Auditor Regulation and External Reporting Bill — Second Reading 
Auditor Regulation and External Reporting Bill — Second Reading 
[Volume:671;Page:17997] 
Auditor Regulation and External Reporting Bill 
Second Reading 
Hon ANNE TOLLEY (Minister of Education) 
 on behalf of the  
Minister of Commerce 
: I move  
That the Auditor Regulation and External Reporting Bill be now read a second time 
. 
The bill proposes two major changes. First it will consolidate all financial reporting and auditing and assurance standards setting within a single Crown entity to be called the External Reporting Board. The board will replace the Accounting Standards Review Board from 1 July 2011. In consideration of the bill the Commerce Committee has not recommended any major changes to the Accounting Standards Review Board and the External Reporting Board - related provisions. 
Second the bill will introduce auditor licensing for issuer audits. Specifically the bill recognises that audits of companies that manage substantial public investments or otherwise obtain large amounts of money from the public must be performed by the top members of the auditing profession. The need for this change has been highlighted by finance company audit failures. In 2009 the Registrar of Companies expressed concerns about the capability of some of the auditors and audit firms to carry out finance company audits to the required standard. In the last 6 months the disciplinary tribunal of the New Zealand Institute of Chartered Accountants has made orders against four members who between them led five failed finance company audits. The tribunal found that those audits were not carried out in accordance with the institute’s ethical professional and auditing standards. 
The bill provides that the licensing of auditors will be carried out by the Institute of Chartered Accountants and by any other professional accounting body that may be accredited by the Financial Markets Authority. The Financial Markets Authority will set the minimum licensing standards oversee the professional accounting bodies and be responsible for practice reviews. This reform represents another important part of the Government’s ongoing work programme to restore investor confidence in the financial sector which also includes amongst other things the establishment of the Financial Markets Authority and the review of securities law. 
The Commerce Committee recommended a number of amendments to strengthen the bill the most significant of which is to provide for auditing firms to be registered. Firm registration will be permitted if the firm includes at least one licensed auditor and meets any other requirements imposed by the Financial Markets Authority. This change reflects the fact that audit quality is reliant on two matters: the competence of the practitioner and the quality of the auditing firm’s systems processes and procedures. 
Equivalent changes have been made to the bill in relation to overseas auditors which will operate in accordance with the principles of mutual recognition. The overseas regulatory system will not have to be the same as New Zealand’s but the Financial Markets Authority must be satisfied that the overseas requirements are equivalent to or as satisfactory as the requirements applying to New Zealand firms. 
The committee has also recommended changes in relation to the application of the bill to the Auditor-General. It is recognised internationally that Auditors-General in democratic societies must be free from direction or interference from the executive branch of Government in carrying out their core audit responsibilities. On the other hand the New Zealand Auditor-General is responsible for carrying out several major issuer audits including the Crown Kiwibank Air New Zealand and the Port of Tauranga. 
The regime may not be fully credible if the application of the bill to the Auditor-General is seen to be ineffective so the committee has recommended that it be strengthened in two ways. First the Auditor-General would need to be satisfied that persons appointed to carry out those audits either meet the minimum licensing standards set by the Financial Markets Authority or have the competence qualifications and experience that are equivalent to or as satisfactory as those minimum standards. Second the committee has recommended the inclusion of a provision that would allow the Auditor-General to invite the Financial Markets Authority to carry out practice reviews and require him or her to take reasonable steps to ensure that the period between reviews does not exceed 4 years. 
The final change to the bill I wish to comment on is the removal of a clause that would have made it an offence for auditors to not comply with auditing and assurance standards. That clause is not needed because it is unlikely to contribute to audit quality. Auditors already have strong incentives to comply with ethical professional and auditing and assurance standards; they can be sued for negligence or face disciplinary action. The threat of substantial damages awards and losing one’s livelihood and the resultant harm to firms’ and practitioners’ reputations should be enough to focus the mind. 
In short this bill will reserve issuer audits to experts and will substantially reduce the future risk of issuer audit failure. I conclude by thanking members of the Commerce Committee for their work in considering the bill and acknowledging the contributions of those who provided submissions on the bill. I commend this bill to the House. 
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. 
