Good evening, ladies and gentlemen.
I would like to begin by thanking the Group of 100 for the invitation to speak tonight. It is certainly good to see so many accounting and finance practitioners here this evening a sign, I hope, of the endorsement of the reforms that I will be discussing.
Ladies and gentlemen, as all of us are well aware, corporate regulation has an immediate and pervasive impact on the business environment, and therefore an immediate and pervasive impact on corporate decision-making.
The Government recognises the impact this regulation has on economic activity and recognises the importance of putting in place a modern and a responsive regulatory regime.
It is crucial to any well functioning economy. Indeed, this was one of the biggest messages coming from the Asian Economic Crisis: the need for greater transparency at the national level and greater transparency in the market place.
This is a very important issue, and an issue I would like to spend a minute or two exploring.
So, why is transparency so important?
Transparency reduces the frequency and the severity of financial crises by improving economic policy and leading to more informed decisions by the private sector.
Transparency is about the giving the people who use financial information better information and giving them more useful information. This is particularly important for the world's financial markets.
For business, transparency at the national level is of paramount importance.
If a government's economic policy is not understood by the market or the market thinks key economic data is deficient, then this can have major implications for both the country and implications for its business community.
For instance, it can dent a county's credit rating and put pressure on its exchange rate.
It can increase the cost of capital; and it can deter investment in that country's securities markets.
But worries about transparency do not only happen at the national level.
Similar concerns can arise about individual entities in countries - such as Australia - that have a high level of transparency.
An important part of our corporate law economic reform program CLERP - has therefore been to ensure a high level of company transparency.
The Corporate Law Economic Reform Program Bill 1998, covering accounting standards, directors' duties and corporate governance, fundraising, and takeovers, was debated in the House of Representatives on the morning of 3 June and passed without amendment.
I am keen to progress the Bill through the Senate as soon as possible though that may take a little longer than the debate in the House!
As this audience well knows, financial reporting requirements play an important role in our companies' ability to compete effectively and to compete efficiently.
However, many accounting standards are seen as out of step with modern business practices they are seen as too prescriptive, they are seen as too technical and they are seen as imposing excessive compliance costs on business.
The Government has heard these concerns and, through its CLERP Bill, is taking action.
And it is taking action through new arrangements for the Australian accounting standard setting process and the adoption of procedures that must be followed when setting standards.
The Bill proposes three key reforms to standard setting.
First, the set-up of an advisory body, the Financial Reporting Council, which has responsibility for overseeing the setting of accounting standards;
Second, the reconstitution of the Australian Accounting Standards Board (AASB) as a body corporate; and,
Lastly, changes to the making and interpreting of accounting standards. This last change is crucial, and involves several parts.
This change will require the AASB to prepare a cost/benefit analysis on a proposed standard before it makes an Australian accounting standard, before it comments on an international exposure draft or before it proposes a standard for adoption as an international accounting standard.
It will also help interpret accounting standards by setting out the objectives of the standard setting provisions and making sure the standards are interpreted in line with those objectives.
The latter change, in particular, is expected to strengthen the position of company financial officers and the position of company auditors in their discussions with directors about what should or should not be included in financial reports and the accounting treatment of those matters.
The Bill also deals with the use of international accounting standards a topic I will comment about a little later.
The proposed functions of the AASB are very similar to those of the current Board.
The Bill gives the AASB a range of powers including the ability to engage staff and consultants and set up committees, advisory panels and consultative groups.
The size and the composition of the AASB will be something for the FRC to work out. The Government will be responsible for appointing the Chair and the FRC responsible for appointing other members.
The Government is very conscious of the need to ensure continuity with the AASB's existing work during the transition to the new standard setting arrangements, and it is my expectation that the advice of the FRC will be sought on the most appropriate way of achieving this outcome.
I should mention that a recruitment process for the Chair of the AASB will commence shortly. This should mean the successful person will be involved in the administrative process for the new standard setting arrangements.
The FRC's functions will include:
- overseeing the operations of the AASB, including appointment of all members (other than the Chair) and approving and monitoring the AASB's priorities, business plan, budget and staffing;
- monitoring the development of international accounting standards and furthering harmonisation between Australian standards with international standards; and
- promoting a greater role for international accounting standards in the local standard setting process.
Ladies and gentlemen, some commentators have suggested that the FRC might have too much power and too much control over the standard setter.
We understand these concerns, and I can say to you tonight that the Bill has been designed to ensure that the FRC will be unable to influence the technical deliberations of the standard setter and will not be able to veto, either in whole or in part, any accounting standard made by the AASB.
It is important to understand, however, that the new AASB, though independent, will be fully accountable to the FRC in much the same way that the UK Accounting Standards Board is to the UK Financial Reporting Council and the US Financial Accounting Standards Board is to the US Financial Accounting Foundation.
The Government plans to set up the FRC on an informal basis before the enactment of the CLERP Bill and, in this regard, I expect the Treasurer to make an announcement about the membership of the FRC in the near future.
The idea behind setting up the FRC before passage of the Bill is that the FRC will be able to advise the Government about the establishment of the new standard setting arrangements.
It will also provide guidance on what should be done to ensure there is a smooth transition from the old standard setting environment to the new.
Turning to accounting standards in the international arena.
Ladies and gentlemen, we believe that the transparency of global capital markets will be improved through high quality, internationally recognised and accepted, accounting standards.
As standards made by the International Accounting Standards Committee currently have the greatest prospect of such acceptance, we have decided that Australia's standard setting resources should be used to help in improving the quality of existing IASC standards and the development of new standards.
The agreement between the IASC and the International Organisation of Securities Commissions for the development of a core set of standards offers real hope that we will ultimately achieve internationally accepted standards.
However, there are some sectors of the financial community that are less than enthusiastic about adopting international standards.
While there may be debate on whether internationally recognised or accepted standards should be those made by the IASC, or a group of national standard setters, or even a single standard setter, the issue will ultimately be resolved by the international financial community.
Of far greater importance, however, is the need for the move to internationally accepted standards with minimal delay.
This is because continuation of the existing arrangements has the potential to affect the transparency of the world's capital markets and to impose cost burdens on all players in those markets.
I know that what I am saying will not be music to the ears of everyone present. The issue of accounting for intangible assets, in particular, is one that may not have a happy ending for every Australian company.
The major capital markets of the United States, Canada and continental Europe may well be out of step with Australia but, if we are to survive and thrive - in the global environment, it is Australia that will have to get back into step.
I also know that there are concerns about a part of the Bill, which gives me, as Minister, power to make a direction about the role of international accounting standards in the Australian system.
I should stress that, if and when this power is it will be necessary for me to obtain a report from the FRC on the desirability of exercising the power. In preparing such a report, it is expected the FRC will need to consider a range of issues, including:
- whether the International Organisation of Securities Commissions had endorsed international standards for the purposes of cross-border listings and fundraising; and
- the acceptance of international accounting standards in the world's major capital markets.
Ladies and gentlemen, the challenge of economic reform in a globalised economy especially in the accounting arena - never disappears.
Where we are now, and the strength we have today, is the product of yesterday's reform.
And as we move forward, as we move toward the new millennium, the strength of tomorrow will be the product of today's changes.
And I am certain that our reforms are building that strength.
Thank you