TRANSCRIPT
of

THE HON PETER COSTELLO MP
Treasurer

Press Conference

Canberra

Wednesday, 18 September 2002

12.15pm

SUBJECTS: Corporate Law Economic Reform Program (CLERP); Family

Tax Benefit; Iraq

TREASURER:

In June of this year the Government announced that as part of its ongoing modernisation

of Australia’s corporate law, we would be releasing the Corporate Law Economic

Reform Program No. 9 which we release today on Corporate Disclosure: Strengthening

the Financial Reporting Framework.

The Report contains around 41 proposals to strengthen corporate disclosure

and to improve the regulation of the auditing profession.

We propose to take public submissions in relation to these proposals up until

22 November of this year, thereafter prepare legislation based on these proposals

for introduction into the Parliament next year. That timetable will also give

us the chance to respond to any new recommendations that come out of the HIH

Royal Commission which is expected to report in February of next year.

The Australian system of corporations law, having been substantially modernised

through our program 1 to 6, is, in many respects, advanced on that of the United

States. For example Australia has had a system of continuous disclosure, unlike

the American system of quarterly reporting.

Nonetheless we have taken into account the serious financial collapses which

have occurred in the United States in relation to companies like Enron and WorldCom.

We have not been immune in Australia from corporate collapses which require

lessons to be learned and responses to be made. And I talk in particular of

HIH where the Government has called a Royal Commission.

With the exception of HIH it is not apparent that there has been substantial

auditing failure in Australia. The Royal Commission is still to consider the

role of the auditors in relation to HIH. And so I leave that to one side.

Nonetheless, we think it is timely that the system of regulation in respect

of auditors be improved. We have set up in this country a Financial Reporting

Council which has a majority of non-professional representatives on it, that

is, it represents the stakeholders with nominees from the Australian Shareholders

Association, the Australian Stock Exchange, nominees from the investment community,

which currently oversee accounting standards. We are going to give the Financial

Reporting Council the role of overseeing auditors and auditing standards which

will be given the force of law. And in relation to those auditing standards,

this body, which has a majority not from the auditing profession, will have

the power to overlook auditors and their role. And disciplinary proceedings

will be taken through the Companies Auditors and Liquidators Disciplinary Board.

We will make Audit Committees mandatory for Australia’s top 500 companies.

We will make audit partner rotation compulsory after 5 years.

We will require a report by a company of all non-audit services which are provided

by its audit firm.

We will require Audit Committees to certify that the receipt of non-audit services

did not compromise audit independence.

We will enhance the continuous disclosure provisions, which as I said, are

in my view and I think in the view of many observers, substantially in excess

of what is required in the United States.

And we will give additional powers to the Australian Securities and Investments

Commission to enforce those rules by issuing infringement penalties.

In addition to all of those matters, we will strengthen the law to prevent

retaliation against an employee who in good faith reports to the corporate regulator

what they suspect to be a contravention of the law, in the interests of encouraging

disclosure and enhancing information to shareholders. Australia has thoroughly

modernised its corporations law through the program that we put in place commencing

in 1996, much of which has been overseen by Senator Ian Campbell, my Parliamentary

Secretary, who has done a magnificent job in relation to that process and in

addition, in relation to this series of proposals.

It has been acknowledged that our corporations law is as good as any other

in the world and certainly in advance of that of the United States. But we want

to make sure that we stay on the leading edge of developments, that in areas

where we require further modernisation we put in place a series of proposals

which will enhance disclosure, protect shareholders, whilst not at the same

time reducing the capacity of corporations to get on with business and to return

profits.

The CLERP paper No. 9, I believe, strikes the right balance. I encourage the

professions, the business community and all interested stakeholders to respond

to the Government by November. And the Government proposes, after taking into

account those comments, to deal further with these matters with legislation

in the course of next year.

JOURNALIST:

Treasurer, did you consider at all as part of the (inaudible) having a ban

on a company, on an audit company providing non-audit services to the same company,

and if you did, why did you not go with that?

TREASURER:

Well, we did consider that. And the, as I understand the situation in the United

States, they introduced a ban which the SEC can relieve you of. So you go bit

by bit back to the SEC for an exemption. The proposal that we came to was a

proposal not to ban it, but to require the reporting to shareholders and to

require the Audit Committee to actually make a statement to the shareholders

as I say in relation to the press release, to certify that it did not compromise

audit independence. So we think that putting that right up front, making it

absolutely clear, requiring an Audit Committee to certify it, will prohibit

situations where there is any conflict of interest and it will enhance the disclosure

to the shareholders rather than have piece by piece this matter being considered

by your corporate regulator, to put it on the record and to empower shareholders

and analysts in relation to that situation.

JOURNALIST:

Treasurer, would there potentially be any penalty for company directors who

had certified that, and it was subsequently found that there had been some compromise?

TREASURER:

Oh yes, if a company director certifies something that was not the case, that

is a breach of the director’s duty and the company director could expect stiff

enforcement action to be taken against that company director.