PESETA SAM LOTU-IIGA (National—Maungakiekie) 
: 
 Thank you for the opportunity to speak to this second reading of the Auditor Regulation and External Reporting Bill. I note that the presiding officer has changed in appearance in the last 5 minutes but I also congratulate Assistant Speaker H V Ross Robertson on his appointment. He is a good man from South Auckland he has worked hard in this House over 24 years and he has served his local community. I wish to acknowledge his ascendance to the role of Assistant Speaker a prestigious role. 
I will talk quickly about this bill. Minister Tolley quite clearly in her representations this morning talked about the nature of the bill. The bill is overdue. It is overdue because we have had a period when the non-regulation or self-regulation of auditors for financial issues has not worked and it has not worked for several reasons. This bill will address some issues around the licensing of auditors and the registration of audit firms in order to get quality people behind audits. After all it is really not about the regulation; it is about the people who are involved in auditing financial accounts. I take the point also of the previous speaker Mr Parker who talked about compliance costs. But I say that the cost of finance company failures over the last 7 to 10 years has been great and that cost needs to be mitigated through oversight and through the regulation of this industry. This bill comes at a vital time to restore confidence in our financial markets and to restore confidence in capital markets in order for firms to raise capital easily and to build on the economic growth that this country certainly deserves. 
This bill brings about two things. It is about establishing a licensing regime but it also establishes and consolidates the accounting and auditing standards setting set by the Accounting Standards Review Board which will of course become the external reporting board. All I ask is that when these rules are set in place the relevant regulators do their job and are well-resourced and they enforce the laws that we as a Parliament set out. I think that is the critical part of this legislation. There is no point in having laws around regulating financial markets if those laws are then not enforced and the resources not put in place. 
This legislation may I say is part of a wider broader scheme of laws we have brought to the House which have had multiparty support in relation to the set-up of the Financial Markets Authority and the regulations of securities trustees. This is just another building block in securities regulations that we as a National Government have brought to this House. We are very proud of this bill and of the work that members on all sides of our Commerce Committee have put into it. 
I will make just a final point about the limitation of auditors’ liability; I think the last speaker actually summed it up quite well. It is a complex issue and it does add to compliance costs which we as parliamentarians are aware that we want to avoid and reduce. But at some point we need to do this. I look forward to the Securities Act review—which will certainly be proceeded with later this year—in addressing that matter; members of our committee found it to be a little bit of an issue. I support this bill and commend it to the House. 
CLARE CURRAN (Labour—Dunedin South) 
: 
 Much as it is a great honour to speak in front of you Mr Assistant Speaker Roy in the House today I was looking forward to the opportunity to add my congratulations to the new Assistant Speaker Ross Robertson. I will hold those congratulations because I have a particularly important message to pass on to him in his role as the new Assistant Speaker. 
The ASSISTANT SPEAKER (Eric Roy) 
: Don’t feel constrained! 
CLARE CURRAN 
: I would like to put on record that it is an honour to speak before all of the Speakers in this House today and I am looking forward to speaking before the new Assistant Speaker as well. 
In speaking to the Auditor Regulation and External Reporting Bill in its second reading I say that there is one thing about the Commerce Committee: we do a pretty good job we have robust discussions we thrash through the issues and ultimately I believe we are all committed to good law. 
The bill is supported by Labour and one of the core reasons why it is supported by Labour is that it is part of that important financial markets reform process that was begun under the previous Labour Government. I need to put that on the record because although it is important also to acknowledge the good work being done by Minister Power in this area in relation to the whole package of financial reforms those reforms really do flow from the important work that was done under the Labour Government and largely under the auspices of the previous Minister of Commerce the Hon Lianne Dalziel who happens to be the chair of the Commerce Committee. I think the point is that ultimately we are seeing a commitment on both sides of the House to good law being made in this area. 
As my colleague David Parker pointed out Labour does however retain some concerns about the bill and about the way in which this package of bills is being introduced. I will touch on one of those matters in a minute which has been mentioned by both of the previous speakers—that is the limitations on liability. I also endorse what my colleague David Parker said about the systemic issues of the complexity of financial accounting issues which emerge right throughout these reforms. They underline these reforms and underline some of the reasons for the need for the reforms. The areas are so complex and so dense that the ordinary person out there particularly an investor has great difficulty in understanding them. 
