TREASURER:
Shortly after the Government was elected in 1996, we commenced a program of modernising Australia's corporate law under a program known as the Corporate Law Economic Reform Program, CLERP. Over the course of the last six years or so, this has allowed us to substantially modernise Australia's corporations law, and in many respects become a world leader.
Today we are announcing the next instalment in relation to that program, our ninth instalment, CLERP 9, which is going to review audit regulation and our system of corporate disclosure. Let me make clear, in the context of current events, that Australia's corporate disclosure regime is in many respects much more advanced than the United States. We operate a system of continuous disclosure as opposed to quarterly reporting, which the United States operates, but we feel the time is right to consider that it is state of the art and we will be reviewing that.
In addition we will be reviewing audit functions, which arises really out of three areas. The first is, anticipating that this might be necessary, a report was commissioned from Professor Ramsay, who has recently reported to the Government in relation to the regulation of audits. The second is the events of HIH and particularly the role of the auditors, which is now subject to a Royal Commission we anticipate will give recommendations in relation to audits, and thirdly, the world wide collapse of Arthur Andersen and the events stemming from that, as particularly focused on the question of separating audits from other management consulting or other advice which previously was done in-house and where conflicts of interest could said to be arising.
And so we intend to bring together our CLERP 9 to take the recommendations from Ramsay, from HIH and review of the events in the United States to bring together by 2003, up to the date, up to the minute state of the art audit review.
Can I say, Senator Campbell, who has been working on this program for really, he started back in 1996-1997, had got agreement to bring forward the CLERP program some weeks ago and it's certainly been in train, heightened I think in topicality by the events overnight. This is not something that has come forward in response to the events overnight but the events overnight make it much more topical.
Perhaps I will just say something very briefly about the events overnight. You have seen in the last 24 hours enormous volatility on stockmarkets around the world which stems largely from the collapse of WorldCom, the very large American telecommunications company. It appears, at this stage, as if one of the key reasons for that was that the company was misrepresenting expenses as capital expenditures. This would be a breach of proper reporting rules and is a matter that will be investigated by the American SEC.
Unfortunately it comes on top of the events in relation to Enron and the events in relation to Arthur Andersen, and this has obviously caused a great deal of worry and concern amongst investors in the United States in particular. These events have highlighted again how important it is to have a system of proper corporate regulation. As far as the Australian Government is concerned, we want to make sure that our regulation is state of the art, and in many respects it is better than the United States, and that our corporate regulator is active in bringing to justice people who have breached those standards. And I think you have seen in relation to HIH, where proceedings have already been taken against some of the directors, a very, very active Securities and Investments Commission, but obviously there is a long way to go. The events of the United States illustrate, I think, that in the United States a lot of work is going to have to be done in relation to accounting standards and enforcement. I can assure you in Australia, although we are in many respects in a more advanced position, we will be similarly ensuring that our laws are enforced and our regulator is in front of the game to ensure that our stockmarkets are clean and promote confidence.
JOURNALIST:
Treasurer are you concerned that there will be flow on effects (inaudible) potential collapse of WorldCom in Australia and also how would these measures you are announcing today prevent such a collapse happening here?
TREASURER:
Well, it looks as if this collapse is because people have misrepresented financial information. If that is the case, the people responsible should be brought to justice, and I believe that is what the American SEC will be looking at. It does look also in the United States as if there has been a bit of a systemic weakness in the sense that stock options granted to employees have not been reported as expenses. And I know that the Federal Reserve Chairman has made statements recently saying this is a systemic weakness in accounting practices, and of course stock options during the days of the 'tech bubble' became a very preferred way of rewarding employees.
As to the effect of WorldCom on the real economy as opposed to the stockmarkets and so on in Australia, it looks as if we have very limited exposure from that in the real economy, but obviously it affected our stockmarkets yesterday, it has led to enormous volatility in world stockmarkets and on exchange rates there will be considerable fallout as a consequence. But it is, if I could take you back 18 months ago, there was a lot of newspaper commentary about why Australia should be emulating the United States in relation to technology stocks and how we were being left behind by huge stockmarket asset rises, you are seeing a lot of that unwind, and because we missed the upside of the bubble, we have missed a good deal of the downside of the bubble. And in hindsight those people that were urging us, 18 months or 2 months ago, 2 years ago, to be a bit like America, may have been giving us the wrong prescription.
JOURNALIST:
Mr Costello do you think that there is a risk, given as you say (inaudible) systemic things here that there could be a really long-term period of international economic uncertainty on a greater scale than we have had perhaps flowing from Japan in the last decade, I mean what's the possibility that we really are facing a very long-term systemic problem flowing out of the US?
