Corporate Law Economic Reform Program (CLERP), Budget

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Pacific Islands Forum Economic Ministers’ Meeting (FEMM)
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Corporate Law Economic Reform Program (CLERP), Budget


Press Conference
Thursday, 27 June 2002
11.30 pm


SUBJECTS: Corporate Law Economic Reform Program (CLERP), Budget


Shortly after the Government was elected in 1996, we commenced a program of

modernising Australia’s corporate law under a program known as the Corporate

Law Economic Reform Program, CLERP. Over the course of the last six years or

so, this has allowed us to substantially modernise Australia’s corporations

law, and in many respects become a world leader.

Today we are announcing the next instalment in relation to that program, our

ninth instalment, CLERP 9, which is going to review audit regulation and our

system of corporate disclosure. Let me make clear, in the context of current

events, that Australia’s corporate disclosure regime is in many respects much

more advanced than the United States. We operate a system of continuous disclosure

as opposed to quarterly reporting, which the United States operates, but we

feel the time is right to consider that it is state of the art and we will be

reviewing that.

In addition we will be reviewing audit functions, which arises really out

of three areas. The first is, anticipating that this might be necessary, a report

was commissioned from Professor Ramsay, who has recently reported to the Government

in relation to the regulation of audits. The second is the events of HIH and

particularly the role of the auditors, which is now subject to a Royal Commission

we anticipate will give recommendations in relation to audits, and thirdly,

the world wide collapse of Arthur Andersen and the events stemming from that,

as particularly focused on the question of separating audits from other management

consulting or other advice which previously was done in-house and where conflicts

of interest could said to be arising.

And so we intend to bring together our CLERP 9 to take the recommendations

from Ramsay, from HIH and review of the events in the United States to bring

together by 2003, up to the date, up to the minute state of the art audit review.

Can I say, Senator Campbell, who has been working on this program for really,

he started back in 1996-1997, had got agreement to bring forward the CLERP program

some weeks ago and it’s certainly been in train, heightened I think in topicality

by the events overnight. This is not something that has come forward in response

to the events overnight but the events overnight make it much more topical.

Perhaps I will just say something very briefly about the events overnight.

You have seen in the last 24 hours enormous volatility on stockmarkets around

the world which stems largely from the collapse of WorldCom, the very large

American telecommunications company. It appears, at this stage, as if one of

the key reasons for that was that the company was misrepresenting expenses as

capital expenditures. This would be a breach of proper reporting rules and is

a matter that will be investigated by the American SEC.

Unfortunately it comes on top of the events in relation to Enron and the events

in relation to Arthur Andersen, and this has obviously caused a great deal of

worry and concern amongst investors in the United States in particular. These

events have highlighted again how important it is to have a system of proper

corporate regulation. As far as the Australian Government is concerned, we want

to make sure that our regulation is state of the art, and in many respects it

is better than the United States, and that our corporate regulator is active

in bringing to justice people who have breached those standards. And I think

you have seen in relation to HIH, where proceedings have already been taken

against some of the directors, a very, very active Securities and Investments

Commission, but obviously there is a long way to go. The events of the United

States illustrate, I think, that in the United States a lot of work is going

to have to be done in relation to accounting standards and enforcement. I can

assure you in Australia, although we are in many respects in a more advanced

position, we will be similarly ensuring that our laws are enforced and our regulator

is in front of the game to ensure that our stockmarkets are clean and promote



Treasurer are you concerned that there will be flow on effects (inaudible)

potential collapse of WorldCom in Australia and also how would these measures

you are announcing today prevent such a collapse happening here?


Well, it looks as if this collapse is because people have misrepresented financial

information. If that is the case, the people responsible should be brought to

justice, and I believe that is what the American SEC will be looking at. It

does look also in the United States as if there has been a bit of a systemic

weakness in the sense that stock options granted to employees have not been

reported as expenses. And I know that the Federal Reserve Chairman has made

statements recently saying this is a systemic weakness in accounting practices,

and of course stock options during the days of the ‘tech bubble’ became a very

preferred way of rewarding employees.

As to the effect of WorldCom on the real economy as opposed to the stockmarkets

and so on in Australia, it looks as if we have very limited exposure from that

in the real economy, but obviously it affected our stockmarkets yesterday, it

has led to enormous volatility in world stockmarkets and on exchange rates there

will be considerable fallout as a consequence. But it is, if I could take you

back 18 months ago, there was a lot of newspaper commentary about why Australia

should be emulating the United States in relation to technology stocks and how

we were being left behind by huge stockmarket asset rises, you are seeing a

lot of that unwind, and because we missed the upside of the bubble, we have

missed a good deal of the downside of the bubble. And in hindsight those people

that were urging us, 18 months or 2 months ago, 2 years ago, to be a bit like

America, may have been giving us the wrong prescription.


