Recent Legislative Changes
The Enron crisis in the United States and the accompanying regulations (particularly SOX) directly influenced Switzerland. The modified provisions in the Swiss Code of Obligations (articles 727 et seq. CO) and the new law requiring auditors to be overseen by a regulator did, in fact, significantly change the CG landscape.
An examination of CG and auditing reveals, in my opinion, both improvements (e.g., the establishment of a supervisory authority for all auditing firms in Switzerland) and shortcomings (i.e., first, the rule that the smallest corporations may opt-out of the auditing process, which was previously mandatory for all corporations; second, the introduction of mere review auditing for small corporations with a lower independence standard for the auditors; and perhaps third, the presence of a supervisory authority for all auditing firms.
Mandatory Auditing by External Auditors?
Until lately, all companies in Switzerland — except the LLC – were subject to required external audits. The pertinent Swiss laws have been modified as of 2008.
As a general rule, all firms (excluding partnerships) must be audited, regardless of their legal structure (corporation or LLC); nevertheless, three “categories of auditing” exist, including ordinary auditing, review auditing, and opting out of auditing.
Under the new laws, only bigger organizations that fulfill particular criteria or other requirements (e.g., all publicly listed companies) must undergo regular audits (article 727 CO). Smaller firms, i.e., corporations that do not fulfill the specific criteria and standards for regular audits, may choose to review auditing at a lesser quality (article 727a CO). Finally, even the tiniest businesses may “simply say no” to any auditing at all (opting out of the auditing process following article 727a para 2 CO).
Tasks and Levels of Independence
The regular auditors must evaluate and report on whether the annual accounts and the board’s suggestions for the use of balance-sheet profits correspond with the legislation and the articles of incorporation (articles 728a et seq. ); especially, the regular auditors must verify the internal control system (article 728a para 1 Alinea 3 CO). In contrast to regular auditors, review auditors have fewer duties in line with articles 729a et seq.; for instance, the internal control system is not a problem.
Auditors’ independence is always a vital and frequently complex issue for CG reasons. However, in Switzerland, the independence standards vary depending on whether a regular or review audit is performed.
Of course, all audits must be independent in general, as underlined by articles 728 para 1 CO and 729 para 1 CO. However, as an additional general rule, regular auditors (article 728 CO) must meet a higher standard of independence than review auditors (article 729 CO); the main difference between the auditing providers is that review auditors are permitted to provide bookkeeping and other services, such as legal and tax advice, to the corporations to be reviewed by them (article 729 para 2 CO).
Auditors’ Civil Liability
Article 755 CO of Swiss corporate law explicitly allows for audit liability. All persons engaged in the audit of annual accounts and consolidated financial statements, etc., i.e., involved in auditing processes, are liable to the corporation and the shareholders and creditors for all damages caused by intentional or negligent breaches of their auditing duties.
If many people are accountable for damages, they are jointly and severally liable with the others (article 759 CO). This provision seems to jeopardize auditors if a claimant concentrates on them rather than the board members because of an alleged “deep pocket hypothesis.”
As a result, the current legislative reform wants to include a new clause in Swiss corporate law to limit auditors’ obligation to the plaintiff:
The Federal Council specifically included Germany and Austria in its initial proposal (bundesrätlicher Vorentwurf), which suggested limiting caps in case of negligence of CHF 10 million for private firms and CHF 25 million for listed corporations. In my opinion, such a clause would be inconsistent with Swiss general liability laws and would not qualify as a privilege for auditors. Nonetheless, the majority of observers support such a provision.
For complete information about the Audit Law and for audit services please contact our law firm in Switzerland.