Senate Economics Legislation Committee, , 3:41:52 to 4:59:38
Senators examine consulting sector reforms, the government's response to the PwC scandal, and risks of regulatory capture.
Topics: Integrity, Public service staffing, Procurement
Speakers: Tony McDonald, Barbara Pocock, Hon Katy Gallagher, Dave Sharma, James Kelly, Jason McDonald, Lisa Darmanin, Speaker 22
>> Thank you, chair. Um, I have [clears throat] some questions about the government's response to the parliamentary joint committee on corporations and financial services final consulting report. Um I in October Minister Ayres said this report was an important body of work. Why then did the government respond to a comprehensive 200page report and many many days of evidence with a poultry six-page report that only noted all 40 tripartite
>> Senator Tony McDonald assistant secretary policy and corporations division. Um the uh as you say the um uh the parliamentary inquiries cover a broad range of issues and um and the government is implementing a large package of reforms in relation to that matter. Um the uh there's a lot of that work that has been uh implemented but there's as outlined in the government response there's a number of items that are still a work in progress. Um this is a point Mr. Kelly covered earlier in rel in response to Senator Canavan where we have uh a number of steps in in place. Um I think in the different the two committee responses there's only one where the government disagrees. There are a number of others that talk about um either noting agreeing or agreeing in principle. Um but as the minister has said before sort of many of those elements even where we just saying that we're noting it there's work that has proceeded and indeed sort of is underway and um uh and will continue. So um we uh we when providing a response and this response was a sort of uh overk um we we try and provide it as best we can at a point in time uh based on all of the moving parts that that are going
ahead. Well, there were some really important recommendations uh that have been ignored, including lowering the partnership caps, separating audit from non- audit, improving whistleblower protections, not allowing PWC to tender for government work till all investigations have concluded. These are all very practical, doable things that our evidence says suggest is pressing. They are pressing and they are important. When will you as a government actually enact reforms that match the scale of this problem,
>> Uh, well, I'm not sure I can add anything further to um the government response that's being provided. Um, Senator PCO, >> it's our position is outlined in the
question of partnership caps and separating audit from non-order, incredibly important uh reforms that really would make a difference to uh conflicts of interest and perceptions of conflicts of interest and to good governance and ethical practice in this sector. You have no plans at present in this period of government to deal with those issues in a legislative way.
Um I'm just trying to get the uh response
>> perhaps if I could assist Senator I think um >> uh this may be referring to uh the absence of such measures in the regulatory initiatives grid. Um and perhaps to assure you, Senator, that um that the regulatory initiatives grid outlines announced and publicly public regulatory reform priorities and initiatives that are expected to material affect the financial sector over the next two years. But and we try and be as comprehensive as possible, but it's not intended to be exhaustive or capture day-to-day policy work such as the Creary's ongoing uh policy consideration of issues in relation to accounting, auditing and consulting firms. So the position we're in is that sort of we put things onto the regul regulatory initiatives grid once the government's agreed to them. But sort of we don't know everything that the government's going to agree to over the next two years. So um I'll try and avoid double negatives, Senator, but the absence of an initiative from the rig does not mean that work is not occurring in this regard and it doesn't mean that nothing will be done uh over the next two years.
>> But surely the grid represents a priority listing. If you're on the grid already, you're going to be ahead. And there is as I can see nothing on that grid in relation to audit or assurance in the consulting sector had a look at
um I guess I come back to the point sort of that uh points go on to that uh where um once the government has has agreed to it and so that's um we this is I mean I think it's an important initiative to try and give transparency and awareness to the sector of stakeholders to know what is coming forward but um uh but it can't cover everything and sort of uh it covers what we Right.
>> So not an exhaustive list. We can it it it's not impossible that it appears there but at present not there and yet we've had such a detailed inquiry over years where there is cross party agreement across Senate agreement about what needs to happen that's quite specific and a roadmap essentially laid out. I must say as a senator was part of that how incredibly disappointing that is. Minister, um if I can go to uh unless you want to offer any other comment on that.
>> Happy to go to your next lot of questions. Senator,
>> in May 2024, Treasury released a consultation paper titled response to PWC regulation of accounting order and consulting firms in Australia. The website says that the consult consultation process now being completed. Consultations now been closed for more than 18 months. What has the government done in the time since?
Um, Senator, that consultation process uh ranged a number of raised a number of issues and uh uh complex points to consider which we have um examined carefully um and um thought through uh the and developed uh different options that could be um that could address uh the risks with current regulatory settings. um but also uh how how to avoid the potential for uh unintended consequences in doing that. So how to get the balance right um and that um we expect the next step so we've done a number of those pieces of work. We would expect the next step in that process would be um a consultation poper to start to go into um some more of those options in greater in a greater level of specificity. Um uh but as to the timing of when that paper would go for consultation that would be a matter for government.
