David Knott has wasted no time in stamping his own ideas on how the ASIC will operate, including greater role-sharing among the senior ranks. Tom Ravlic reports.
There are several standard questions journalists ask in particular situations. A breathless swimmer just out of a pool at a major swim meet will be asked: "How do you feel?" and politicians will almost always be quizzed on whether taxes will rise if they sneak into office at the next federal poll. And those people taking over from high-profile predecessors will get the hardy perennial about what they want to achieve during their time in office. David Knott took over at the Australian Securities and Investments Commission last November from long-time chairman, Alan Cameron. Knott's response to the customary "new guy" question is quite simple: his eyes are firmly set on ensuring the ASIC fulfills its role as effective custodian of market integrity. "The first thing I'd say is that I don't come into this job as a crusader who has a particular set of personal agendas to achieve," says Knott, appointed deputy-chairman at ASIC in mid-1999 after Peter Day resigned to return to the private sector. "I come into the role on the basis that ASIC has a statutory mandate," Knott says. "Its objectives are set down for it by the Parliament. I see it as my role to internally shape ASIC and its directions to achieve those outcomes; and externally to bring our variety of stakeholders from the business end, professional end and consumer end to develop policies to try to bring those conflicting interests together."
It didn't take long for Knott to make some critical internal changes to the way ASIC operates in an attempt to enhance its effectiveness as a regulator. Within a fortnight of taking over as chairman he announced the creation of additional national director roles intended to speed up decision-making processes within the commission and spread top level workloads across a greater number of shoulders. The announcement of those changes late last November was accompanied by news that the commission was to conduct an extensive internal management review in order to see whether the existing structure is appropriate, given the commission's additional responsibilities such as its coverage of superannuation and the move into a consumer protection role. Knott has also moved to divide what was previously a single office dealing with the changes to financial services regulation emerging out of the so-called CLERP 6 reforms of the financial sector. "I've split the financial services regulation out of the general one-stop shop national directorate that we had into two," Knott explains.
"We now have a special directorate for financial services regulation and that's left other traditional regulation and policy in its own directorate." The internal shake-ups and reviews are one aspect the ASIC chairman has overseen. There are also significant issues out in the business community that the regulator is monitoring, including the continuing debates over appropriate disclosures to the market place and the downturn in financial markets concerning the new economy companies. "All of those issues come together in a way that is focusing our mind quite actively on whether we should be doing things differently," Knott says. "I think you should expect in 2001 that in some of these areas we will be more visible." The new economy phenomenon is one the ASIC is actively pursuing. Dotcom entities, as they are tagged by the press, raise myriad financial reporting and corporate governance issues, creating by default an environment where the regulator has little choice but to warn against laxity. Like Cameron before him, Knott expresses reservations about the business sense of those entrepreneurs with a single idea, a bit of cash and, perhaps, a handful of shareholders tagging along for a bumpy ride without a seat-belt in sight.
"In Australia over the last three years, and indeed around the world, this growth of new technology companies has introduced to the market a whole wave of new entrepreneurs who do not come from steep traditions of corporate governance, understanding of the law and the like," Knott explains. "They've had easy access to capital. They've had undemanding access to capital. They've often floated companies more in hope and expectation than on the basis of any established business. There's been a bit of a cocktail there for potential fallout." Several internet-based companies have had stop orders placed on their prospectuses when the ASIC discovered the disclosures were less than suitable. Those disclosures do not just relate to the accounting issues, but to the risks companies face and also the production of hypothetical scenarios in prospectus documents that, in essence, produce numbers that mean nothing. Concerns about the use of hypothetical assumptions in prospectuses led to ASIC producing an information release in conjunction with the Big Five accounting firms and the Auditing and Assurance Standards Board to warn companies not to use numbers derived from "blue sky" scenarios.
New economy companies also featured prominently in a recent financial reporting surveillance program, which resulted in 53 companies being asked to explain apparent shortcomings in their accounting practices. Concerns raised by ASIC during that exercise included the perennial issues of accounting for intangible assets and apparent inaccuracies in the quarterly cash flow statements of some entities. It's not just the dotcom entities the commission is pursuing. They have caught up with various auditors and liquidators via the disciplinary process that takes place under the auspices of the Company Auditors and Liquidators Disciplinary Board. Some commentators have claimed CALDB lacks independence and is merely a voice for the commission, but the ASIC chairman says CALDB has no operational connection with the commission. "The CALDB is deliberately established as an independent tribunal. It lives in a completely independent building and it has absolutely no operational connection with ASIC," Knott asserts. "We do not act as investigator, judge and jury in relation to these complaints. If we identify a matter we believe warrants disciplinary consideration for auditors and liquidators we prepare a case - as we would for any other type of investigation - and we present it to this forum."
David Knott highlights the fact that CALDB outcomes can be appealed by the parties involved to the Administrative Appeals Tribunal. "It is important that the issue is understood," he says. "It would be dangerous if it was thought that ASIC arbitrarily both makes out the complaint and in some way decides the outcome, which isn't right. I think that to some extent some of the recent publicity about the CALDB has confused that issue." Consumer protection is the most recent addition to the commission's suite of responsibilities and chairman Knott identifies this as one of the areas where the ASIC is likely to be put into conflict with industry. Australia's regulator has a high reputation internationally, particularly because of some of the innovative thinking in regulation. One such example is the proposals put forward last year by the Federal Government for ASIC to have tougher oversight powers over the ASX as a result of the ASX trading its own shares on its own exchange. The ASX has proposed its own internal review processes in addition to the proposed powers the Government wants ASIC to have within its bailiwick. Powers that will be added to the existing supervisory role ASIC already plays. "Those powers would effectively give us audit or direct review powers over the way the ASX exercises its supervisory function," Knott explains.
"For this time and this market [those changes] represent a fairly significant development," he says. "Whether over time they will be enough we will have to wait and see."
Where they're going
Several of ASIC's former executives have revealed where they'll be working in the next few months. Former chairman Alan Cameron starts his stint this month as a consultant with Arthur Andersen and Andersen Legal that will see him advising AA partners, staff and clients on various issues related to corporate law. Cameron's role will also see him deal with the audit and assurance division with Arthur Andersen on accounting and corporate governance matters. Former chief accountant Jan McCahey commences her partnership at PricewaterhouseCoopers this month. PwC's head of assurance and business advisory services John Thorn said the firm saw her appointment as an opportunity to help clients navigate the regulatory maze in order to provide solutions. Joe Longo, the ASIC's national director, enforcement, will join Freehills Hollingdale & Page as senior counsel after just over five years with the commission.
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