Parker David: Auditor Regulation Bill Financial Reporting Amendment Bill — Third Readings 
Text is incorporated into the Bound Volume 
Parker David: Auditor Regulation Bill Financial Reporting Amendment Bill — Third Readings 
[Sitting date: 11 May 2011. Volume:672;Page:18626. Text is incorporated into the Bound Volume.] 
Hon DAVID PARKER (Labour) 
: 
 I begin by referring to the Financial Reporting Amendment Bill which is one of the two bills that we are considering at the moment. This bill sets up a new organisation called the External Reporting Board which takes over from the Accounting Standards Review Board and sets accounting standards.  
The functions of the board are described in new section 24 which is being inserted into the principal Act. Its functions are “to prepare and … issue financial reporting standards for the purposes of” various Government and private institutions. The board can according to new section 27 express standards that apply to “(a) all reporting entities or groups; or (b) specified reporting entities or groups;” and that is an issue that I will discuss developing a theme that Labour members have mentioned on a number of occasions in earlier readings on this bill.  
We need to be very careful not to over-regulate here. I agree that we need to have someone who sets standards and that financial reporting standards are important and I have no particular gripe with the structure that is being proposed—indeed Labour members are voting for it. But I will be keeping an eye out in the future as to whether the standards that are produced are practical and to see that we are not over-regulating for all. As a consequence of the need to have very precise and detailed standards in respect of a few entities we ought not to require that same level of detail and prescription in respect of all the other entities. Otherwise we are over-regulating them and putting them to great cost. I know we in this House and the accounting profession often get up and say compliance costs are a terrible thing and we must limit compliance costs—and we must. Overly onerous and expensive compliance costs are a bad thing and they are a curb upon the success of our businesses. They give an advantage to larger institutions over smaller institutions because for them those costs are a lower proportion of their turnover and profit. Just because we need those higher standards for some it does not mean we need for them all.  
We must take care as we have ever-improving financial reporting standards for the most difficult of situations that we are not making them so complex that people find them impractical and too many people cannot understand them nor should we be driving people to have to always use expensive professionals in order to meet their financial reporting obligations when simpler standards could be complied with by people working within their own businesses at less cost. I for one am looking forward to the External Reporting Board taking advantage of its breadth of powers to bring forward standards that are fit for purpose and that do not apply the same minimum standard to all sorts of entities.  
That leads me to a related concern in respect of the Auditor Regulation Bill. We have heard prior contributions from both sides of the House—and we agree—that there is a need to have an appropriately qualified audit profession and that its members have on occasion different skills from accountants and need to have their own standards of regulation. But we are in the process again of increasing compliance costs for businesses. Yes in respect of the compliance costs for large finance companies and the like I do not mind them being a bit higher in order for them to have proper scrutiny of their business so as to avoid repetition of some of the poor practice that we have had of late. I do not think that all of those who are responsible can escape their share of responsibility for what went wrong by saying they were not told to do it properly. I would have thought that the existing rules gave plenty of latitude to good auditors to go in there and expose some of the related party lending that was problematic in those organisations and to check whether some of the wide boys from the last time there was a clean out in the New Zealand financial system were doing it again during the last property bubble that we had.  
Having said that I do not mind seeing an increasing standard but it does worry me that this will apply to the regulation of all issuers because not all issuers are the same as finance companies. Although some finance companies have tens of millions of dollars on their books an issuer can be anyone who issues securities to the public and that includes an innovative small business trying to raise a bit of growth money. That small business might have been until this point of growth a husband and wife a family or a couple of partners in a small business that was growing and developing an innovative idea it wanted to take to the next stage of development which required them to take it offshore. For them to take it offshore they will need to get some more capital and they will not be able to get more capital from the banks in New Zealand so they will have to raise it and we want them to be able to raise it through capital markets. We do not want the only people able to invest money in these companies to be people who are already wealthy and therefore fit the exclusions of the Securities Act—although I do not know whether they would be an issuer then; maybe an issue is an offer of securities to the public rather than to the big end of town. But the point is that we do not want businesses that are expanding to be unable to do so because of the cost of raising money because they are all of a sudden determined to be an issuer and are then caught by overly onerous rules relating to the costs of audits and the complexity of the audit rules that they have to comply with. This is a serious problem in New Zealand and we risk making it worse through this legislation.  
Again Labour members are not saying that has to be the outcome here but the propensity of those who are in control of these rules is to try to drive things to an ever-higher standard. We know that that is the propensity of people who are in charge of setting these regulations. That seems to be the natural way of it. The sorts of people who are attracted to sitting on these boards are of a mind to do things ever better but the cost of perfection is sometimes too high. I do not want to eliminate risk. I just want to appropriately guard against improper levels of risk being taken by people who are either misleading people or not properly making disclosure to the public.  
I think we have to be very careful on the implementation of this legislation that we are not allowing these new regulators to over-regulate—not the finance company end of town which is where the problem has been but the small innovative company that wants to raise relatively small amounts of money. When I say “relatively small amounts of money” we are talking about $250000 half a million dollars or a million dollars which when raised from 20 people is not a large amount of money each. We do not want to over-regulate that space. The key to that is who goes on these boards and the skills that they bring and that those people themselves are focused on appropriately minimising cost just as they are focused on appropriately ensuring minimum standards. That lies largely within the control of the Government. I have been in this role. On a lot of these specialist boards we normally accept the recommendation that comes from the professional bodies—the accountants and the solicitors. I think we are reaching a point in our experience of how regulations forever grow where it is appropriate for Governments of the day to say: “OK we actually accept your competence to do this job but we want some assurance that you’re not going add to complexity and therefore to costs for our businesses in a way that threatens their competitiveness.”  
Labour backs both of these bills. It is necessary that we tighten up the control of audits. I do not accept the proposition that some of the things that went wrong ought not to have been able to be picked up under existing laws. I think there have been some failures in that regard and I am hopeful that some of that will be brought into the open in some of the litigation that will go through the courts in the years that come as a consequence of the failures of the finance companies. None the less these are good bills and I support them.