>> So this is a second round of consultation uh following the first and an 18month gap since the first. Is that what you're
>> Uh yes, but it's not the same consultation. Senator,
>> a different paper. When can we expect to see that paper?
>> It's a matter for government. Senator,
>> um Senator PCO, can I just add in after say I didn't have anything in the I can just provide some further information that the assistant treasurer is introducing a bill this week which engages directly with recommendations of the report from the committee and the minister has written to the committee bringing it to their attention. Um it's the financial reporting systems reform bill and it deals with recommendation 2023 and 24 of uh the committee's report.
>> Is that the bill a bill relating to the external reporting Australia?
>> Yes.
>> Yeah. I I've got questions on that ahead. Thank you.
>> It might assist the committee um as the chair of that committee. I actually have a copy of the correspondence and seems as it's up for discussion today. Might just table that. >> Oh yeah, sorry. >> Which gives us a bit of an update. It's >> Yeah, just the same thing. >> Sorry, I should have said >> um the min Yeah, the minister had written. I wasn't sure if it had landed with the committee. >> It just >> Yeah, it just got delivered to me. >> in real time here in estimates.
Why are the submissions to this inquiry to date not public?
>> Uh sorry, this is to the um the one from 2024. >> Um well, the release of uh submissions uh Senator is a matter for uh the government. Um typically um what would happen is um uh the trigger point for releasing submissions is when the next step was taken in that process. Um but um it's a matter for the government um when submissions are uploaded.
>> I mean this is a sector that loves consultation and loves long long delays and hopes the government's going to fall asleep and the Australian public will stop paying attention. that is their modus operandi and so the delay is really concerning the failure to be transparent about what this sector has said is a real concern. Uh Minister, will you make those submissions public?
>> I'll take some advice on that. Senator Pot,
>> thank you. Um the two inquiries and the discussion paper by Treasury all identified partnership size as being an issue that has caused scandal in the sector. Uh currently as you know there's a partnership limit of a thousand for accountants and on page 13 of the review treasury said quote the limit may be too high. We recommended the limit should be 100 which is at the level of a range of other professional uh partnerships. What is the government or department planning to do about partnership limits and what's your current thinking?
So Senator those are um points that uh we canvas amongst the options of the the next way forward sort of. Um so it would be a matter for um the different options for handling um that issue and for what that level would be set at. Um uh were it to change uh would be matters that would be canvased properly in the the consultation paper. But the release of that paper would be a matter for government.
>> And just last question, I'm out of time on this bit. Uh how will you ensure the voice of citizens is is part of this process? I look at the list of who's turning up here. The big four turn up very enthusiastically along with the bodies that they essentially capture and have a very big voice on. They're in your ear a lot. How are ordinary people who are affected by the behavior of these very large firms and their governing bodies uh represented?
S it's a very good point. It's one that we talked about at the last guest estimates as well. Um there are um there are a number of mechanisms including the use of um public consultation processes that we um uh that we take account of. Um but as I said previously as well, it is um it is something that we um uh we drill into our staff on a regular basis that sort of um while it is human nature to be looking to engage uh directly with the people you're talking about, but just be aware of that is not the entirety of the community that has an interest in these matters and that um uh part of the training for our staff is to think about the questions that are not being put and the views that are not being put and not allow themselves to be uh covered um just by uh the loudest voices. Um and as we um as we talk through as canvas in the letter that um has just been tabled, part of that in the context of the financial reporting process is um is putting in place measures to balance out the the necessary need to have experts in the room with um having a balance on appropriate boards and and uh and scan sitting bodies so that other voices are heard and they're not crowded out by those. But um I I don't think there's an easy answer to it and it's a challenge that uh is incumbent on us as policy advisers to government um to uh continue to be aware of.
>> Well, these are the kings of regulatory capture and citizens are a small voice. So I wish you well in doing that and I'll continue to ask about it. Thank you.
>> Ask you some questions about the economic reform roundt and some financial regulation initiatives that were flagged. the RG97 endeavor who knows about that >> superenuation matters are dealt with by revenue group this >> it's not necessarily superanuation is it >> uh RJ uh sorry the the group in Treasury that has had carriage in respect of RG 97 >> where's that group it's not markets anymore >> it's so retirement in income and must have been a big renovation at L cres >> is in revenue group as it was at the
>> No, it's only a joke. Okay. >> They kept the most guarded. >> Well, it's it's important to maintain um
>> Okay. So, you don't know about that? >> Uh the that group will appear later, Senator. So, they're the appropriate um
>> Fantastic. Great. Well, I've had a good
>> Okay. Senator Sharma.