Mr Costello do you think that there is a risk, given as you say (inaudible)

systemic things here that there could be a really long-term period of international

economic uncertainty on a greater scale than we have had perhaps flowing from

Japan in the last decade, I mean what’s the possibility that we really are facing

a very long-term systemic problem flowing out of the US?


Well, if you look at US equity markets, the Dow Jones index back about 9,000,

which shows that over the last say three years, it has just been treading water.

But if you look back over a longer period of time and you put this in the context

of a decade or two you could even read into it that the correction has a bit

further to go. I, even at this level, it may be out of whack with long-term

historical trends. Now, that is an equity market, the question is, how that

is going to work out into the real US economy. I think it will have effects

in the real US economy, frankly, because there are so many Americans during

the build up of the stock market, and particularly during the tech bubble, who

leveraged their way into the equity markets, and you would expect that to have

an effect. So, you have got to put all of those things together and try and

get a handle on where the US economy is going. Now it has been through a recession,

we think it is moving out. The US Federal Reserve overnight said that it is

expecting final demand to pick up. But interestingly enough has not moved monetary

policy yet. This is an extremely accommodative monetary policy in the United

States, at 1 ¾ per cent, and the fact that the US Fed has still got rates

at 1 ¾ per cent will tell you, I think, that it is not seeing, you know,

any great strength coming through the economy at the moment. It expects it,

as it said, over coming quarters but the fact that it did not change rates gives

you an idea that they are adopting a wait and see attitude and I think that

is prudent in the circumstances.


You’ve ridden out these American down-turns before with the Australian economy.

If that, if it does turn down how well placed are we to cope with that given

the Australian dollar is on the rise again?


Well, the two great international events that in years gone by would have

severely shaken the Australian economy was the Asian crisis of 1997, the US

recession of 2001, and we came through both of them with a strong economy. Now,

the American economy was probably just strengthening at the end of 2001, they

went through the shock of September the 11th and now they are taking enormous

stock market volatility. At this stage it looks like it is still going to be

a stronger economy than it was in 2001, certainly that is the expectation of

the US authorities and that is our forecast. So, I would like a strong US economy

– I think that is good for the world – but let’s not overreact, it is still

going to be better than a recession economy and it was a recession economy in

2001. We were able to ride out a US recession in 2001, so, as the US economy

turns that should be better for us.


Treasurer, would it be prudent next Tuesday for our Reserve to adopt a wait

and see approach with regards to what this collapse may have, or the impact

may have on world growth and subsequently (inaudible)…


I am sure what it will do next Tuesday will be very prudent.


Treasurer, do Australian investors have the same mistrust of Australian companies

as American investors now do in their corporate community?


Well let’s put this in context. We have not got a blameless record in Australia,

have we, in terms of corporate regulation. We have had One-Tel, we have had

HIH, but certainly they are not of the dimensions of Enron, Arthur Andersen,

WorldCom. So, I wouldn’t say we have been blameless but certainly the things

that have rocked the US economy have been on a dimension that we haven’t seen

in Australia. Now we have got to make sure in Australia that we attend to these

things. In HIH the court has already imposed 20 year disqualifications on some

of the directors, you know, subject to appeal, but it has been very active.

Harris Scarfe, the CFO was jailed for 6 years, yesterday, I believe. One-Tel,

there are proceedings on foot against three former directors in relation to

that. So, we have got to make sure that our own house is in order. The good

thing is, I think our regulator has been pretty pro-active, pretty quick in

getting these matters to court here in Australia. In the United States the dimension

of the problem appears to be much greater. It appears to me that there are systemic

weakness, particularly in relation to stock options and I think it probably

has rocked the United States as a consequence, much in, to quite a degree, and

they are coming off what has been a very long-run bull market and I think there

is going to be some fall-out as a consequence of that and the American authorities

will have to come to terms with it.


Treasurer, do you understand that the public would be becoming increasingly

concerned when the business pages of the papers start to rival the crime pages?


Well, some company directors have broken the law and when they break the law

in Australia our corporate regulator is going to prosecute them. A couple of

them got disqualifications for 20 years recently, 20 years, that is quite a

long time, and that, if I may say so, is not the conclusion of the matter. That

was only on one separate part of it. Now, you have got to remember this, everybody

is innocent until proven guilty but the regulators will continue to go very

carefully, and I think the public is entitled to know that the regulator is

going to be very active and I can assure them our regulators will. I can assure

them of this, that our regulators are increasingly moving up to get in front

of the game. We do not want a situation where you have fall-out of the dimension

of the American stock markets – the Enrons, the Arthur Andersens, WorldComs.

I mean, Arthur Andersen, the firm of Arthur Andersen, a world wide firm of Arthur

Andersen has collapsed and gone out of business in the last 12 months. That

is enormous and the effect that it has had on stock markets is going to be enormous



Treasurer, just two quick questions, do you think the audit function of companies

should be separated from their management (inaudible) like Arthur Andersen did

which would be a tricky, I don’t know whether it is now, I doubt it. And secondly,

isn’t the weaker American dollar something that is really worrying us because

wasn’t that one of the key factors which allowed us to sail through the two

recent crises?