The issues about financial literacy—and this has been brought to the attention of the Minister on a number of occasions—are critical. They need to be addressed but they are not being addressed by this Government as we see it. 
The bill strengthens the regulation of practitioners who carry out audits of issuers 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. Minister Tolley in her speech pointed out that the bill really is about the registration of auditing firms and that it will really strengthen the regulatory and legislative remedies for that whole area. 
We support the bill ultimately because we want to see confidence restored to New Zealand’s financial markets. The bill has been through a wide consultation period. There were a number of submissions to the select committee and I will touch quickly on a couple of areas about liability. 
Initially I will talk about the liability of partners issue. In the select committee process we touched on two areas and they are covered in the commentary on the bill. Under the bill as introduced all partners of an audit firm would be liable if a firm breached the relevant restriction. The amendment proposed by the select committee meant that a partner would commit an offence only if the relevant breach took place with his or her authority permission or consent if he or she could reasonably have known that the breach was going to be committed and failed to take all reasonable steps to prevent it. Under clause 8(5) of the bill as introduced every partner of an audit firm would have been committing an offence if the firm breached the relevant restriction. The select committee considered that larger firms particularly would be disproportionately sanctioned by such a provision. That is why that change was brought in during the select committee consideration. 
The second issue was about limitations on liability. Both David Parker and my colleague on the select committee Sam Lotu-Iiga have referred to that issue. We considered carefully whether the bill should be expanded to introduce measures to limit auditors’ liability but we recommended no amendments to that effect. That was ultimately because our conclusion was and the advice provided to us stated that we had no scope for that under the bill. However the commentary on the bill refers to the issue because we recognised that some form of liability limitation would harmonise the New Zealand system with international practice. We asked the officials for quite comprehensive advice on the issue. We considered it quite carefully in light of jurisdictions that have adopted alternative liability systems and some of the approaches that have been adopted elsewhere. I know that the relevant Minister Simon Power is not in the House but I am keen for a response from him about his views if he has any. 
I will quickly touch on the alternative approaches that have been adopted elsewhere. There are four of them. The first approach is incorporation. In many jurisdictions companies and/or limited liability partnerships are able to carry out audits and those limited liability partnerships are an alternative corporate business vehicle that give the benefits of limited liability but allow their members the flexibility to organise their internal structure as a traditional partnership. The second approach is proportionate liability—that is the court determines liability among the negligent parties according to their share of the blame. That approach includes allowing the courts to have regard to the comparative responsibility of any wrongdoer who is not a party to the proceedings. The third approach is liability caps which provide for the amount of liability to be capped at a multiple of the fee and/or a fixed dollar amount in relation to any one course of action. The fourth is contractual restrictions on liability. Under that approach the auditor or the preparer may contractually agree to a restriction in liability. 
We looked at a number of jurisdictions including Australia the United Kingdom Singapore and Hong Kong where auditor liability reform has been considered and still is being considered internationally. Some jurisdictions such as Australia have settled policies and laws and we would do well to look carefully at them. That is why the select committee considered harmonisation. Other jurisdictions such as the United Kingdom have implemented reforms and are now evaluating their performance. Still others such as Singapore and Hong Kong are identifying issues with their current regimes and are still beginning to consider possible reforms. In the commentary on the bill we stated that although we concluded that such an amendment would be outside the scope of the bill we asked to see this issue addressed in the broader review of securities law. The previous speaker from across the House Sam Lotu-Iiga referred to that issue. In particular the select committee believed that consideration should be given to amending the Securities Act and replacing auditors’ current exposure to joint and several liability with alternative systems such as proportionate liability or capped liability. Thank you. 
DAVID CLENDON (Green) 
: 
 Kia ora koutou. I am pleased to take a short call on the Auditor Regulation and External Reporting Bill. We will indeed be continuing to support this bill as we have supported related bills in large part because they seek to remedy the damage done by many years of the wholly inadequate regulation of our economy. The lack of regulation has caused considerable harm to individuals to companies and indeed to the reputation of New Zealand as a safe and good place to do business. 
