Andrew Bragg (NSW, Liberal Party) Share this | Hansard source

It's a really great pleasure to rise to speak to the PJC on Corporations and Financial Services' final report on the regulation of auditing, which of course follows the interim report. I started my career, for better or worse, as an internal auditor at Ernst & Young and got some good skills for life there. Learning how a risk and control framework can do great things for an entity is a good skill. I would say in relation to this inquiry—which, as Senator O'Neill reminded the chamber, was initially referred by her to the committee chaired by my colleague Senator Paterson—that this report has landed 10 quite good recommendations, which are bipartisan and, I think, really could improve the quality of auditing in Australia.

Certainly, there is a sense in some quarters that there is too close a proximity between auditors and audit clients, and perhaps this is a consequence of there being these four large auditing firms and then a second tier of much smaller audit organisations. I would say from my own experience of working mainly in internal auditing that there were certainly instances where their proximity was too close and there were audit partners that I don't think had the independence required to perform an external or internal audit.

These recommendations, which appear in the interim report and have been endorsed in this final report that's being tabled by my colleague Senator Paterson today, are effectively a way to shore up and improve the existing system. My reading of these recommendations is that they are designed to ensure that there is more confidence in the system. I'll look at a few of these recommendations in detail.

Recommendation 4 deals with the question of a more detailed declaration. That does address the comment I made about where an external auditor providing advisory services to an entity can give rise to a conflict of interest. In many cases, there's been a price war to win the auditing contract. That is almost a bit of a loss leader. Advisory services are where the audit firm or the professional services firm can make a considerable amount of money—which is all good; I have no problem with people making money. But the audit function is so important to our corporate governance structure in Australia that, where there are conflicts, where there are misaligned incentives, they really ought to be stamped out, given the importance of having an audit that reflects the true and fair position of a company's financial accounts. Just as important, I would say, is the role that internal auditors play. I don't just say that as a former internal auditor. Genuinely, there is a greater appreciation of the importance of having a proper risk and control framework.

One of the great disappointments in the last few weeks has been that the corporate regulator has failed to comply with its own risk and control framework. The corporate regulator appeared at Senate estimates two weeks ago, I think it was. It's very embarrassing that the corporate regulator has a risk and control framework, has a control on remuneration, and was unable to comply with that control. That sends a very bad signal. It shows how important it is that internal auditing—a lot of this is about professional services firms winning the contract for the external auditing and providing advisory services which then distort or conflict with the sort of audit you would expect of a public company. In my time, I saw it happen.

Recommendation 4, which provides more fulsome confidence to the market that there will be a full disclosure of services provided, is an important one. Equally, recommendation 5 gives a safeguard that there are no secret commissions or additional payments happening in the background. Recommendation 6 deals with tenure. I think tenure is very important. I'm not certain there is a case for people to be the audit partner for more than a decade. Generally speaking, 10 years is what the ASX Corporate Governance Council would say is a period in which someone can be an independent director on a company board, and after 10 years they lose the right to call themselves independent.

APRA has said that it should be, I think, eight years for people to be on a superannuation board. Like many things APRA does, this has not been enforced. In fact, there are people who are currently sitting on superannuation boards who have been on a board for 26 or 27 years. I'm 36 years of age. That's a long time. That's a good deal—27 years on a board. I do think that tenure is important. If all the other transparency arrangements are in place and the market can make a judgement about the capacity and the appropriateness of a long-term audit tenure, then I think that is okay. The question is: what about the individuals? I think that's what recommendation 6 really asks the government and, ultimately, the parliament or its delegated authorities to put more detail around.

The other recommendation that I want to touch on in the time that I have remaining is recommendation 9. It is a good reminder of how important the control frameworks are and that anything we can do to improve confidence in these control frameworks so that, when people invest in a public company, whether it's a large or small public company, they feel that the accounts are a true and fair position and there is no funny business going on.

Finally, recommendation 10—I'm always interested in all things digital. We have a problem in this country of still doing too many things on paper. The Corporations Act, which was written in 2001, still requires paper delivery of documents and doesn't provide for technology neutrality. This has been a real drag on our productivity and efficiency. I've had many representations from listed companies that have had to chase around small retail shareholders at their last known address for seven years after they were last able to contact them, and send them, effectively, phonebook style correspondence for seven years. We have a plan to try and digitise and modernise the Corporations Act, or many of its provisions. In future, the more that we can provide for technology neutral delivery in a digital age, the more it will enhance our productivity and efficiency. Certainly, the next time we write a Corporations Act we should provide for that form of technology neutrality. I understand that some people will always want to have paper documents and when you have retail shareholders who want a particular form of paperwork there should be a protection so that can be supplied. But, in the main, my sense is that digital accounts will be the way to go and that recommendation 10 is another good contribution.

I congratulate everyone who was involved with this committee report, particularly Senator O'Neill and Senator Paterson.