TREASURER:
In June of this year the Government announced that as part of its ongoing modernisation of Australia's corporate law, we would be releasing the Corporate Law Economic Reform Program No. 9 which we release today on Corporate Disclosure: Strengthening the Financial Reporting Framework.
The Report contains around 41 proposals to strengthen corporate disclosure and to improve the regulation of the auditing profession.
We propose to take public submissions in relation to these proposals up until 22 November of this year, thereafter prepare legislation based on these proposals for introduction into the Parliament next year. That timetable will also give us the chance to respond to any new recommendations that come out of the HIH Royal Commission which is expected to report in February of next year.
The Australian system of corporations law, having been substantially modernised through our program 1 to 6, is, in many respects, advanced on that of the United States. For example Australia has had a system of continuous disclosure, unlike the American system of quarterly reporting.
Nonetheless we have taken into account the serious financial collapses which have occurred in the United States in relation to companies like Enron and WorldCom. We have not been immune in Australia from corporate collapses which require lessons to be learned and responses to be made. And I talk in particular of HIH where the Government has called a Royal Commission.
With the exception of HIH it is not apparent that there has been substantial auditing failure in Australia. The Royal Commission is still to consider the role of the auditors in relation to HIH. And so I leave that to one side.
Nonetheless, we think it is timely that the system of regulation in respect of auditors be improved. We have set up in this country a Financial Reporting Council which has a majority of non-professional representatives on it, that is, it represents the stakeholders with nominees from the Australian Shareholders Association, the Australian Stock Exchange, nominees from the investment community, which currently oversee accounting standards. We are going to give the Financial Reporting Council the role of overseeing auditors and auditing standards which will be given the force of law. And in relation to those auditing standards, this body, which has a majority not from the auditing profession, will have the power to overlook auditors and their role. And disciplinary proceedings will be taken through the Companies Auditors and Liquidators Disciplinary Board.
We will make Audit Committees mandatory for Australia's top 500 companies.
We will make audit partner rotation compulsory after 5 years.
We will require a report by a company of all non-audit services which are provided by its audit firm.
We will require Audit Committees to certify that the receipt of non-audit services did not compromise audit independence.
We will enhance the continuous disclosure provisions, which as I said, are in my view and I think in the view of many observers, substantially in excess of what is required in the United States.
And we will give additional powers to the Australian Securities and Investments Commission to enforce those rules by issuing infringement penalties.
In addition to all of those matters, we will strengthen the law to prevent retaliation against an employee who in good faith reports to the corporate regulator what they suspect to be a contravention of the law, in the interests of encouraging disclosure and enhancing information to shareholders. Australia has thoroughly modernised its corporations law through the program that we put in place commencing in 1996, much of which has been overseen by Senator Ian Campbell, my Parliamentary Secretary, who has done a magnificent job in relation to that process and in addition, in relation to this series of proposals.
It has been acknowledged that our corporations law is as good as any other in the world and certainly in advance of that of the United States. But we want to make sure that we stay on the leading edge of developments, that in areas where we require further modernisation we put in place a series of proposals which will enhance disclosure, protect shareholders, whilst not at the same time reducing the capacity of corporations to get on with business and to return profits.
The CLERP paper No. 9, I believe, strikes the right balance. I encourage the professions, the business community and all interested stakeholders to respond to the Government by November. And the Government proposes, after taking into account those comments, to deal further with these matters with legislation in the course of next year.
JOURNALIST:
Treasurer, did you consider at all as part of the (inaudible) having a ban on a company, on an audit company providing non-audit services to the same company, and if you did, why did you not go with that?
TREASURER:
Well, we did consider that. And the, as I understand the situation in the United States, they introduced a ban which the SEC can relieve you of. So you go bit by bit back to the SEC for an exemption. The proposal that we came to was a proposal not to ban it, but to require the reporting to shareholders and to require the Audit Committee to actually make a statement to the shareholders as I say in relation to the press release, to certify that it did not compromise audit independence. So we think that putting that right up front, making it absolutely clear, requiring an Audit Committee to certify it, will prohibit situations where there is any conflict of interest and it will enhance the disclosure to the shareholders rather than have piece by piece this matter being considered by your corporate regulator, to put it on the record and to empower shareholders and analysts in relation to that situation.
JOURNALIST:
Treasurer, would there potentially be any penalty for company directors who had certified that, and it was subsequently found that there had been some compromise?
TREASURER:
Oh yes, if a company director certifies something that was not the case, that is a breach of the director's duty and the company director could expect stiff enforcement action to be taken against that company director.
JOURNALIST:
Treasurer, can I ask on another matter about the Treasury discussion paper, the Government bond market and the future of that, can we expect something soon?