It is clear that the wholly excessive deregulation of our financial markets our business sector and so much else in the late 1980s and 1990s is a failed experiment. It has done serious harm and few people in the House would not have a personal or family relationship or a friendship with someone who has suffered the consequences of this lack of regulation or some sort of financial misadventure caused by the inadequate oversight of the financial and business sector generally. Deregulation and the abandonment of adequate and appropriate oversight of the sector caused serious harm. It opened up the opportunities for greed. The whole mantra “Greed is good” suddenly became a good thing. It created opportunities for people to be exploited by the unscrupulous. It made those who were trusting vulnerable to being exploited and often unfortunately such things as celebrity endorsements led people astray. There was a general lack of financial literacy which has been referred to by previous speakers even on the part of those who were active participants in the market. So it is good to see that some serious attention and efforts are being made to put back into place some appropriate regulation. 
In the bigger picture clearly New Zealand is not alone in this. There is an international acknowledgment that lack of regulation or an unregulated free market is actually a recipe for financial social and environmental disaster and steps are being taken to remedy that. There will not be a substantial return of confidence in the financial markets until such time as people see a sensible and coherent regulatory framework in place to ensure there is transparency and a degree of comfort in investing and being in business. Although I am not denying there will always be risk and that that is simply a matter of business reality I believe that unregulated markets put the risk beyond what is acceptable or normal or reasonable. 
We acknowledge that this bill is one of a series of interrelated bills that are making their journey through the House in a series of fits and starts. It is to the credit of this Government in fact that it is engaging positively with this issue and indeed it is also a credit to the previous Government who initiated some of these measures that are now coming towards some fruition. 
A particular example of one amendment in this bill recommended by the select committee is the amendment to strike more of a balance between the responsibility of individual practitioners and that of firms within which they work and this was commented on by the previous speaker. Clearly financial competency and integrity of the individual is critical and there is a personal responsibility—an absolute responsibility—on practitioners to operate and exercise competence and integrity in an ethical approach. It is equally important that the policies and more critically indeed the practices of firms are equally in line with establishing regulation and transparency because not only the policies but the embedded practice affect behaviours in the market and that is as important as policy and legislation. The step to achieve that better balance is important and it is a useful element of this bill. 
Clearly progress is being made but we are still a long way short of exploiting and capturing a much broader opportunity to invest in change to get beyond short-term and quite limited thinking about how to make our economic prospects better to look for means and practices where we can survive and flourish economically and at the same time to reduce any adverse social and environmental effect of business and practice in business. What is really required here and what is actually emerging internationally—an area that I think we are a little slow in following—is a debate starting from first principles on the purpose and form of our economy and on some of the base assumptions underpinning it. That debate needs to occur here and as a matter of urgency if we are not soon to discover that the remedial measures we are seeing in this and other bills as beneficial as they are are really inadequate. They are far from sufficient other than as interim provisions. 
There is a very real and very positive opportunity for the Government to show some leadership: to take the opportunity to encourage and over time even oblige practitioners to adopt what is emerging as best practice internationally; to bring together alongside and as part of financial reporting the reporting on environmental and social information; and to bring those into accounting standards and practice. Globally a major thrust in accounting standards and practice is to bring those financial environmental social and governance strands of good management into one integrated reporting system. Although I acknowledge Mr Parker’s commentary about complexity in reporting this system does not need to add layers of complexity. It is about adding integrity; it is about a more integrated and much more rational approach to the financial and more expansive reporting of business activity. 
The accounting and auditing profession has always measured and continues to measure and to report upon the flow of money through a business an organisation or an economy. The New Zealand Institute of Chartered Accountants among others over time has also looked at expanding the role of financial reporting. It has looked at and had some hand in developing various mechanisms and models for extending accounting and auditing practice to report on the whole of a business’s activity and the effect of that activity when looking at environmental and social cost and benefit alongside the purely financial matters generated by business. That gives us a much clearer and a more complete picture of the real value the real influence and the impact of the business sector. 