TREASURER:
Well, if you look at US equity markets, the Dow Jones index back about 9,000, which shows that over the last say three years, it has just been treading water. But if you look back over a longer period of time and you put this in the context of a decade or two you could even read into it that the correction has a bit further to go. I, even at this level, it may be out of whack with long-term historical trends. Now, that is an equity market, the question is, how that is going to work out into the real US economy. I think it will have effects in the real US economy, frankly, because there are so many Americans during the build up of the stock market, and particularly during the tech bubble, who leveraged their way into the equity markets, and you would expect that to have an effect. So, you have got to put all of those things together and try and get a handle on where the US economy is going. Now it has been through a recession, we think it is moving out. The US Federal Reserve overnight said that it is expecting final demand to pick up. But interestingly enough has not moved monetary policy yet. This is an extremely accommodative monetary policy in the United States, at 1 ¾ per cent, and the fact that the US Fed has still got rates at 1 ¾ per cent will tell you, I think, that it is not seeing, you know, any great strength coming through the economy at the moment. It expects it, as it said, over coming quarters but the fact that it did not change rates gives you an idea that they are adopting a wait and see attitude and I think that is prudent in the circumstances.
JOURNALIST:
You've ridden out these American down-turns before with the Australian economy. If that, if it does turn down how well placed are we to cope with that given the Australian dollar is on the rise again?
TREASURER:
Well, the two great international events that in years gone by would have severely shaken the Australian economy was the Asian crisis of 1997, the US recession of 2001, and we came through both of them with a strong economy. Now, the American economy was probably just strengthening at the end of 2001, they went through the shock of September the 11th and now they are taking enormous stock market volatility. At this stage it looks like it is still going to be a stronger economy than it was in 2001, certainly that is the expectation of the US authorities and that is our forecast. So, I would like a strong US economy - I think that is good for the world - but let's not overreact, it is still going to be better than a recession economy and it was a recession economy in 2001. We were able to ride out a US recession in 2001, so, as the US economy turns that should be better for us.
JOURNALIST:
Treasurer, would it be prudent next Tuesday for our Reserve to adopt a wait and see approach with regards to what this collapse may have, or the impact may have on world growth and subsequently (inaudible)…
TREASURER:
I am sure what it will do next Tuesday will be very prudent.
JOURNALIST:
Treasurer, do Australian investors have the same mistrust of Australian companies as American investors now do in their corporate community?
TREASURER:
Well let's put this in context. We have not got a blameless record in Australia, have we, in terms of corporate regulation. We have had One-Tel, we have had HIH, but certainly they are not of the dimensions of Enron, Arthur Andersen, WorldCom. So, I wouldn't say we have been blameless but certainly the things that have rocked the US economy have been on a dimension that we haven't seen in Australia. Now we have got to make sure in Australia that we attend to these things. In HIH the court has already imposed 20 year disqualifications on some of the directors, you know, subject to appeal, but it has been very active. Harris Scarfe, the CFO was jailed for 6 years, yesterday, I believe. One-Tel, there are proceedings on foot against three former directors in relation to that. So, we have got to make sure that our own house is in order. The good thing is, I think our regulator has been pretty pro-active, pretty quick in getting these matters to court here in Australia. In the United States the dimension of the problem appears to be much greater. It appears to me that there are systemic weakness, particularly in relation to stock options and I think it probably has rocked the United States as a consequence, much in, to quite a degree, and they are coming off what has been a very long-run bull market and I think there is going to be some fall-out as a consequence of that and the American authorities will have to come to terms with it.
JOURNALIST:
Treasurer, do you understand that the public would be becoming increasingly concerned when the business pages of the papers start to rival the crime pages?
TREASURER:
Well, some company directors have broken the law and when they break the law in Australia our corporate regulator is going to prosecute them. A couple of them got disqualifications for 20 years recently, 20 years, that is quite a long time, and that, if I may say so, is not the conclusion of the matter. That was only on one separate part of it. Now, you have got to remember this, everybody is innocent until proven guilty but the regulators will continue to go very carefully, and I think the public is entitled to know that the regulator is going to be very active and I can assure them our regulators will. I can assure them of this, that our regulators are increasingly moving up to get in front of the game. We do not want a situation where you have fall-out of the dimension of the American stock markets - the Enrons, the Arthur Andersens, WorldComs. I mean, Arthur Andersen, the firm of Arthur Andersen, a world wide firm of Arthur Andersen has collapsed and gone out of business in the last 12 months. That is enormous and the effect that it has had on stock markets is going to be enormous too.
JOURNALIST:
Treasurer, just two quick questions, do you think the audit function of companies should be separated from their management (inaudible) like Arthur Andersen did which would be a tricky, I don't know whether it is now, I doubt it. And secondly, isn't the weaker American dollar something that is really worrying us because wasn't that one of the key factors which allowed us to sail through the two recent crises?
