Switzerland has acquired another cluster risk in addition to that of monster bank UBS. An authority is now even warning of this.
The Federal Audit Oversight Authority FAOA normally monitors the quality of Swiss annual accounts and auditors.
But now it has discovered a mega-risk for the Swiss financial center.
All major banks involved
Moreover, the emergency merger of Credit Suisse (CS) with UBS is only the starting point. With the emergency merger of CS and UBS, the structure of the Swiss market for auditors is also undergoing a major shift.
It should be mentioned that the auditor EY will audit all financial institutions in Finma supervisory categories 1 and 2 – without exception – once the transition from CS to UBS is complete, according to the FAOA’s 2023 annual report.
This is a warning, as not only behemoth bank UBS, but also systemically important financial institutions such as Zürcher Kantonalbank ZKB, the Raiffeisen Group and Postfinance all rely on the auditor EY.
Insurance industry also affected
According to the Swiss Financial Market Supervisory Authority Finma, these categories 1 and 2 include “extremely large, significant and complex market participants” and “very significant, complex market participants” with a very high or high risk to the stability of the financial system.
However, EY is not only established in the banking world. EY’s auditors are also used by insurance groups such as Zurich Insurance Group and Baloise.
And that’s not all. The Swiss stock exchange SIX also has its annual financial statements audited by … EY. The Zurich investment house Vontobel is also involved.
EY needs a lot of staff
Looking ahead, the FAOA has been in close contact for months with PwC AG as the partial auditor of the CS Group division and with Ernst & Young AG as the auditors/audit firm of the combined UBS AG regarding the transition of the CS audit from PwC to EY.
“In particular, it is important to consider how EY AG will recruit the necessary staff and specialists for the significantly larger auditing mandate,” the supervisory authority said in response to its concerns.
If EY needs so many new auditors quickly, quality could suffer.
Risk of contagion
But the personnel problem is nothing when you think of EY’s already poor image. In Germany, they clearly violated professional rules at the listed company Wirecard and audited billions in money that did not exist, as reported by muula.ch.
In Germany, hardly any company can still have its annual financial statements audited by EY without being looked at askance or having to explain itself.
If something like this spills over into Switzerland, the entire financial center will come under pressure.
And the Americans have also found huge weaknesses at EY during their inspections in Switzerland, as was reported by muula.ch. This is a burden for the country.
Swiss financial groups should therefore urgently consider whether, from a risk perspective, they should not immediately switch to an auditor other than EY, such as PwC, Deloitte, KPMG or BDO.
No equalization planned
Monster bank UBS has already decided this question for itself.
The invitation to the next Annual General Meeting of UBS states that the Board of Directors is proposing the re-election of Ernst & Young AG, Basel, as auditors for the consolidated financial statements and the annual financial statements (individual financial statements) of UBS Group AG for the 2024 financial year.
However, by switching to another auditor, UBS could have sent a signal that it not only represents a cluster risk for the Swiss financial center, but also contributes to the wider distribution of risk.
17.04.2024/kut./ena.