>> Thank you. Um we got >> We're trying to wrap up, aren't we? Surely. All right. I'll keep it very quick. Um, I just want to ask about the National Competition Council. >> So, I believe the three current members of the council, their terms expire on next Tuesday, the 17th of February.
the answer's yes. For the record,
>> sorry, that that's when they expire. Um, what is the process to appoint new counselors or has a process been undertaken? Is a process underway?
>> Yes, Senator. the the the process I think is near near finalization and it does involves consulting the well consulting the states looking for nominations then going back to the states to approve nominations.
>> Okay. What's the process that's being
>> that uh so that is the process senator the the uh the uh the states are asked for nominations uh the treasur's right to the treasur with the nominations uh we pro provide advice to the treasur on uh a range of people that could be provide that could fill those roles um and uh then the uh treasures out to the treasures other state treasurers with uh his preferred candidate ates and uh
>> Okay. Just is is this process that's being conducted now is this consistent with the um the new Australian >> I think because it started before uh that came out it's not subject to that require those requirements at the moment. at all. >> Minister, is that your understanding as well of this?
>> Well, the um the BRIGs uh well the new um Australian government appointments framework came into effect in February this year.
>> Yeah.
>> Um and as we discussed in the finance uh committee covers a range of you know a number of positions. Um and you know we through that we're pretty clear about how that appointments framework should
>> But so my reading is any appointments made now that the frameworks in place should be made consistent with that >> it doesn't matter when the process started is when the appointment's made.
Right. >> Well no but the the framework didn't come into effect until February.
>> But the framework's in effect now.
Right. >> It is there was processes underway before that. like there it's a timing issue they've started before that then they continue that's why you have a date of effect
so senator I mean this process is largely complete by that date of effect it's also not the case sorry that this is not going to be a suitable process under that appointment framework obviously we've seen the appointments framework we're thinking very hard about as a department about how we operationalize it and support administers in applying it >> okay >> I think for both the NCC and the Australian competition and consumer Commission when we get to it kind of factor in always thinking about the process that's appropriate is we do have to deal with these timelines and kind of involvement in the states that make it a bit un you know bit different than say an ASIC or an appetype appointment that came up earlier
>> and just um one of the components of the Australian government appointments framework is the recommendation that no person should serve on more than two Australian government boards at any one time. believe at least one of the current um counselors is on more than two government boards currently. Has that been um taken into account with this recommendation? Are you has this been factored into the consideration and
uh I the the uh the the current uh or the recommended counselors um and the their uh what boards they're on would have been information that we gathered but I can't recall given this new framework whether we actually took it into consideration again given the new
>> said it is generally taken into account whether it's taken into account the the way the appointments framework would ask a minister to think about it um that's kind of harder question to answer but certainly as Mr. McDonald said what other things a person who's might be considered is on is is kind of a routine part of consideration. It is the case in the treasury portfolio we do have a number of very specialized um um bodies and and panels um who you know it's a small pool of expertise we're going to be looking at and they kind of do link across each other. So that's something we're going to have to navigate in the future and just kind of think about how
we approach that. And that's why the fle that's I mean we had this discussion in the other committee but you know when there's argument about legislation or um you know the best way to deal with appointments it recognizes that across government there are different you know uh different issues that agencies have and ministers have to consider and so there is flexibility in the framework uh to accommodate that because of the nature of the huge variance in in appointments across government.
>> Yeah. I mean I can see that exception is given for specialist or significant
>> Exactly.
>> and eminently talented people. Has a recommendation gone to the treasurer then for these new appointments?
>> Yes.
>> Okay. Um are you expecting more than members? I mean there's currently three counselors, right?
>> I wouldn't want to pre um prejudge any announcements that might be made, Senator.
>> Okay. How long will the term of the new appointments be?
>> Uh I think the f I think it's 5 years for the general uh appointments.
>> Okay. Um and is it fair to expect an announcement on this before the appointments of the current um members expire?
>> I think it's anticipated that uh there won't be any gap.
>> Okay. All right. Thank you.
>> Thank you, Senator Senator PCO.
>> Thank you. And um I'm just sitting here reading the letter that's been tabled today and I I want to go to this question of the external reporting I understand that the new board will quote not retain [clears throat] the coercive information gathering powers of the financial reporting council. Um, am I correct in saying that this refers to the FRC's information gathering powers as outlined in section 225A of [clears throat] the ASICH act which includes penalties for non-compliance?
Uh, Michael, assistant secretary corporations branch. Um, that that's right. Um, there was overlap between that role that the financial reporting council plays and the role that ASI plays in terms of regulating uh audit and quality. And so the view was taken that um ASICH should maintain that role and continue with their ability to um uh with their existing um information gathering powers and ability to um investigate those cases. um we seen saw reports last year of them taking um action on a range of auditing.