There is indeed an International Integrated Reporting Committee that is leading the work globally headed by one Sir Michael Peat a former partner in KPMG and it counts among its members one Sir David Tweedie who is chair of the International Accounting Standards Board. Tweedie was quoted late last year as saying: “The case for globally consistent financial reporting standards is well understood and accepted. It is appropriate to apply the same global approach to other aspects of corporate reporting. This initiative represents an important step on that journey.” He is referencing there the inclusion of social impact and environmental impact information within regular financial reporting mechanisms. In some instances internationally it is becoming a legal requirement to incorporate social and environmental reporting. Incentives are being provided. It is probably too early for this House to legislate for a broader more comprehensive integrated form of accounting and reporting but certainly there is an opportunity to recognise the value of that approach and to facilitate to provide some leadership and encouragement to the industry and the business sector. Already some of our major companies like Zespri are doing this and so are some unexpected companies. Some of the major roading contractors like Fulton Hogan and Downer EDI are now building that sort of reporting into their financial cycle of reporting and it is to their credit that they are doing that in advance of any requirement. They understand they are being driven in part by the market but also by an understanding of the ethical and indeed the practical value of doing so. 
In summary these financial regulatory bills are useful. They are helpful in repairing some of the shortcomings of the non-regulated approach to finance and the economy. They are enabling us to become more reliable and to improve the integrity of financial reporting. But we need to take bolder moves and I believe that it would be to the Government’s credit and that it would gain value from making some moves to improve the understanding of the social and environmental impacts of business as well as the financial impacts and consequences of business. We could very easily improve our performance across all of those spheres of influence. Kia ora. 
RAHUI KATENE (Maori Party—Te Tai Tonga) 
: 
 Thank you for this opportunity to speak at the second reading of the Auditor Regulation and External Reporting Bill. This bill strengthens the regulation of practitioners who carry out audits of issuers. It will require the New Zealand Institute of Chartered Accountants to regulate auditors as a specialist profession rather than as chartered accountants. It also provides for the Financial Markets Authority to be responsible for auditor oversight in monitoring and reporting on the adequacy and effectiveness of the institute’s regulatory systems. This should assist to promote in respect of issuer audits quality expertise and integrity in the profession of auditors and to promote the recognition of the professional status of New Zealand auditors in overseas jurisdictions. 
We note that a report by the Registrar of Companies identified that audit failure was a contributing factor in the finance company collapses. Without putting too fine a point on it this whole issue of financial company collapse is of particular concern to us in the south—and to my constituents of Te Tai Tonga. I have spoken out about the concerns we in the Maori Party have with South Canterbury Finance falling into such a position to result in a massive Government bailout funding that could have been much better spent on reducing poverty. I have challenged the board and management of the company—the people who caused the mess—to take ownership and work towards creating solutions. But I am also ready to note the widespread issues of ownership and responsibility that we must consider around the finance company collapses—including as this legislation highlights the role of the auditor. 
Auditor quality is a core element of financial market confidence and by logical association a core element in restoring investor confidence. It is essential that the practitioners who carry out financial sector audits have the necessary skills and experience to carry out the work to a high standard. So we are of course supportive of the need to have the means by which to report on the adequacy and effectiveness of those systems and to take action in respect of those systems that are inadequate or ineffective. The bill is consistent with the party’s emphasis on improving the performance of Government bodies and professional bodies. It also assists to restore the confidence of New Zealand investors in securities. We will support this bill at its second reading. 
KATRINA SHANKS (National) 
: 
 It is my pleasure to take a call on the second reading of the Auditor Regulation and External Reporting Bill. It was interesting to sit on the Commerce Committee which dealt with this bill. I am a chartered accountant by trade. Also I came up through the Audit Office. That was where I started in my profession. So I had a good understanding of the implications of this bill and what people were talking about. 
We talked about capital markets. This bill will influence capital markets because it is addressed to audits of public issuers. It has a very narrow focus. We have a problem with confidence in our capital markets especially among our mum and dad investors. I know that in the Ohariu electorate a lot of mum and dad investors come into my office and tell me stories about how they lost their money. They are concerned about what they can do in the future. They want to know what the Government can do to help them find somewhere to invest that gives slightly higher returns than a bank does. But of course we know that when we get into that situation we take on additional risk. In effect this measure has been partly brought about by the finance company failures. It is acknowledgment that the role of auditors did play a small part in terms of validating accounts and financial information to people who most probably did not quite understand what they were reading. 