JOURNALIST:

Treasurer, can I ask on another matter about the Treasury discussion paper,

the Government bond market and the future of that, can we expect something soon?

TREASURER:

Yes, we can. I’m attending the Commonwealth Finance Ministers’ meeting next

week and the World Bank IMF annual meeting on the weekend, whether or not I

can get the paper out before we go, I’m not sure. But if we don’t, we probably

won’t, it will be shortly after I get back from the annual meeting of the IMF

and World Bank.

What we will be doing, is, we will be forming a consultative group, which will

involve operators in the market and we’ll also be asking for public discussion

on the question as to whether the Commonwealth needs to maintain Commonwealth

Government securities on issue and if it does, the amount of liquidity that

would be required and correspondingly how we would run an asset portfolio. That’s

one alternative. The other alternative of course is not to maintain Commonwealth

Government securities and not to run an asset portfolio. There are pros and

cons of each position. I want to have full consultation before making a decision.

There is no urgency to making the decision. We are a running a portfolio. We

will continue to run a portfolio in the near future. This problem only arises

if we get to a situation where we can retire all of the Commonwealth’s debt.

That is obviously not going to happen in the immediate future.

As I have said earlier, this is a problem that many countries would love to

have. Let’s not get too worried about the immediacy of this. We have got time

for a full and proper debate and that is what we will do.

JOURNALIST:

Are you canvassing the possibility that the Government may hold a stock of

shares?

TREASURER:

Well there are two alternatives. If we were in a position, and I underline

`if’, where we could retire net debt, we could do one of two things. We could

not have securities on issue, that is have no debt. Or alternatively, we could

have a gross position, which would have our securities out there, which would

be matched by an asset position. They’re the two alternatives. And I’m not announcing

which of those we would do, if, underlining if, the situation arises, but I’ll

certainly be taking consultation with interested market players and others when

we put out a position paper in relation to this.

JOURNALIST:

Treasurer, if CLERP 9’s proposals were in fact the law, do you believe that

the HIH collapse wouldn’t have happened?

TREASURER:

Well the thing about HIH, we’ve got a Royal Commission, which is going to give

us an explanation as to why the HIH collapse occurred, and I don’t want to prejudge

it. It could have occurred for a number of reasons. It could have occurred because

the directors were at fault. It could have occurred because there were unforeseen

investment or insurance issues. It could have had some relation to the auditors.

The Royal Commission has not taken evidence in relation to the auditors yet,

so I can’t prejudge that question. Let’s suppose it came to the conclusion that

there was some contribution from the auditors, then you would have to look at

whether there would have been a system of regulation that could have prevented

it. Can I make this point? The law is never going to ban corporate collapses.

You can’t pass a law saying no company shall ever collapse. Companies, you know,

from now until the end of time will collapse for whole series of reasons. It

may be because their product is a product that no-one wants to buy. It may be

because they’re undercapitalised. It may be that the people that are running

it don’t have sufficient enterprise. You can’t just look at a corporate collapse

and say, somebody is engaged in malfeasance. Now as we look at the evidence

coming out of HIH, the Royal Commission’s been a very interesting Royal Commission,

I’m not going to prejudge, it has, I think, uncovered some very interesting

evidence. It hasn’t started in relation to auditors yet, but we’ll get its report

and then we’ll know the outcome.

JOURNALIST:

Treasurer, to what extent has this Report not picked up the recommendations

of the Ramsay Report and where it hasn’t picked them up, what was the reason

for that?

TREASURER:

I think it goes much further than the Ramsay Report. The Ramsay Report was

a good report and we picked up all of the recommendations of the Ramsay Report

in the sense of having an independent board that’s responsible for auditing

standards, not comprised of stakeholders.

As it turned out we already had such a Board, and it was the Financial Reporting

Council and it had its responsibilities in relation to accounting standards

and we’re now going to extend that to auditing standards. But this goes much

further than Ramsay in other significant areas. In relation to disclosure, in

relation to the penalties, in relation to analysts, in relation to a whole host

of areas so, and this is not to say that Professor Ramsay’s report was not useful,

it was very useful. But as things developed in relation to the United States,

we thought it was necessary to pick up those Ramsay matters and go further,

and this goes very substantially further.

JOURNALIST:

Treasurer, the US remedy for this sort of problem will involve a steep hike

in penalties, is that something that you’re envisaging as well.

TREASURER:

In relation to continuous disclosure, you’ve got to remember that the United

States doesn’t even have continuous disclosure, but in relation to continuous

disclosure for bodies corporate, we’re increasing the penalty to $1 million

from $200, 000. In addition to that we are also introducing the power for ASIC

to take proceedings against other persons, not just the corporation but other

persons that may have breached their duty of continuous disclosure. And in addition

to that we are introducing a new power for ASIC to lodge penalties for infringement,

if you like, an on-the-spot fine. Now you can contest that if you don’t like

the on-the-spot fine, you can go to court like you can with a traffic infringement,

but a new power for an on-the-spot fine and in addition to that, we’re also

enhancing the powers to actually require an explanation of externally generated

rumours that may be affecting a stock price.