TREASURER:
Yes, we can. I'm attending the Commonwealth Finance Ministers' meeting next week and the World Bank IMF annual meeting on the weekend, whether or not I can get the paper out before we go, I'm not sure. But if we don't, we probably won't, it will be shortly after I get back from the annual meeting of the IMF and World Bank.
What we will be doing, is, we will be forming a consultative group, which will involve operators in the market and we'll also be asking for public discussion on the question as to whether the Commonwealth needs to maintain Commonwealth Government securities on issue and if it does, the amount of liquidity that would be required and correspondingly how we would run an asset portfolio. That's one alternative. The other alternative of course is not to maintain Commonwealth Government securities and not to run an asset portfolio. There are pros and cons of each position. I want to have full consultation before making a decision. There is no urgency to making the decision. We are a running a portfolio. We will continue to run a portfolio in the near future. This problem only arises if we get to a situation where we can retire all of the Commonwealth's debt. That is obviously not going to happen in the immediate future.
As I have said earlier, this is a problem that many countries would love to have. Let's not get too worried about the immediacy of this. We have got time for a full and proper debate and that is what we will do.
JOURNALIST:
Are you canvassing the possibility that the Government may hold a stock of shares?
TREASURER:
Well there are two alternatives. If we were in a position, and I underline `if', where we could retire net debt, we could do one of two things. We could not have securities on issue, that is have no debt. Or alternatively, we could have a gross position, which would have our securities out there, which would be matched by an asset position. They're the two alternatives. And I'm not announcing which of those we would do, if, underlining if, the situation arises, but I'll certainly be taking consultation with interested market players and others when we put out a position paper in relation to this.
JOURNALIST:
Treasurer, if CLERP 9's proposals were in fact the law, do you believe that the HIH collapse wouldn't have happened?
TREASURER:
Well the thing about HIH, we've got a Royal Commission, which is going to give us an explanation as to why the HIH collapse occurred, and I don't want to prejudge it. It could have occurred for a number of reasons. It could have occurred because the directors were at fault. It could have occurred because there were unforeseen investment or insurance issues. It could have had some relation to the auditors. The Royal Commission has not taken evidence in relation to the auditors yet, so I can't prejudge that question. Let's suppose it came to the conclusion that there was some contribution from the auditors, then you would have to look at whether there would have been a system of regulation that could have prevented it. Can I make this point? The law is never going to ban corporate collapses. You can't pass a law saying no company shall ever collapse. Companies, you know, from now until the end of time will collapse for whole series of reasons. It may be because their product is a product that no-one wants to buy. It may be because they're undercapitalised. It may be that the people that are running it don't have sufficient enterprise. You can't just look at a corporate collapse and say, somebody is engaged in malfeasance. Now as we look at the evidence coming out of HIH, the Royal Commission's been a very interesting Royal Commission, I'm not going to prejudge, it has, I think, uncovered some very interesting evidence. It hasn't started in relation to auditors yet, but we'll get its report and then we'll know the outcome.
JOURNALIST:
Treasurer, to what extent has this Report not picked up the recommendations of the Ramsay Report and where it hasn't picked them up, what was the reason for that?
TREASURER:
I think it goes much further than the Ramsay Report. The Ramsay Report was a good report and we picked up all of the recommendations of the Ramsay Report in the sense of having an independent board that's responsible for auditing standards, not comprised of stakeholders.
As it turned out we already had such a Board, and it was the Financial Reporting Council and it had its responsibilities in relation to accounting standards and we're now going to extend that to auditing standards. But this goes much further than Ramsay in other significant areas. In relation to disclosure, in relation to the penalties, in relation to analysts, in relation to a whole host of areas so, and this is not to say that Professor Ramsay's report was not useful, it was very useful. But as things developed in relation to the United States, we thought it was necessary to pick up those Ramsay matters and go further, and this goes very substantially further.
JOURNALIST:
Treasurer, the US remedy for this sort of problem will involve a steep hike in penalties, is that something that you're envisaging as well.
TREASURER:
In relation to continuous disclosure, you've got to remember that the United States doesn't even have continuous disclosure, but in relation to continuous disclosure for bodies corporate, we're increasing the penalty to $1 million from $200, 000. In addition to that we are also introducing the power for ASIC to take proceedings against other persons, not just the corporation but other persons that may have breached their duty of continuous disclosure. And in addition to that we are introducing a new power for ASIC to lodge penalties for infringement, if you like, an on-the-spot fine. Now you can contest that if you don't like the on-the-spot fine, you can go to court like you can with a traffic infringement, but a new power for an on-the-spot fine and in addition to that, we're also enhancing the powers to actually require an explanation of externally generated rumours that may be affecting a stock price.
