Auditor independence in focus Early Warner

Should the Government act now? asks Professor Bob Baxt.

The ongoing problems of auditors as illustrated by the recent Enron disaster in the USA, and the subsequent Congressional hearing into that company (which happened to raise the problems with HIH in Australia as well) highlights the importance of this issue. But, we have seen two statements by different ministers of the Federal Government which create a problem for the business community and their advisers. It will create an even bigger problem for accountants (auditors in particular). Senator Campbell, the Minister responsible for business and corporate affairs has indicated that the Government will be acting immediately in relation to the auditor independence issue (as a result of the Enron story). Federal Treasurer Peter Costello, however, has suggested (and in my view appropriately) that the Government should await the outcome of the Royal Commission into HIH before introducing changes. This raises the question of legislation on the run or knee-jerk legislative changes. Far too often we find governments adopting the practice of amending legislation very quickly and with little regard to the long-term impact that the legislation may make. On the other hand, if there was a critical issue that a court case or some other event had uncovered then of course more urgent action on the part of the Government might be warranted.

However, the issues raised by the events, although they may be slightly more spectacular than those that were raised earlier, are not new. Indeed, the writer had suggested many years ago that the question of auditor independence needed urgent attention. Writing in the book published by CCH in the 1980s, I commented on two decisions in the New South Wales Supreme Court in which these questions had been raised. The first, was the decision of Pacific Acceptance Corporation Ltd v Forsyth (decided in 1970) in which Justice Moffitt had suggested that the question of independence was an extremely difficult one and one that needed attention. His suggestion that something needed to be done went unheard and some 15 years later in the Cambridge Credit litigation (Cambridge Credit Corporation Ltd v Hutcheson) a similar question arose. This time Rogers J in the New South Wales Supreme Court raised the issues of conflict which was exposed by the issue of independence. While the Companies Auditors and Liquidators Disciplinary Board has also had a say on this particular matter it has only been the recent events surrounding the Harris Scarfe organisation, One.Tel, HIH and now Enron that has brought these matters to the attention of the Government.

The Ramsay Report which has suggested a course of action for the Government might be regarded as a quick and sensible solution to the problems; on the other hand, with the HIH report due later this year or early next year one wonders why the Government would act now if in fact it may have to review the possible "solution" once Justice Owen has delivered is report in the Royal Commission. Generally speaking I do not favour urgent knee-jerk reactions to problems that may arise. The question of auditor independence is not one that I believe needs a knee-jerk reaction. I believe organisations can and will respond positively and responsibly to the problems that have been thrown up by the recent events, and that we will see self-regulation play a very significant part in ensuring that some of the problems that have arisen can be dealt with positively, if not completely eradicated. In due course, legislation may be necessary to ensure that the problems are dealt with in a different fashion. But one suspects that the solution will not be necessarily a pure matter of additional legislation but a combination of legislation and self regulation.

The issues that arose last year with the collapse of One.Tel, and the payment of bonuses to directors, was also the subject of some urgent suggested action on the part of the Government. The urgency has now disappeared and action has not yet been taken. One hopes, that this reflects the fact that those responsible in government and advising government are giving the matter a more detailed consideration than was obviously possible because of the high profile issues that were thrown up by these events. The law already provides a considerable amount of protection in this and other areas and we probably do not need further legislation to add to the burden that companies and their advisers already bear in that regard. This is an area of the law (like so many) which the author suggests needs to be dealt and guided by the proposition that we should "hasten slowly" in reviewing the issues.

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