JOURNALIST:

Treasurer, how do you, on another matter, how do you respond to Labor’s claims

that the changes, the sort of changes, the fine tuning to your Family Tax Benefits

for families are just a bandaid solution that is basically saying to families,

well you should take less money now, so you don’t get a debt later?

TREASURER:

The point about the Family Tax Benefit is this, that those people that

are asked to re-pay money are asked to re-pay it because for one reason or another

they have been overpaid, there is no dispute about that. You are not asked to

repay money unless you have been overpaid. If all you have been paid is your

just entitlements you are not being asked to repay. And so what the Government

says, it has put in place new options which will prevent the overpayment occurring

so that people do not get the money and are then asked to pay it back. So, it

is a pretty silly criticism isn’t it, to say a proposal to prevent the overpayment

is a bad idea. The prevention of the overpayment is the necessary pre-condition

to doing away with the need for the repayment after the event.

JOURNALIST:

Treasurer, since, in the wake of Enron and HIH, accountants have done a lot

of soul searching and come up with a lot of recommendations about how to improve

their own image. Do you expect that their Review of analyst’s independence to

be the more contentious part of this Review?

TREASURER:

The analysts’ independence is an issue that has come up particularly in the

United States where it has been said that there were analysts that were recommending

that stocks be bought at the same time as their firm was selling stocks, and

that the market should have been informed. And the requirements that we have

in this will require these analysts to disclose conflicts of interest out to

the market. I think people are entitled to know that. I hope it is not controversial,

I hope that analysts agree with us on this but we will wait to see whether or

not they do.

JOURNALIST:

Can I ask you about two thing here you said just before. One was that there

will be a requirement for continuous disclosure from people who are not directors,

can you explain what that is…

TREASURER:

Well not from, not the corporation. People who are, who have an obligation,

suppose the CEO or company secretary, if it is found that they have breached

the duty of continuous disclosure they can be subject indeed to action. So it

is not just the corporation, we are putting this obligation of continuous disclosure

back on officials, officers of the company as well.

JOURNALIST:

An explanation of rumours, how broadly does that go? Does that mean journalists

are going to be hauled before ASIC to explain…?

TREASURER:

I wish they were Sid, it would be a matter of great regret if they were not.

But, what I mean by that is, you will quite often see movement in a stock because

a rumour is around let us say, that the Chairman is going to resign or the corporation

is going to be split up or something like that. And what it will do is it will

empower the asking of the corporation for an explanation to the market. Now

the explanation may well be, this is untrue, there is no basis. But it is not

directed at journalists. It is directed at the corporation to actually respond

to matters that might be out in the marketplace that are affecting share prices.

JOURNALIST:

Treasurer, can I ask you, can I ask you about the debate that is going on in

the Parliament at the moment which I don’t think you have contributed to yet,

are you…

TREASURER:

Iraq?

JOURNALIST:

Yes.

TREASURER:

I spoke this morning.

JOURNALIST:

I am sorry. I missed it… it has been a long day so far. What is the…

TREASURER:

Your life will be enriched by reading it I assure you.

JOURNALIST:

Oh don’t worry I will go straight back and do it. Given the move of Iraq yesterday,

what is your view about sticking with the UN processes now or should there be

another element to any kind of UN resolution that gives, that allows, some kind

of unilateral action, military action eventually by the US?

TREASURER:

When the UN first, back in 1991, passed a resolution calling for the destruction

of weapons of mass destruction and the capacity to deliver them beyond one hundred

and fifty kilometres, and international verification – Iraq accepted that –

it said it would accept that and allow inspectors in. And for the next 7 years

or so there was a program of delay, of obfuscation, and eventually in 1998 they

just refused to comply anymore. I refer to that to say that the making of the

promise the inspectors will be allowed in is not the delivery of the objective.

The delivery of the objective is full cooperation until such time as all those

weapons of mass destruction are taken out of existence. So we can welcome the

fact that a statement has been made to say inspections will be allowed, but

such a statement has been made previously, and it hasn’t led to the dismantling

of those weapons of mass destruction. The important thing here, I think, is

full cooperation in the inspection and the dismantling of the weapons. That

is the critical thing and that’s what the International Community will have

to be very sure about, and it’s too early at the moment to say what would have

to be done if there is a program of obfuscation and delay and non compliance.

But I just say the thing is not solved by a statement to that effect.

JOURNALIST:

I guess I am asking, should the UN resolution cover that option, should it

go beyond…?

TREASURER:

I think the UN will be very minded I think as to what will have to be done

to ensure compliance and I’m sure that will be a matter of great discussion

and debate and I’m sure that is very much on the minds of everybody that is

feeling this in New York and we’ll wait to see what comes out of it.

Thanks very much, Thank you.