Prasad Rajen: Auditor Regulation and External Reporting Bill — Second Reading 
Prasad Rajen: Auditor Regulation and External Reporting Bill — Second Reading 
[Volume:671;Page:18010] 
Dr RAJEN PRASAD (Labour) 
: 
 What the Auditor Regulation and External Reporting Bill does for somebody like me whose field this is not is make me ask why the regulation of auditors needs to be reformed. Indeed just a quick reflection on what has happened over the past few years in relation to the failure of large firms and the loss by so many people of so much money has led to this piece of the framework which really ought to avoid those kinds of failures in the future. Financial reporting is hugely important to investors to regulators and to other financial market participants in their resource allocation decisions. 
So how are people to make their investments etc. and how are regulators to operate? There needs to be confidence that the general purpose financial reports the GPFR provide unbiased transparent and relevant information about the economic performance and position of businesses. This bill is an important piece of the framework that provides that kind of information and we would expect that to be the case. But in New Zealand over some period of time there have been strong indications that the auditors of some failed finance companies have lacked the necessary competence to carry out those audits or have not had a sufficient degree of independence. Whatever the reasons have been there clearly was a problem with our auditors that needed to be fixed. New Zealanders have relied so far on a self-regulatory model and in many areas that works quite well but in something as important as this where the effects of things going wrong are so devastating on a large sector of our communities something as important as this cannot be left to self-regulation. This bill has begun to address that issue. 
New Zealand needs to change in order to obtain the right to practise in Australia as well and in other jurisdictions such as the European Union so in a sense we have to make our rules and regulations consistent with best practice elsewhere. The purpose of an audit is to provide assurance to investors regulators and other market participants that a set of financial statements is free from material error because business decisions are made on the basis of those statements. With that being the background and with that being the case then what are we doing? 
This bill which has been to a select committee and come back strengthens the regulation of practitioners who carry out audits of issuers. It also reconstitutes the Accounting Standards Review Board as the external reporting board and requires the Institute of Chartered Accountants to regulate auditors as a specialist profession rather than as chartered accountants; this is a major move. Labour clearly supports the bill and has been involved in the reform of this area for some time. We started the financial markets reform process so we are pleased that this Government is continuing that good work and that this piece of it is coming back and we are about to go into the Committee of the whole House stage on it. 
The recurring theme that we hear in this particular area is the need to strengthen investor protection and that is an important aspect of what this bill is designed to do. The bill creates an independent oversight system for issuer audits with the aim of promoting the quality and expertise of the auditing profession and of ensuring that New Zealand and overseas laws are aligned. That is very clear. Once it is passed the bill ought to restore confidence in New Zealand’s financial markets. As others have said this is a complex bill. This is a detailed bill; I will not pretend to understand every aspect of it but I do understand what it is designed to do and what some of its key elements are which have not worked in the past. When I myself ran commissions we relied on our auditors to tell us that everything was indeed in the right place. At least that guarantee is strengthened by the provisions of this particular bill. 
The select committee has clearly taken a very good look at this bill and has made quite a number of changes as well. In relation to one change auditors were formerly regulated as chartered accountants but this bill requires the Institute of Chartered Accountants to regulate auditors as a specialist profession. The Financial Markets Authority will be responsible for auditor oversight in monitoring and reporting on the adequacy and effectiveness of the Institute of Chartered Accountants. The Financial Markets Authority is given oversight of auditors because with regard to the current self-regulatory system which places the onus on chartered accountants to assess their own competence to carry out issuer audits the finance company experience indicates that some practitioners did not make sound decisions. We are moving from the quite liberal position we had in the past in terms of self-audit to a firmly regulated one. Further self-regulation is no longer acceptable in other jurisdictions so I am told; we need therefore to move away from that particular model to match best practice. We need to move away from this model for reasons of international recognition and international credibility as well. Financial markets now operate in the globalised world and therefore those guarantees need to be given. Again the legislation also aligns New Zealand and Australia. 
This new regime will apply to only major audits. It will not impact on small and medium sized companies and non-profit entities and that is appropriate as well. Issuer audits are targeted because investors in those entities are most at risk of losing large amounts of money in the event of an audit failure. In a 2009 report the Registrar of Companies criticised a number of parties including auditors for their role in the finance company meltdown. This bill takes a good look at the system it realigns the system and it changes the model quite radically from a self-audit to a regulated audit. 
The select committee has made a number of changes that further strengthen those moves. One concerned the proposal I think as the bill went to the select committee for all partners in an audit firm to be liable if the firm breached the relevant restrictions. The amendment I think is a sensible one in the sense that it really says that that proposal was going too far. Coming back from the committee the amendment means that only those people who had authority and gave permission or consent will be the ones who will be caught. That is a good change of the select committee as well. 
The Opposition supports the bill. It looks forward to the detailed discussion about some of the changes that have been made and it appreciates the sensible amendments the select committee has made. The bill ought to give quite a bit of confidence to investors in the future that at least the audit leg of the bill the leg that looks after investments has now been strengthened—once this process goes through—and that there will be a set of rules and regulations an authority and a process by which those who carry out audits will meet the standards we expect them to meet. On that note I thank you very much.