It is interesting that the Greens have raised the issue of social reporting and financial reporting. The more reporting that is put in the more complex it gets because for every report that is produced there is an opinion on it especially if we are talking about a public issuer. If we want to have social reporting and all the other tiers of reporting which are really great to have we should consider that someone has to give an opinion on it on whether it is true and fair. That is where it gets more complex. That is where the accounting standards get more complex. I know that Mr David “Perfect” Parker which is what we call him in our select committee asked why it is getting so complex. It is getting so complex because there are more requirements in relation to those accounts and the more requirements there are the more standards and procedures we need in place to ensure that the reporting is correct. It is never-ending. It gets more and more complex. As the financial vehicles out there get more complex we need more rules in place more standards and procedures to understand what is happening when we invest in financial vehicles that have never been in place before. 
I would like to touch on two areas of this bill during this second reading. One is the liability of partners. There was concern that under the bill as introduced every partner of an audit firm would commit an offence if there was a breach of any restriction or standard. The committee thought that was far too wide so we narrowed it down to say that a partner was liable only if he or she had given his or her authority permission or consent or could reasonably have known that the breach was going to be committed and failed to take reasonable steps to prevent it. We narrowed that provision down significantly; otherwise I think we would find that there were no auditors out there to audit anything at all. 
The other thing I was really passionate about in our committee was the issue of limitations on liability. Currently in New Zealand we have what is known as joint and several liability for auditors. I think it is time we addressed the whole issue of liability and limitations on liability. I pushed very hard at our select committee for this issue to be addressed. We got advice on several occasions—because we kept on pushing it—only to be told it was out of scope. The committee has stated in the bill’s commentary that we would like this matter to be addressed later on and that a broader review of the securities law should be looked at especially in relation to exposure to joint and several liability and the alternative systems of proportionate or capped liability that other countries are using very successfully. 
I am taking just a short call on this bill and I look forward to debating it further in the House. Thank you. 
STUART NASH (Labour) 
: 
 It is with interest that I hear Government members say that these bills are so important for our capital markets and our financial markets yet they have very little to say on them. I should have thought that if this bill was such an important bill which I personally think it is then Government members would stand up and put forward the case for why this legislation should go through and would be selling it etc. But they do not seem to be doing that and I wonder why. I wonder whether it is because Government members do not understand what the legislation is about or how it impacts on New Zealanders the economy or the financial market. There does not seem to be any coordinated plan at all. But I stand in support of this bill the Auditor Regulation and External Reporting Bill. 
I note that it is another bill sponsored by the Hon Simon Power. As Simon Bridges informed us a week or so ago Simon Power is the hardest-working National Minister. In fact I think Simon Bridges told us that 40 percent of all legislation before the House this term has been brought forward by Simon Power. I had a look at the Order Paper today and five of the bills on the Order Paper are in the name of Simon Power. The Statutes Amendment Bill (No 2) is in the name of Nathan Guy. I assume that Simon Power handed that bill over to Nathan because Nathan Guy actually has not done anything while he has been a Minister. But it is with concern that I note— 
Hon Member 
: He did order the BMWs. 
STUART NASH 
: Yes there was the BMWs. I suspect that Government members must be incredibly worried that Simon Power is leaving. I do not know why he is leaving but I suspect it is because he is sick and tired of carrying the Government on his shoulders. He does 40 percent of the legislation in this House and he is leaving. He is a very hard-working Minister. Of course there have been rumours about a clash between Simon Power and Steven Joyce. I could not possibly comment even though National members have confirmed it. It is not for me to comment. 
Even though we have a very hard-working Minister in Simon Power the surprising thing is that when he came out with a plan do members know what it was? To sell State assets. The only plan of even the hardest-working Minister on the Cabinet benches was to sell State assets. When is a plan not a plan? When it involves selling State assets; when it harks back to philosophies long discounted and long disproven. Actually I think that is why Simon Power is leaving. It is a hospital pass: “Power you’re leaving. You’ll be the Minister responsible for selling State assets to the public.” He did not want to do that because he knows he cannot do it so he is gone. If Mr Power’s legacy will be selling State assets then that is a bad legacy with which to leave Parliament. 
I come back to the bill. I would like to ask why regulation of auditors needs to be reformed. It is a good question and I will try to answer it. Financial reporting is hugely important to investors. Regulators and other financial market participants need to know that the decisions made by experts are the right ones. There needs to be confidence that general purpose financial reports provide unbiased transparent and relevant information about the economic performance and position of businesses. As has been outlined Labour fully supports this bill. Labour will always support good strong legislation that improves the confidence of investors in our financial and capital markets. 
