BFCSA: 2004 - ATO seeks lowdown on low-doc loans By Alan Kohler

ALAN KOHLER: Well, during the week came more evidence that National Australia Bank's (NAB) eye has been off the ball - a US Securities and Exchange Commission (SEC) investigation into the bank and its auditor, KPMG, for breaching American auditor independence rules. And as SEC Commissioner Roel Campos explains in our 360 Degrees interview today, NAB has the dubious distinction of being the first major company in the world to be investigated under this regulation. Roel Campos, the National Australia Bank is being investigated over auditor independence. Can you explain the process under which it is being investigated by the SEC.

ROEL CAMPOS, COMMISSIONER, US SECURITIES AND EXCHANGE COMMISSION: What is involved here is a situation in which one of our very basic Sarbanes-Oxley rules, having to do with auditor independence, has been possibly - because we don't know the outcome of the investigation - has been possibly violated. And under our rules, what we provide is that auditors who are auditing public companies cannot have other client services, cannot provide other client services. They can't do other consulting. And the problem with that, as you may recall from much of the discussions that occurred prior to Sarbanes-Oxley, is that auditors were seen to be earning substantial fees from non-audit services such as consulting and so they got so large, in the case of the major firms, that the non-audit fees were larger than the audit fees and therefore compromises could be made to the auditing to maintain and preserve that business coming from the non-audit services. In this particular case, again from the...from what's been released, what is being investigated is whether the auditor of the National Bank ended up having some of its people effectively be outsourced and be employees of the bank. In America you cannot be employed by the client that you are auditing. That just destroys the independent auditor situation and would call to question whether the audit and the results of the audit can be relied upon.

ALAN KOHLER: What's the status of a breach of this law - is it a criminal or a civil offence?

ROEL CAMPOS: Well, the SEC - I should make this clear - only has power to bring civil actions, and what that means is that we can go into Federal Court and seek damages, financial damages, and what we try to do in fraud situations is we file a case, a civil case, and we essentially identify the damages - we are the representative of investors and seek restitution or disgorgement of illegal gains. OK, now our particular Department of Justice may look at a case that we have brought civilly and decide that there is also a criminal violation of our securities laws - they both exist in parallel and so it is possible that there could be a criminal investigation. I have no information about that right now. It would depend on the egregiousness and the federal interest in bringing such a case.

ALAN KOHLER: Well, the Sarbanes-Oxley law has been in place, I think, for about 18 months or so. To your knowledge, has there been any other actions or investigations against American companies under this auditor independence rule?

ROEL CAMPOS: Well, I can't recall as I sit here any major case where we have an audit firm that has directly, in a very clear way, ended up violating the independence principle that Sarbanes-Oxley has instituted. It certainly would be the first major international case that involves a foreign issuer or a foreign auditor that potentially - we don't know the results of the investigation - that potentially has violated the auditor independence.

ALAN KOHLER: Which is another way of saying that so far no American companies really have had any problem with this law, have they?

ROEL CAMPOS: It has not been a great problem in America to date.

ALAN KOHLER: What do you think about the National Bank, the National Australia Bank, a major international company apparently forgetting about it, I mean, how could that happen?

ROEL CAMPOS: You know, I can't get into the minds of, you know, the auditor in Australia. Certainly they have an American affiliate and I believe that all of the American accounting companies spent inordinate amounts of time last year and this year studying Sarbanes-Oxley and they know specifically all the requirements regarding auditing. So it's very disappointing to say the least. Things happen and people make mistakes but this would appear to have been a major oversight. But again I'm not judging the evidence, I don't have the evidence in front of me.

ALAN KOHLER: If National Australia Bank and KPMG were found to have breached this rule what sort of penalty would apply?

ROEL CAMPOS: A typical enforcement case, I'm speaking generally now, would involve filing a civil action, seeing whether investors were harmed, and trying to disgorge, essentially, the amount that the issuer - in this case, the bank - made from misleading information. Secondly, we would look at sanctions to essentially take monies away from the perpetrators of the wrongful conduct, so that they will be deterred from doing it again and the rest of the industry will see that there is a cost, an appropriate cost, for violating the rules. That'll depend on how, you know, how egregious and how wilful the bad conduct was. We could also, when it comes to professional providers such as accountants or lawyers, we have an administrative process where we can seek to keep that particular professional from practising, So, in this case, there could be a sanction that would prevent the auditor from auditing listed companies in America for a period of time.

ALAN KOHLER: If you came across a company in America that somehow egregiously breached the auditor independence rules, would you expect the executives and possibly the directors to be accountable for that, and, in effect, for heads to roll?

ROEL CAMPOS: Well, we would always - in a case that involves a violation of securities laws - we will investigate it. We believe we have a very fair process. We ask the executives and the officials involved - both in this case or in cases we're talking about - an issuer, a company or an auditor to submit explanations of what they've done if they wish to - we invite it, we call it our 'wells process'. Sometimes that gives us insight where we don't go forward with an action. But our system is to hold those responsible accountable and accountability may have to do with sanctions involving disgorgement, penalties - again, all monetary. And if they are a professional, a possibility of being barred from being able to do further audit work or further legal work for public companies in America.

ALAN KOHLER: One thing the National Australia Bank has said that they're not in breach of Australian rules, only American rules. Do you think this case might put pressure on the Australian authorities to bring our auditor independence rules into line with those in America?

ROEL CAMPOS: Well, I would never presume to speak for any regulator or any government official in Australia or any other country. That is entirely a judgment that has to be made by them in discharging their duties to their public and their constituents. What I can say is, in America it is a privilege to go into our markets and to seek capital and to access our public markets and to get the low cost of capital in the liquidity there and we have rules that exist and we try to make that very clear. Professionals should understand our rules very, very clearly. And when there's a violation we have no choice but to seek enforcement and to seek to prevent that from happening again and to make sure that people know that there will be a response to a violation.

ALAN KOHLER: We'll leave it there. Thanks very much.

ROEL CAMPOS Thank you. I appreciate it.

http://www.abc.net.au/7.30/content/2003/s962792.htm