Tolley Anne: Auditor Regulation and External Reporting Bill — Second Reading 
Tolley Anne: Auditor Regulation and External Reporting Bill — Second Reading 
[Volume:671;Page:17997] 
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.