Like Swisscanto: proxy advisor ISS calls for auditor rotation

What does the new regulation on auditor rotation say?

Swisscanto's rotation policy for auditors requires that listed companies publicly retender the mandate of an auditor after no more than ten years. This guideline is in line with EU Regulation No. 537/2014, which stipulates a maximum audit engagement period of ten years for public-interest entities.

The fund management companies of Swisscanto and Swisscanto Asset Management International implemented these requirements in their voting policy and guidelines early on and successively years ago. Since then, the permissible mandate period for an auditor has been gradually reduced from an original 20 years to the current ten years. This is based on the premise that companies with a long mandate period for their auditors can prepare accordingly. At the same time, Swisscanto can work towards a change as part of its engagement activities with the boards of directors of the relevant companies.

Now that the proxy advisor ISS has also scheduled this regulation for 2026, Swisscanto's requirements will become the new regulatory obligation for companies throughout continental Europe, including Switzerland.

Swisscanto regulation is stricter than Swiss law

The Swiss Code of Obligations (OR) stipulates in Article 730a that the lead auditor at public-interest entities must change after no more than seven years. This regulation is intended to prevent the emergence of overly close relationships between the persons involved and the company to be audited.

However, it is not only the rotation of the responsible person that is crucial. In order to ensure the independence and objectivity of audits even more effectively, we believe it is equally important that the entire auditing firm be rotated after a maximum of ten years. While a change of personnel is intended to ensure a ‘fresh look’ within the same auditing firm, we believe that only a complete rotation of the auditor can effectively prevent potential conflicts of interest and ‘operational blindness’. The combination of these two rotation requirements – the change of the person responsible for the audit after seven years and a change of the audit firm after ten years – should ensure a holistic approach to audit quality.

Why is auditor rotation so important?

Auditor rotation is an important factor in further strengthening the independence of the audit. This applies not only to financial reporting, but increasingly also to non-financial reporting (NFR). The latter is now also a core topic at general meetings With the increased focus on ESG (environmental, social and governance) criteria, proxy advisors and investors such as Swisscanto expect an audited sustainability report that is subject to the same quality standards as the financial statements.

In particular, the reporting obligations at EU level under the Corporate Sustainability Reporting Directive (CSRD) for non-financial reports are currently in focus This is to ensure the credibility of information on environmental risks, social concerns and governance issues. For this reason, Swisscanto is of the opinion that companies should present an externally audited report and that a binding vote should be held on this report at the Annual General Meetings. This is to ensure that sustainability reporting is also carried out with the necessary care and independence

This is precisely where the relevance of auditor rotation comes into play: a relationship between the company and the auditor that has been in place for too long can impair the critical distance – both in the case of financial and non-financial audits. The regular rotation of the auditing company is intended to ensure that new perspectives are introduced and routines avoided when reviewing sustainability reports as well.

Why is the topic of ‘rotation of auditors’ controversial?

The new requirements are designed to strengthen the independence of auditors and improve the quality of audits. This puts pressure on companies that have retained the same auditors for decades. For example, dormakaba Holding AG has had the same auditor, PricewaterhouseCoopers, for over 100 years. In our engagement discussions, the company assured us that it would change its auditor. We will be keeping a close eye on this at the upcoming Annual General Meeting. In addition, many leading companies in Switzerland, such as Geberit, Swatch Group, Roche and Partners Group, have long-standing relationships with their auditors.

It is noteworthy that the list of larger companies with long-standing auditors does not include any German companies. In the wake of the Wirecard scandal, the relevant regulation in Germany has already been tightened for public-interest entities. This stipulates auditor rotation after ten years at the latest. Germany is therefore not only complying with the requirements of EU Regulation No. 537/2014, but is also playing a pioneering role in this respect throughout Europe.

ISS and Swisscanto: A strong signal to the management

The introduction of auditor rotation, as has been practised by Swisscanto for some time, is a clear signal to company management to pay more attention to the issues of auditor independence and reporting transparency. ISS has announced that from February 2026 it will vote against the re-election of auditors who have been in office for more than ten years (or, in line with EU Regulation No. 537/2014, if the company has not publicly tendered the mandate after this period). Both financial statements and sustainability reports should be assessed by independent auditors with a fresh eye and no conflicts of interest.

Consequences for the upcoming 2025/2026 AGMs

Even though the new ISS policy will not take effect until 2026, this year's AGMs could already provide the first signals of changing shareholder expectations.

Companies that act proactively by appointing new auditors in good time and submitting audited sustainability reports as binding AGM agenda items could gain the trust and approval of investors. By contrast, companies that have not revised their auditor mandates in good time are likely to face ISS rejection recommendations in the foreseeable future.

Particularly affected are companies with long-standing auditor relationships that have not yet initiated a public tendering process. In practice, this could lead to votes on the re-election of the auditing firms not receiving the required approval. For boards of directors, this means that they must proactively address the issue of auditor rotation in order to avoid negative surprises.

Pressure is also increasing in the area of non-financial reporting: Swisscanto is calling for audited sustainability reports and binding votes on them. Companies that are not prepared for this risk losing the trust of shareholders or proxy advisors.

Conclusion

In our view, the ISS regulation, which will be aligned with the existing Swisscanto regulation from February 2026, represents a milestone in strengthening corporate governance. Companies that have been using the same audit firms for many years should no longer postpone the rotation – neither in financial reporting nor in sustainability reporting, which will also be affected in the future.

Particularly in the area of non-financial reporting, which is becoming increasingly important, further strengthening the independence of auditors is of central importance. The required audited sustainability report with a binding vote at the Annual General Meeting is – although not a regulatory requirement in this country – a clear signal: ESG key figures and topics should be included in the audit of companies in the same way as their financial statements.

Those who act now will strengthen their credibility on the capital markets and meet the expectations of investors and the public.