top stories

Share

Risk management must be more than lip service to protect the Australian economy against future financial shocks, warns the Association of Chartered Certified Accountants (ACCA).

The comment comes as ACCA releases the Future of Financial Regulation report following extensive consultation with financial experts across its 57 global accounting partnerships. The report provides nine key principles for regulators, boards and professionals to use as a blueprint for effective regulation.

“Financial regulation is a global issue and Australia is not immune to its failings. While the Australian market hasn’t been hit as hard as other nations around the world, there is always room to improve and strengthen the sector against future financial shocks,” says Australian ACCA panel member, Chris Campbell.

Campbell says the three key principles Australia should look to improve are risk management & internal control, incentives, and business conduct.

“Australian companies have risk management policies in place, however most are not transparent in how these are governed, implemented and reviewed. Companies need to elevate the importance of risk management and internal audit to safeguard against financial threats and corporate failure,” he says.

Campbell says adopting ethics-based corporate cultures on issues like remuneration and incentives will also ensure financial institutions continue to act in the long-term interests of their stakeholders.

“Remuneration and incentive schemes should be structured to match the long-term interests of a company to remain fair and effective. Recent scrutiny of executive remuneration schemes and boards has demonstrated that getting it wrong can be detrimental to a company’s reputation and long-term financial stability,” he says.

Campbell says organisations should go beyond the minimum when it comes to disclosure.

“Transparency is imperative to maintain ethical business conduct. Efforts to improve the disclosure of fee structures to consumers and increased scrutiny of new financial products by regulators are examples of how the market is building momentum towards better regulation and responsibility to stakeholders,” he says.

“The accountancy profession plays a key role in ensuring the quality of financial reporting and auditing to restore faith with stakeholders,” he says.

Campbell points out that some of Australia’s existing regulations are in-line with ACCA’s recommendations such as ‘ensuring fair competition in the marketplace’.

“Australia’s Four Pillars policy, which forbids mergers between the big four banks, is one example of promoting healthy competition in the market. Regulations such as these have helped to shield Australia from the worst of the global economic downturn,” he says.

The Future of Financial Regulation report also warns that the failure of ‘light-touch’ regulation and its role in the global economic downturn does not mean a ‘heavy-handed’ approach is the answer.

“Many corporate failures have not been the result of insufficient regulation, but rather inadequate enforcement of the rules. Authorities need to consider whether increased disclosure will improve compliance before making unnecessary changes to regulatory policy,” he says.

"The nine principles put forward in the Future of Financial Regulation report provide a blueprint to strengthen regulation. The adoption of these recommendations will maintain Australia’s position in the global market place for when the market picks up again," Campbell concludes.

ACCA’s nine key principles for the future financial regulation:

1. Establish the Purpose of Regulation: Facilitate business activity while providing essential safeguards for the interests of stakeholders. Authorities need to have a thorough understanding of the businesses and markets they are supervising.

2. Ensure Fair Competition in the Market: Governments, national and regional authorities should regard healthy competition in the market place as crucial to the enhancement and potential effectiveness of their regulatory systems.

3. Standards of Business Conduct: Strengthened regulation and supervision must promote integrity and transparency. A commitment to an ethical corporate culture will help protect the interests of shareholders and external stakeholders; achieve transparency and help combat threats such as fraud and bribery.

4. Standards of Competence: Companies should be expected to have appropriate skills and human resources at all levels of the business. Each company’s board of directors must understand the technicalities of the business. Individuals with appropriate skills and experience must be involved in the decision-making process and alert and responsive to developments in business practices.

5. Corporate Governance: Boards, shareholders and stakeholders should have a common understanding of the ultimate aim of securing long-term prosperity for the company concerned; while recognising the special interest and rights of the others.

6. Accountability: Companies should be expected to account for their activities transparently, thoroughly and with due regard for the demands, rights and information needs of their stakeholders.

The process of external audit ensures shareholders and the markets receive independent, external assurance about the way that boards manage their companies. Regulators and the auditing profession also have the potential to add new value to the regulatory process through changes in the nature of an audit or extensions to its scope.

7. Incentives: Remuneration schemes for directors and employees should be integrated into a company’s strategic plans and should be careful not to distort behaviour which could be detrimental to the long-term interests of the company. In particular, incentive schemes should be linked, primarily, to the achievement of longer-term shareholder value by the company as a whole.

8. Risk Management and Internal Control: All companies should set up risk management and internal controls that can be objectively challenged by the board, independently of line management. To ensure the integrity of both the risk and internal audit functions, they need to be given a high status within the company structure. Ideally, the officer responsible, if not a member of the board, needs to be made accountable directly to the board rather than to executive management.

9. Funding: Companies in the financial sector should be required to have capital structures and levels of liquidity which correspond to the scale and the level of risk inherent in their activities. Structures should also make reasonable provision for changes in economic circumstances. International regulatory authorities should pursue a co-ordinated approach to the definition of optimal capital levels for the major retail banks. As an integral part of any new regime on capital requirements, the regulation system needs to have built-in safeguards which will help protect against future repetition of boom and bust cycles.

 

---

For further information please contact:

Frances Dwyer IMPACT Communications 02 9519 5411/0402 382 447 frances@impactcommunicatons.com.au

Marcela Balart IMPACT Communications 02 9519 5411/0422 483 371 marcela@impactcommunications.com.au