Parker David: Auditor Regulation and External Reporting Bill — Second Reading 
Parker David: Auditor Regulation and External Reporting Bill — Second Reading 
[Volume:671;Page:17998] 
Hon DAVID PARKER (Labour) 
: 
 I also congratulate you Mr Assistant Speaker Robertson on your reappointment to your role as a presiding officer. It is not quite the same role but it is similar to the role you had in the last Parliament and I congratulate you. 
I will refer to the issue of compliance costs in respect of audits. The Labour Party supports the Auditor Regulation and External Reporting Bill but I still harbour a concern which I discussed the other day in relation to some of the securities legislation about the cost of raising money for new ventures. This bill applies amongst other things in situations where the entity that is being audited is an issuer. An issuer is at law someone who is issuing securities to the public. They might be raising money through selling shares or they might be issuing debenture stock. Those are important things that we need in order to expand our economy. 
In particular the issue that vexes me in New Zealand is the cost of raising private capital for equity ventures. Small businesses in New Zealand face very large costs relative to their size when they take the step of expanding beyond the shores of New Zealand into overseas markets. That step is often taken at a time when those New Zealand organisations are quite small by international standards. The specialised good or service that they are selling might be quite small in market terms in a little place such as New Zealand. 
If the company was based in a country such as Australia the United States or an Asian country where there are many more millions of people they could expand gradually in their home market before having to expand offshore. In New Zealand companies that want to take their businesses further have to expand into export markets at an early stage and that is an expensive and risky thing to do. In order for them to achieve that expansion and not put all of their own personal assets at risk they normally have to get more money into their company. In order to do that they have to comply with our securities legislation which includes compliance with the rules relating to audits. 
The financial reporting standards in New Zealand and around the world have become hideously complex in recent years. 
Katrina Shanks 
: So you keep telling us. 
Hon DAVID PARKER 
: Yes. I hope that Ms Shanks will be convinced. I look forward to her acknowledging this issue because I know she is expert in those matters being a qualified accountant and auditor I expect. The cost of audits has grown very very significantly in the last two decades. 
Hon Parekura Horomia 
: Rip-off. 
Hon DAVID PARKER 
: I do not think it is a rip-off; I think it just a matter of compliance with the increasingly complex requirements of accounting standards and audit standards. I question whether all of those complexities are justified. I do not think they are. I think we are now making the same mistake in respect of accounting standards that we in the legal fraternity have made in respect of legal court rules and processes which have become so hideously complex that the compliance cost is becoming disproportionate to the benefit that accrues from the additional complexity. 
There is no doubt that we need to have standardised accounting rules and there is no doubt that we need to have standardised audit rules just as there is no doubt that we need to have standardised rules relating to the conduct of legal proceedings or to the sorts of things that have to be disclosed to people when they are borrowing money. I am not arguing against standardisation of rules; I am arguing against overly complex rules. We have now reached the point where accounting standards have become so technical that most people cannot understand a set of financial statements when they read them because they are no longer simple. 
Clare Curran 
: Financial literacy issues. 
Hon DAVID PARKER 
: There are financial literacy issues but they are made more difficult by the rules being too complex for most people to understand. We used to be able to read a set of accounts and find a profit and loss statement and a balance sheet as they were then called. They were not perfect but most people could understand them. Now reading a set of financial statements requires one to flick backwards and forwards to notes in the accounts and it seems that we even have to report on things that are completely irrelevant to the state of affairs that is being reported upon. We see in accounts notes such as: “We have no exposure to foreign exchange risk.” If there is no exposure to foreign exchange risk why do we have to report on it? It is a nonsense. It is just an additional complexity that people have to fight their way through to read. 
Peseta Sam Lotu-Iiga 
: It’s one line. 
Hon DAVID PARKER 
: That is true but there are many many examples of that. Financial statements are now very difficult for people to read and understand. Those people are put to the cost of having to use an intermediary whom they have to pay when they ought to be able to read these things themselves. 
In addition the company that has to comply with those rules has to use accountants when it would otherwise be able to do a lot of it internally. When the company uses an accountant the time spent by that accountant on the job is much much longer than used to be the case. Of course they have to charge for that time and therefore the cost to the enterprise is higher. That is true in respect of both the accounting standards which then have to be audited and the audit. The audit of the financial statements which are themselves more complex than they need to be is more complex than it needs to be and therefore more costly. It really is a muddle. 
Clare Curran 
: It hurts your head. 
Hon DAVID PARKER 
: That is right: it starts to hurt one’s head. 
Clause 88 states that the functions of the external reporting board include the setting of standards. Clause 88 substitutes a new Part 3 in which the functions of the external reporting board which has some control over how audits are carried out are set out. New section 24 as inserted by clause 88 states: “The Board has the following functions: (a) to prepare and if it thinks fit issue financial reporting standards for the purposes of …” the Act. We need to make sure that the people who are on the External Reporting Board will be practical rather than writing new and ever more complex rules. 
We have this problem in regulation throughout the economy. The regulators want perfection. Perfection costs too much. We need practical protections rather than perfection and therefore we need to make sure that the people who are on the External Reporting Board are not trying to eliminate risk. We cannot eliminate risk; we can only prudently minimise risk by giving prudent levels of information to people. We in the Labour Party are into alliteration this week and I am quite happy to talk about the “P”s. I really think that the functioning of this legislation relies upon how technical the standards become and it will be very important for the External Reporting Board to have an eye on minimising the complexity. 
I will say something else about the limitation of liability; I know that another member will develop this issue. I think it is time we actually considered—and it is a difficult issue—whether we need to have joint and several unlimited liability in respect of auditors and audit firms. We have similar issues in some other practices like law where we still have joint and several liability for most partnerships. I think we need to consider whether that is right. In practice it forces upon audit firms very big insurance premiums which are passed on to the person buying the audit service and on to the people we are actually trying to protect—the people who are investing in companies and the companies that are raising money. 
We need to keep those costs moderate. This is another area where costs are getting out of control. Insurance premiums are getting too high because the level of risk that auditors are facing is too high in part because of the complexity of the things they are required to audit against and in part because of joint and several unlimited liability. I think we need to consider that. It is not an easy issue because there is a need to have some proper levels of accountability and risk for auditors to hold them accountable for when they do not do their jobs properly. I will not pretend it is an easy job to get right but we need to consider it. In any event there are ways around it at the moment through trusts and things to protect assets so to a certain extent the joint and several liability in respect of all assets is illusory.