>> Well, I I have to say I'm completely unconvinced. I mean we to have a more efficient, effective and fit for purpose organization which has lesser powers than the body the bodies it is replacing. Why will it have weaker powers than the existing structures?
So perhaps Senator to to assist. I mean this partly goes to the question of the composition of of the bodies as well. Um given that uh in order to have effective standards the uh clear feedback from uh the the consultation over time uh is uh about the critical importance of having current practitioners involved in that process. the um then the approach has been to be clearer. It was has always been the case that ASICH has effectively been the regulator of ass of uh audit quality and auditors. The process that was there previously was about providing reports which then can lead can lead to a confusion that they had a role in regulation and the approach that is set out here is to sort of have clarity of roles. We have technical standard setting bodies that are focused on uh the detail and the regulatory functions are sitting very clearly outside of that
unconvincing and so I remain concerned about that. But I want to go to the membership of of the of the body itself. Um we found in the inquiries into consulting a major contributor to the rot at the big four uh was regulatory capture and there was no rule to prevent former partners with financial ties receiving an income currently to being on the tax practitioners board. A classic case of the fox inside the hen house. uh these organizations love that and they find all kind of ways and they tell us constantly there just aren't enough people in the pool of experts and you have to have someone with a financial interest in the in the work that is actually being regulated on the regulator. So I'm absolutely unconvinced about it and a lot of Australians would agree with me. So I really want to make sure that the standards body uh has true um perception and actual removal of conflict of interest. So, will the legislation establish in this body explicitly ban senior executives or partners currently working at a consulting or accounting firm or with ongoing financial links to these firms, that is anyone who's in an organization that's governed by such a body from being members of the government council of the ERRA. This is a pivotal test. Are you going to make sure that there is true independence? When I look at the words in this letter, they're completely unconvincing to me, I have to say. um we rely on you know independence but it's not dominated by persons with act I mean we want an organization not only is it not dominated from it but is actually free from uh perceived or actual conflicts of interest that are financial
>> so perhaps could come back to the point I was just making senator there's uh that is why um the way to avoid regulatory capture in this instance is that this is not a regulatory body it's a standard setting body the regulation of borders is clearly within ASICH. Now within that there are of course conflict of interest and other sort of provisions in there but the uh the approach that's adopted is in relation to standard setting not in relation to regulation but in relation to standard setting it's critically important to have people who are actually undertaking that work being a part of the process. The what the letter refers to and what the bill that will be going to parliament shortly covers is how to get the appropriate um balance within that standard setting body so that the range of voices are covered and these are points that you know were canvased in in the parliamentary inquiries and the parliamentary evidence as well. They are they are not easy issues and it's not an it's about striking the right balance.
>> So Mr. John, you see no risk in putting into a standard setting body people who are currently in receipt of income in relation to organizations doing work to those standards because I do see a real risk there and we have a body of evidence which tells us give us a and we're in there like a rat up a drain pipe. If there's an opportunity to influence a standard, you can bet your bottom dollar those who are making a lot of money from it will find a way to influence it. And the way we can prevent that perception or actuality is by making sure those standard setting boards are free of that compromising presence.
>> Okay. So, Senator, um I didn't say there was no risk. Um but it um as often in cases is about balancing risks. um uh the risk of not having any current practitioners involved in a standard setting body is that um you have standards that are set that don't reflect the um the issues that are being faced by the sector. Now that's um uh the the question is not whether or not there are risks. The real question is how those risks can best be balanced and how the competing considerations uh uh are are managed.
>> Well, we know there was evidence um in the TPB TPB where you know valiant attempts to talk about conflicts of interest and and declaring your conflict has not occurred did not occur. Um, and that is an inadequate protection uh for ethical
>> purp discussing the merits of the policy on a bill that's just being introduced. So I think we've gone as far as we can explaining the reasoning behind it.
>> I'll come back in the parliament.
>> Thank you. Um well that is um sorry um chair I think Mr. McDonald's just wants to make a
>> sorry I just want to correct one of my responses to um Senator Sha because I actually have the the notes here rather than the treasury system Minister Le who wrote to premers and chief ministers on the 24th of June 2025 seeking uh nominations for the NCC and Dr. Lee >> Dr. And on the 15th of December 2025, Assistant Mini wrote to premers and chief ministers seeking their agreement to the proposed attend appointees
>> on the 16th of December.
>> On the 15th of December 2025.
>> Thank you for clarifying that.
>> Thank you very much. Um that concludes our session with market groups. So we will suspend for lunch now and resume at 10 minutes past 2. Thank you everyone.