Well, on the question of separating audit from non-audit functions, I think

yes, there is a very strong argument that that be done and that is what our

CLERP 9 paper is going to deal with.


Wouldn’t they be a bit upset with having to change the structure of their

companies (inaudible) Ernst & Young …


Well, that is something that they may have to deal with, and it is better

dealing with problems in that than watching your business go out of business

as happened in relation to Arthur Andersen. It may have to be actual separation

and divestment, it may be a Chinese wall, it may be something that is subject

to peer review. Our CLERP 9 is going to raise all of those issues and deal with


In relation to the exchange rate, yes, the value of the Australian dollar

kept the Australian economy super competitive through the course of 2001 and

2002 but it is still a competitive exchange rate. One of the things that I said

during that period was that the real story was not the A dollar but the US dollar.

The US dollar was rising all the way through 2001 and 2002. I think the story

is still a US dollar story, that is, that the US dollar is now falling and that

is in relation to other currencies as well.


(inaudible) that logic Mr Costello, surely that there must be a bit of threat

to Australian growth…


I think the exchange rate is, the current exchange rate, as I said, is still

a competitive exchange rate and by historical standards if you look at it in

historical context, and I do not see the current exchange rate as a threat to

growth, no.


Treasurer have you told the regulators that they have to get out there and

head off the sort of things that have occurred in the US? Have you talked with

ASIC about this?


Oh yes, we have lots of talks with ASIC, and ASIC knows that we want ASIC

to be very, very active and very quick, and, you know, at front of the game

to the extent that it can be, and, you know, we do not want a repeat of the

late 1980’s where some people who the corporate regulator were looking for managed

to get out to Spain, and others were subject of interminable proceedings.

I think, actually the HIH episode has illustrated how much ASIC has improved

and how quickly it was able to, we already have, we already have a judgement

in relation to some directors from HIH and that is going to go on appeal. But

whilst the Royal Commission is still running, it still hasn’t reported, we already

have a judgement against a number of Directors.




Sorry, two last questions, you one Tim and then Fran.


On the resourcing of ASIC do you, is there any sort of case for looking at

whether they need more staff, because this was suggested that part of the problem

in the States has been that the SEC just does not have the skilled manpower

to follow up complaints about corporations? And secondly, who will actually

be doing the CLERP Review? Will this be done within Treasury, or…?


Treasury will produce the paper but it will be drawing on the Ramsay Report

and the Business Regulation Advisory Group of private sector appointees who

will be advising us as they did in relation to previous ones. In relation to

ASIC, we increased ASIC’s funding in the most recent Budget, an additional $90.8

million over four years and we anticipated that this would, there would be a

call on its resources and that is why we increased its funding, and it was quite

a significant increase in the context of a pretty tight Budget, I can assure

you. Sorry, Fran.


Now Treasurer, I am afraid that I am going to drag you back to domestic politics.

We are about to wind up for six weeks at least. You still haven’t got your key

Budget measures through the Senate, that has not happened. Do you have a plan

to manage that, a plan to manage the hit that it’s going to make on the Budget

bottom line?


The biggest hit that the obstruction of the Labor Party and Democrats in the

Senate has made on the Budget is in relation to the Pharmaceutical Benefits

Scheme. That is, around about, $300 million per annum. It is totally irresponsible,

and we now know from the Labor Party that they support a co-payment, they tell

us that, they introduced it, and they reserve the right to increase it if they

ever get into Government, they are just going to vote against it while they

are in Opposition. Now, what that will do, is that will, as I have said earlier,

it will undermine the sustainability of the Pharmaceutical Benefits Scheme –

that’s what it will do. And, it will just mean that the Government will have

to be more careful in relation to the admission of new treatments, that is a

consequence, we will have to be very careful in relation to that, because the

scheme in its current form is growing at an unsustainable rate. Now, I notice

that the Deputy Leader of the Opposition, Jenny Macklin, said they were opposing

these changes “at the moment”. Recall that phrase, “at the moment”.

Now I don’t know if by moment she means they will oppose them until they return

to Government, which could be a very long moment, or they are opposing them

until such time as a breath of sanity comes through the Labor Party. Now, that

could be a long moment too, but let’s hope that it is not. But if the Senate

rejects them, yes, we will refer them back to the Senate for a second time –

that is what we will do, and we will give the Senate time to reflect on its

decision and time to reconsider the need to base the Pharmaceutical Benefits

Scheme on a financially sustainable level.


(inaudible) fight an election on that basis?


As I said, we will refer it back to the Senate and we will give the Senate

time to reconsider its opinion.

Thank you very much.