken to optimise our regulatory framework.
This work was the product of extensive consultation with stakeholders, including accountants, to identify ways of reducing the compliance burden while still meeting our policy objectives.
I believe this project is a good example of how to tackle complex regulation in a practical way that benefits both businesses and consumers.
I am now looking at how we can achieve these results in other areas of corporate regulation.
This work is very close to finalisation and has been a fascinating exercise. Last year, primarily through the Business Regulation Advisory Group, I sought input from industry on ways to simplify corporate and financial services regulation.
As the next step in this process is imminent. I intend to undertake consultation on a range of issues.
These will not only cover settling the refinements to financial services regulation, but also explore ways in which we can simplify and improve other aspects of corporate regulation, such as in relation to company reporting obligations… auditor independence… corporate governance… fundraising… takeovers… collective investments… and dealing with regulators.
The consultations I conducted with the accounting profession identified a number of regulatory issues of concern.
These include the financial reporting requirements for proprietary companies… the complexity and scope of the current reporting requirements… restrictions on the payment of dividends… executive remuneration disclosures… and financial services regulation.
I look forward to considering these issues in the near future.
I would encourage your profession to continue to be actively involved as the Government undertakes further work to reduce the regulatory burden.
Ladies and gentlemen, just as the regulatory burden affects business, government and the broader community, all parties have a role to play in reducing it. Because even with the best of intentions, the Government cannot address this issue on its own.
We need the support of the business sector to effectively set our sights and chart our course. As accountants you are well placed to provide this advice to Government.
Conclusion
In conclusion, the Australian Government always looks at the big picture – both domestic and international.
We are committed to developing regulatory regimes that take into account how Australian companies operate within our global village.
To this end, we strive to develop regimes that account for international standards… allow for cooperation between regulators… and ensure that our regulatory frameworks don’t place Australian companies at a competitive disadvantage.
Our ultimate goal is to create a regulatory system that will allow Australian companies to operate effectively without unnecessary regulatory interference.
It’s what I call A Simpler Regulatory System, and one I am wholly committed to implementing.
To put it another way, we are getting on with the job of allowing business to do what they do best — generate growth and create jobs, for the well-being of all Australian people.
Thank you.
I’m now happy to take any questions you may have.