TREASURER:
Well, on the question of separating audit from non-audit functions, I think yes, there is a very strong argument that that be done and that is what our CLERP 9 paper is going to deal with.
JOURNALIST:
Wouldn't they be a bit upset with having to change the structure of their companies (inaudible) Ernst & Young …
TREASURER:
Well, that is something that they may have to deal with, and it is better dealing with problems in that than watching your business go out of business as happened in relation to Arthur Andersen. It may have to be actual separation and divestment, it may be a Chinese wall, it may be something that is subject to peer review. Our CLERP 9 is going to raise all of those issues and deal with them.
In relation to the exchange rate, yes, the value of the Australian dollar kept the Australian economy super competitive through the course of 2001 and 2002 but it is still a competitive exchange rate. One of the things that I said during that period was that the real story was not the A dollar but the US dollar. The US dollar was rising all the way through 2001 and 2002. I think the story is still a US dollar story, that is, that the US dollar is now falling and that is in relation to other currencies as well.
JOURNALIST:
(inaudible) that logic Mr Costello, surely that there must be a bit of threat to Australian growth…
TREASURER:
I think the exchange rate is, the current exchange rate, as I said, is still a competitive exchange rate and by historical standards if you look at it in historical context, and I do not see the current exchange rate as a threat to growth, no.
JOURNALIST:
Treasurer have you told the regulators that they have to get out there and head off the sort of things that have occurred in the US? Have you talked with ASIC about this?
TREASURER:
Oh yes, we have lots of talks with ASIC, and ASIC knows that we want ASIC to be very, very active and very quick, and, you know, at front of the game to the extent that it can be, and, you know, we do not want a repeat of the late 1980's where some people who the corporate regulator were looking for managed to get out to Spain, and others were subject of interminable proceedings.
I think, actually the HIH episode has illustrated how much ASIC has improved and how quickly it was able to, we already have, we already have a judgement in relation to some directors from HIH and that is going to go on appeal. But whilst the Royal Commission is still running, it still hasn't reported, we already have a judgement against a number of Directors.
JOURNALIST:
Treasurer…
TREASURER:
Sorry, two last questions, you one Tim and then Fran.
JOURNALIST:
On the resourcing of ASIC do you, is there any sort of case for looking at whether they need more staff, because this was suggested that part of the problem in the States has been that the SEC just does not have the skilled manpower to follow up complaints about corporations? And secondly, who will actually be doing the CLERP Review? Will this be done within Treasury, or…?
TREASURER:
Treasury will produce the paper but it will be drawing on the Ramsay Report and the Business Regulation Advisory Group of private sector appointees who will be advising us as they did in relation to previous ones. In relation to ASIC, we increased ASIC's funding in the most recent Budget, an additional $90.8 million over four years and we anticipated that this would, there would be a call on its resources and that is why we increased its funding, and it was quite a significant increase in the context of a pretty tight Budget, I can assure you. Sorry, Fran.
JOURNALIST:
Now Treasurer, I am afraid that I am going to drag you back to domestic politics. We are about to wind up for six weeks at least. You still haven't got your key Budget measures through the Senate, that has not happened. Do you have a plan to manage that, a plan to manage the hit that it's going to make on the Budget bottom line?
TREASURER:
The biggest hit that the obstruction of the Labor Party and Democrats in the Senate has made on the Budget is in relation to the Pharmaceutical Benefits Scheme. That is, around about, $300 million per annum. It is totally irresponsible, and we now know from the Labor Party that they support a co-payment, they tell us that, they introduced it, and they reserve the right to increase it if they ever get into Government, they are just going to vote against it while they are in Opposition. Now, what that will do, is that will, as I have said earlier, it will undermine the sustainability of the Pharmaceutical Benefits Scheme - that's what it will do. And, it will just mean that the Government will have to be more careful in relation to the admission of new treatments, that is a consequence, we will have to be very careful in relation to that, because the scheme in its current form is growing at an unsustainable rate. Now, I notice that the Deputy Leader of the Opposition, Jenny Macklin, said they were opposing these changes "at the moment". Recall that phrase, "at the moment". Now I don't know if by moment she means they will oppose them until they return to Government, which could be a very long moment, or they are opposing them until such time as a breath of sanity comes through the Labor Party. Now, that could be a long moment too, but let's hope that it is not. But if the Senate rejects them, yes, we will refer them back to the Senate for a second time - that is what we will do, and we will give the Senate time to reflect on its decision and time to reconsider the need to base the Pharmaceutical Benefits Scheme on a financially sustainable level.
JOURNALIST:
(inaudible) fight an election on that basis?
TREASURER:
As I said, we will refer it back to the Senate and we will give the Senate time to reconsider its opinion.
Thank you very much.