I have spoken about this issue before in this House many times. I cannot hammer it enough. Investors really need to have confidence in those who profess expertise in certain areas whether they be trustees directors financial advisers or auditors. We all know that investment implies risk. The higher the return the higher the risk—that is how it should work. Most investors tend to understand that. However the risk of incompetence and the risk of negligence are almost impossible to quantify and therefore they are not risks that investors can plan for—nor should they have to and certainly not in a First World country such as New Zealand. If we want to have a great reputation in the global market and if we want to bring foreign direct investment into this country then all investors in this country need to have confidence that our financial regulations are up to scratch that they meet world standards. In fact that is a given. It is not something we can go out and parade and hawk. It is a given because if they are not up to scratch then we will not even be looked at. 
In New Zealand there has been a strong indication that the auditors of some failed finance companies lacked the necessary competence to carry out the audits or did not have a sufficient degree of independence. The results of that have been nothing short of catastrophic for our financial markets. We know that over 60 finance companies have collapsed. Before that I do not think anyone could have named 10 finance companies let alone the 60 that have collapsed. I do not want to say that every single auditor who was responsible for auditing a finance company was negligent incompetent or had a conflict of interest but there is very very clear evidence that many did. That is what we have to prevent. 
As I said the collapses have been catastrophic for our financial markets but not only that; they have been catastrophic for our citizens. Over $4 billion has been wiped from the savings of good hard-working Kiwis. These are Kiwis who put away money for their retirement put away money for their children’s education for their grandchildren’s education. These are New Zealanders who are near the end of their lives. When I say near the end of their lives it is all relative; they have another 20 or 30 years to go. But that money was their nest egg. It was how they were going to be able to retire with dignity and it is gone. I cannot think of anything more heartbreaking or gut-wrenching than knowing that $50000 $100000 or $200000 that people had put away for their retirement was gone. After working and paying taxes for 40 years it was gutted by people ordinary New Zealanders trusted. People such as Richard Long stood up and hawked one of these companies. Colin Meads said one was as safe as houses. Unfortunately Colin Meads was a great All Black but he does not know much about finance companies. The health costs and the costs to our economy have been huge. There have been cases of suicide and depression and I suspect that they are the tip of the iceberg. I suspect we will never know the health effects that this experience has had on a whole lot of people out there. 
Before this bill—and this is why the bill is so important—New Zealand’s self-regulatory model was no longer within the range of acceptable auditor regulation systems. New Zealand needs to change in order to obtain the right to practise in Australasia and other jurisdictions such as the European Union. In the United States a classic case is Arthur Andersen. People used to talk about the “Big Five” accounting companies; now they talk about the “Big Four” or the “Big Three”. Arthur Andersen was the auditor for Enron. When Enron collapsed it brought down one of the largest accountancy companies in the world. At that time the US undertook a complete review of the relationship between auditors and those they audited. We probably should have done that when Enron collapsed. As we all know that work was started under Lianne Dalziel and it has been continued by the Commerce Committee. I am not on that select committee but it has been continued by that committee and it is long overdue. 
As has been mentioned the bill is a complex and detailed piece of legislation. It is over 100 pages. Who would have believed that a bill governing what auditors do would be over 100 pages? There are nearly 100 clauses in the bill. It is very complex legislation. It shows how complex the role of auditing is. It proves how defunct our law is in terms of governing that area. To round up Labour supports any legislation that will improve the confidence of investors in our capital and financial markets. Labour will support any legislation that means foreigners will look at our financial and capital markets and invest with a high degree of confidence. But one thing I would like to say is that the Hon Simon Power the Minister who brought this bill to the House is a very hard-working Minister but he is also the Minister who has introduced the concept of selling State assets. I ask what sort of plan that is—to sell State assets. It is a shame. 
JONATHAN YOUNG (National—New Plymouth) 
: 
 I am very pleased to stand in support of the Auditor Regulation and External Reporting Bill and I am pleased to hear members on the other side of the House likewise doing so. I must admit that Mr Nash’s speech improved until he came to the last couple of sentences. The first half of his speech of course was full of what is now becoming a predictable knocking of some of our hard-working Ministers. 
