By Gareth Vaughan
Auditors, fingered by Registrar of Companies Neville Harris as culprits in the collapse of numerous finance companies in recent years, are set to lose their self regulating status.
This change was confirmed yesterday as Commerce Minister Simon Power welcomed Parliament's Commerce Select Committee’s report on the Auditor Regulation and External Reporting Bill.
The bill establishes a new licensing regime for major audits, such as the audits of banks, insurance companies, and stock exchange listed firms. It won't, however, impact on the auditing of small and medium-size companies and non-profit entities.
"The bill strengthens auditor regulation by consolidating all accounting and auditing standards-setting into a reconstituted Accounting Standards Review Board, to be called the External Reporting Board (XRB). It also requires the Institute of Chartered Accountants (NZICA) to license auditors, and the Financial Markets Authority to oversee the NZICA and be responsible for quality reviews," Power said.
'Integral part' of restoring investors' confidence
The bill is an "integral part" of the government’s programme aimed at restoring investor confidence in the country's financial markets after the demise of 63 finance companies and other entities over the past five years put up to NZ$8.59 billion of investors' money held in about 205,649 deposits at risk. See our Deep Freeze List for full details.
“The Registrar of Companies identified that audit failure was a contributing factor in the collapse of finance companies, so it’s important we introduce independent oversight," Power added.
A report by Registrar of Companies Neville Harris to Parliament's Commerce Select Committee in 2009 said the audits of many failed finance companies lacked the rigour and analytical depth expected for entities managing substantial public investments.
Harris also questioned whether some of the "second-tier" accounting firms such as BDO Spicers, Staples Rodway and Hayes Knight used as auditors by many of the finance companies had the capability and experience to conduct the initial due diligence for the assignment and to audit such complex and elaborate company and business structures.
The demise of auditor self regulation also comes after international pressure on New Zealand to introduce independent oversight of auditing. In 2009 Power said the NZICA faced a potential conflict of interest as it both regulated auditors in the public interest and promoted the interests of the accounting profession. Power noted the European Commission had written to New Zealand and 33 other countries inquiring whether they had a public-oversight system equivalent to the regulations in place in European Union member states.
Another key plank in the government's attempt to resurrect investor confidence is the creation of new financial markets regulator the Financial Markets Authority (FMA). It's due to be up and running in May and is set to have Australian style powers to act, potentially retrospectively, against company directors, auditors and trustees. (Also see Gareth Vaughan's opinion piece: Memo to the Govt: Please allow the FMA to take retrospective action on investors' behalf and pass the Class Actions Bill too.)
Won't be an offence to not comply with standards
Power said the select committee has also recommended removing a clause from the bill that would have made it an offence for auditors to not comply with auditing standards.
“I agree that this provision is not needed, because the Crimes Act applies to serious offending such as fraud and deception," said Power. “Once the bill is enacted, New Zealand will have an effective auditor oversight regime that is consistent with international standards.”
Subject to the legislation being enacted, Power said the XRB will start operating on July 1. The auditor regulation provisions will come into force once the NZICA and the FMA have established new regulatory systems.
Power said he welcomed the select committee’s recommendation that auditing firms be registered, because it recognises that audit quality is not just about an individual auditor’s skills, knowledge, and experience, but is also about their firm’s systems and processes.
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