JOURNALIST:
Treasurer, how do you, on another matter, how do you respond to Labor's claims that the changes, the sort of changes, the fine tuning to your Family Tax Benefits for families are just a bandaid solution that is basically saying to families, well you should take less money now, so you don't get a debt later?
TREASURER:
The point about the Family Tax Benefit is this, that those people that are asked to re-pay money are asked to re-pay it because for one reason or another they have been overpaid, there is no dispute about that. You are not asked to repay money unless you have been overpaid. If all you have been paid is your just entitlements you are not being asked to repay. And so what the Government says, it has put in place new options which will prevent the overpayment occurring so that people do not get the money and are then asked to pay it back. So, it is a pretty silly criticism isn't it, to say a proposal to prevent the overpayment is a bad idea. The prevention of the overpayment is the necessary pre-condition to doing away with the need for the repayment after the event.
JOURNALIST:
Treasurer, since, in the wake of Enron and HIH, accountants have done a lot of soul searching and come up with a lot of recommendations about how to improve their own image. Do you expect that their Review of analyst's independence to be the more contentious part of this Review?
TREASURER:
The analysts' independence is an issue that has come up particularly in the United States where it has been said that there were analysts that were recommending that stocks be bought at the same time as their firm was selling stocks, and that the market should have been informed. And the requirements that we have in this will require these analysts to disclose conflicts of interest out to the market. I think people are entitled to know that. I hope it is not controversial, I hope that analysts agree with us on this but we will wait to see whether or not they do.
JOURNALIST:
Can I ask you about two thing here you said just before. One was that there will be a requirement for continuous disclosure from people who are not directors, can you explain what that is...
TREASURER:
Well not from, not the corporation. People who are, who have an obligation, suppose the CEO or company secretary, if it is found that they have breached the duty of continuous disclosure they can be subject indeed to action. So it is not just the corporation, we are putting this obligation of continuous disclosure back on officials, officers of the company as well.
JOURNALIST:
An explanation of rumours, how broadly does that go? Does that mean journalists are going to be hauled before ASIC to explain...?
TREASURER:
I wish they were Sid, it would be a matter of great regret if they were not. But, what I mean by that is, you will quite often see movement in a stock because a rumour is around let us say, that the Chairman is going to resign or the corporation is going to be split up or something like that. And what it will do is it will empower the asking of the corporation for an explanation to the market. Now the explanation may well be, this is untrue, there is no basis. But it is not directed at journalists. It is directed at the corporation to actually respond to matters that might be out in the marketplace that are affecting share prices.
JOURNALIST:
Treasurer, can I ask you, can I ask you about the debate that is going on in the Parliament at the moment which I don't think you have contributed to yet, are you...
TREASURER:
Iraq?
JOURNALIST:
Yes.
TREASURER:
I spoke this morning.
JOURNALIST:
I am sorry. I missed it... it has been a long day so far. What is the...
TREASURER:
Your life will be enriched by reading it I assure you.
JOURNALIST:
Oh don't worry I will go straight back and do it. Given the move of Iraq yesterday, what is your view about sticking with the UN processes now or should there be another element to any kind of UN resolution that gives, that allows, some kind of unilateral action, military action eventually by the US?
TREASURER:
When the UN first, back in 1991, passed a resolution calling for the destruction of weapons of mass destruction and the capacity to deliver them beyond one hundred and fifty kilometres, and international verification - Iraq accepted that - it said it would accept that and allow inspectors in. And for the next 7 years or so there was a program of delay, of obfuscation, and eventually in 1998 they just refused to comply anymore. I refer to that to say that the making of the promise the inspectors will be allowed in is not the delivery of the objective. The delivery of the objective is full cooperation until such time as all those weapons of mass destruction are taken out of existence. So we can welcome the fact that a statement has been made to say inspections will be allowed, but such a statement has been made previously, and it hasn't led to the dismantling of those weapons of mass destruction. The important thing here, I think, is full cooperation in the inspection and the dismantling of the weapons. That is the critical thing and that's what the International Community will have to be very sure about, and it's too early at the moment to say what would have to be done if there is a program of obfuscation and delay and non compliance. But I just say the thing is not solved by a statement to that effect.
JOURNALIST:
I guess I am asking, should the UN resolution cover that option, should it go beyond...?
TREASURER:
I think the UN will be very minded I think as to what will have to be done to ensure compliance and I'm sure that will be a matter of great discussion and debate and I'm sure that is very much on the minds of everybody that is feeling this in New York and we'll wait to see what comes out of it.
Thanks very much, Thank you.