The new law aims to guarantee a higher quality of auditing services and increase confidence in the auditing institutions and, to that end, abolished the principle of self-regulation previously applied in the auditing industry in Switzerland. The ASA provides for an admission procedure for all auditors and audit firms; only persons admitted by the newly established Audit Supervisory Authority are permitted to provide auditing services. The ASA further regulates the supervision of auditing firms.
Simultaneously with the introduction of the ASA, the provisions of the Swiss Code of Obligations which govern the scope and types of audits have been fundamentally revised and came into effect on 1 January, 2008.
Changes to the audit laws
One of the fundamental changes to the existing laws governing audits is that a company’s legal form (share incorporation, limited liability company, association or foundation) is no longer the relevant criteria to determine whether or not the annual financial statements of a company have to be audited. Rather, the company’s economic size is now decisive. This change primarily affects limited liability companies (Gesellschaft mit beschrankter Haftung) which, under the old regime, were not subject to mandatory audits.
A second important change is that the Swiss Code of Obligations now provides for two different scopes of audit, the regular audit and a new form, the limited audit. Under the new provisions, small and medium-sized enterprises (SMEs) are only subject to a limited audit. The introduction of the limited audit seeks to help the SMEs keep the auditing costs low while still avoiding material misstatements in the annual financial statements. A company qualifies as an SME if it does not meet two of the three following thresholds in two consecutive years: a balance sheet total of CHF10m (£4.67m), revenues in the amount of CHF20m (£9.34m), or an annual average of 50 full-time employees. Under certain circumstances, the SMEs and their shareholders may elect an opting-out to entirely refrain from any audit, an opting-down to have the audit performed by an auditor which is not admitted under the ASA, or an opting-up to have a regular audit.
The regular audit requirement for all companies which exceed the above-mentioned thresholds, or which are publicly-held, means they are obliged to prepare consolidated financial statements; this essentially corresponds to the audit under the old provisions of the Swiss code of obligations. What is new, though, is that the auditor is now legally obliged to verify whether an internal control system exists, and expressly address any deficiencies it may have.
Admission and supervision of auditors
Under the ASA regime, no person (be it an individual or a legal entity) may provide auditing services to companies unless they have been formally admitted by the Audit Supervisory Authority. Under the ASA, an auditor may be admitted in one of three categories: (i) the admitted auditors (zugelassene Revisoren), which are authorised to perform limited audits; (ii) the admitted audit experts (zugelassene Revisionsexperten) which are authorised to perform regular audits (the admitted audit experts distinguish themselves from the admitted auditors primarily by having substantially longer professional experience); and (iii) the supervised audit firms (staatlich beaufsichtigte Revisionsunternehmen). These are audit companies which are authorised to perform regular audits for publicly-held companies. A company qualifies as a publicly-held company if (a) its shares are listed on a stock exchange; (b) it has a bond outstanding; or (c) if it contributes at least 20% of the assets or turnover to a company mentioned under (a) or (b).
Supervised audit firms have to meet specific additional legal requirements in terms of independence, reporting on the auditing services, and quality assurance. Worth mentioning are the rules regarding independence. The annual fees paid for auditing and other services by a single company (including its associated companies) may not exceed 10% of the firm’s total fees.
Furthermore, there are different waiting periods in case of transfer of personnel. If a person had an executive function or a leading accounting position in his/her company, and subsequently takes over an executive position at an audit firm, such a person may not perform any auditing services to his/her previous company for a period of two years.
Besides the administration of the admission procedure, the second major task of the Audit Supervisory Authority is the supervision of the supervised audit firms. To verify that these firms meet all legal requirements, it reviews them at least every three years (both a firm review and, to a lesser extent, a file review).
The auditing of global groups is a cross-national task. The ASA addresses this reality as follows: in principle, foreign audit firms which perform audit services for Swiss publicly held companies are required to obtain an admission from the Audit Supervisory Authority. However, the admission procedure is limited to the questions of whether the firm is supervised by a foreign authority that is accepted in Switzerland.
If this is the case, such an audit firm is not subject to supervision in Switzerland. If an audit firm provides audit services to a foreign company whose shares are listed on a Swiss stock exchange or which has a bond issued in Switzerland, the firm is subject to an admission by the Audit Supervisory Authority. If the audit firm provides evidence that it is supervised by a foreign authority accepted in Switzerland, the admission procedure and the supervision do not apply. Switzerland is currently in the process of determining which foreign audit supervising authorities are accepted as equivalent.
To discharge its duties efficiently, the Audit Supervisory Authority cooperates closely with other Swiss and foreign supervisory authorities. It is granted encompassing powers and may sanction non-compliance. In case of violations of applicable laws, it may revoke the admission for a limited or an unlimited period. In serious cases, auditors may be fined up to CHF1m (£467,000) or be imprisoned.
Consequences in practice
As the new laws have just come into force in Switzerland, the practical consequences are difficult to predict. It seems likely, however, that the auditing costs for large companies will increase. In the cases of SMEs, the consequences are less clear. While many of these companies are, by law, only subject to a limited audit, it will be interesting to observe to what extent banks, creditors, investors and shareholders will accept that SMEs only undertake a limited audit. In practice, many of the SMEs may find themselves forced by these stakeholders to an opting-up (regular audit), again increasing their costs.
The organisation of the admission procedure and the supervision will be one of the biggest challenges for the Audit Supervisory Authority. Just to deal with all admission requests will take approximately two years. Also, it remains to be seen whether or not the new laws will lead to over-regulation. To decrease that risk, it is expected that the implementing ordinance to the ASA will revert as much as possible to existing professional standards.
Joachim Kloter and Severin Roelli are partners in the corporate and commercial department at Pestalozzi Lachenal Patry in Zurich.