The reason this bill is very important is simply that trading which is what this is all about requires an accurate quantifying of weights and measures and our auditors are our measurers. It is incredibly important that what they do is accurate transparent robust and independent and this bill will ensure that. As the previous speaker and other speakers have alluded to I think that the numbers of financial companies who have experienced demise at the tremendous expense of New Zealand investors were not strongly serviced by a robust auditing regime. This bill will ensure that in terms of our future we are robust. 
It is very important to understand that the $4 billion to $6 billion that has been lost out of our economy has been lost by people who tremendously relied upon it such as the many people who have entered retirement. It is very important to understand that in this nation in the next 20 years more of those people will be in retirement. In fact our retirement numbers will double. It is imperative that we have financial systems in place that will never ever allow what has happened to happen again. Our future depends on a robustness of transparency and accountability and it depends upon the ability to have internationalisation of standards because so many of our opportunities are global. It is important to realise that currently six people are supporting one elderly person but in a very short time there will be just three people providing that support. Therefore having a robust financial system and having strong capital markets will be incredibly important. It is not just a matter of increasing taxation to care for our increasing ageing population. We need to have an incredibly robust economy that is growing strongly and this Government is focusing strongly on that in order to have the wealth in our nation to enable young and old to experience the lifestyle they aspire to. 
I am very happy to support this bill as are other members of the House. The Commerce Committee has worked incredibly hard over this last year. We have worked through a whole suite of legislation that will bring stronger and more robust support to our economy. I am very happy to commend this bill to the House. Thank you. 
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. 
MELISSA LEE (National) 
: 
 I commend the member opposite my dear friend Rajen for his considered contribution to this debate. Considering that he does not sit on the Commerce Committee I like to think that either he studied the Auditor Regulation and External Reporting Bill or he had really good speaking notes. That is unlike the speech his colleague Stuart Nash delivered for the Opposition. Until his last sentence it looked like Labour had a fan club for the Hon Simon Power. He did so well until the last sentence. I commend him for his positive contribution recognising the wonderful work that our Ministers are doing. 
This bill is about licensing regimes for major audits of the likes of banks insurance companies and companies listed on the stock exchange. I will give an example that is non - accounting-related. One of the reasons the Auckland councils amalgamated was to provide standards across the whole city and to have a vision for the whole region rather than those things being replicated over so many councils across the Auckland region. This bill provides that standard for accounting just like the Auckland Council is doing for the city. 
This bill recognises the fact that with the advent of the financial market failures audits of companies that manage substantial investments from the public must be performed by people who are the best at what they do meaning the top echelons of people. It is to protect the moneys of the public. It is to restore confidence in finance companies—confidence that was lost by the mums and pas of New Zealand who had invested a lot of money. With the advent of the financial market failures they lost a lot of money. This bill is part of what the Government is doing to restore that confidence. It is a great bill. I commend it to the House. 
Hon RICK BARKER (Labour) 
: 
 When people reflect on the progress of human history and look at the important elements of it they usually start with philosophers like Plato and Socrates. They look at the great mathematicians like Archimedes and Euclid and also they think about the great physicists poets and composers. No one puts on their list an accountant. But the fact is that the Dutchman who devised double entry accounting probably has had more influence on our lives than any of the others who went before. 
We are all subject to having sets of accounts and the tyranny of accrual accounting. This place is run on accrual accounting and every Government establishment is run on accrual accounting. 
Jonathan Young 
: Did you say “cruel”? 
Hon RICK BARKER 
: It can be cruel accounting. One of the great reforms of the 1980s was putting the Government books on to accrual accounting. Reforms have flowed from that. People did it at the time to ensure that the Government’s books were accurate. People need to be able to rely upon the figures and to make judgments from them. 
We have seen some terrible examples around the world of where figures have sadly proven inaccurate. I draw members’ attention to for example WorldCom a massive company that collapsed into a shower of nothing and Enron. Other major accountancy companies have suffered as a consequence such as Arthur Andersen LLP. We have seen the global financial crisis where banks have melted down and people have lost millions and we have seen finance companies in New Zealand going crash—all because the accounting systems were inadequate. The numbers that they represented proved not to be the reality. 
Debate interrupted. 
Sitting suspended from 1 p.m. to 2 p.m.