The story begins on 12 March 1917, in the midst of World War I, one day after mutiny broke out among Russian soldiers in Petro-grad and Baghdad was captured by British troops. On that Monday, Basler Handelsbank (BHB) founded a company called Verwaltungs-, Revisions- und Treuhand AG, with its registered office in Basel.4 From these modest origins, following multiple mutations and mergers, EY Switzerland as we know it today came into being.
Although the company was founded in the middle of World War I, it was in no way a response to it. On the contrary, Basler Handelsbank was reacting to a trend that had already taken root in more peaceful times, which saw one Swiss major bank after the other branch out into the audit, advisory and trust business. The Swiss Bank Corporation (today, UBS), Basler Handelsbank’s biggest rival on the Basel financial scene, and located exactly opposite it, had led the way in 1906 with the foundation of Schweizerische Treuhandgesellschaft (STG).
Even before the war broke out, “foundation fever” had done so in Zurich. In 1910, on the initiative of a group of banks and “private capitalists”, Zürcher Treuhand-Vereinigung was established; later renamed Fides Treuhand-Vereinigung Zürich, it was taken over by the Schweizerische Kreditanstalt (today, CS) in 1928. It is now part of KPMG. Another wave of foundations followed in 1912, including that of the Schweizerische Revisionsgesellschaft AG Zürich (later, Revisuisse) by the Bank in Winterthur (now, UBS), Aargauische Creditanstalt and a few other banks. The large banks thought that these companies would help them keep a closer eye on their clients. Auditing, advisory and trust services gave them the opportunity to inspect company accounts, assess borrowers’ creditworthiness and tap into new lines of business. Such a practice is totally unthinkable nowadays. At that time, however, the vested interest on the part of the large banks provided the decisive impetus for the emergence of a new service sector in Switzerland – a service sector that, until the 1990s, was dominated by the four companies mentioned above: STG (Swiss Bank Corporation), Fides (Schweizerische Kreditanstalt), Revisuisse (Union Bank of Switzerland) and ATAG (Basler Handelsbank). In more recent history, these names have disappeared in the wake of mergers with the leading international companies. STG and Revisuisse are now part of PWC, while Fides belongs to KPMG and ATAG to EY Switzerland. Only Deloitte, which also ranks among the “Big Four” worldwide, has been able to secure a foothold in this market without having to merge with a major Swiss company.
If we take a look beyond Swiss borders, we see that even the Swiss Bank Corporation was behind the pack when it founded STG in 1906. In Great Britain, companies offering accounting and auditing services had been around for decades. The accounting firm Harding & Pullein, which would later give rise to EY, was founded in 1849. The institution of the trustee as wealth manager had long existed in Great Britain. US trust companies were set up in the second half of the 19th century to manage, pool and invest assets. Like today, the financial centres on either side of the Pond were much more dynamic than their Continental European counterparts.
This business model served as a paradigm for the first recorded trust company in the German-speaking world, founded by Deutsche Bank and Bank Jacob Stern in 1890. Deutsche Treuhand-Gesellschaft (DTG) represented the interests of investors and took care of the regular collection of dividends on foreign shares for German shareholders. In 1900, DTG (now part of KPMG) received the mandate from Pfandbrief creditors to review the net assets and results of operations of mortgage banks who had got into trouble due to fraudulent accounting practices. This gave birth to a new line of business: auditing. This was later supplemented by financial and tax advisory. It was typical in Germany to combine the audit and trust business. In Great Britain and the United States, by contrast, the two professions were strictly divided into “trustee” and “accountant”.
In Switzerland, the industry more or less directly copied DTG. When it founded STG, the Swiss Bank Corporation openly admitted it was doing this in the aim of filling a perceptible gap in Swiss business life, and not only took on the name, but also copied the programme of operations almost verbatim from that of Deutsche Treuhandgesellschaft. Auditing was far less developed on the Continent than it was in English-speaking countries. This had far less to do with Great Britain’s role at the forefront of the Industrial Revolution than it did with the British financing system. In 19th century Great Britain, the organised capital market played a greater role than it did on the Continent. Early on, this gave way to the need to reduce information asymmetry between investors and managers. From the middle of the century onwards, the balance sheets of private limited companies had to be published annually and audited by several auditors, or chartered accountants as they were known, a title that was protected by state law at the end of the 19th century. One of these auditors had to be chosen by the shareholders.
The situation in Switzerland was quite different. To begin with, the demand for high finance in the first half of the 19th century was smaller since industrial development was initially propped up by the textile sector, in which business is initially much less capital-intensive. Secondly, companies tended to finance themselves using their own profits and loans from their local bank rather than via the private capital market. As creditors or investors, banks had different methods at their disposal to gain an insight into a company’s financial situation than via audited financial statements. Often they dispatched a representative to the Board of Directors of the company in which they were investing.
Although the Swiss Code of Obligations of 1881 stated that an audit department whose function was to perform mandatory financial audits was as much a part of a public limited company as an Annual General Meeting and a Board of Directors, the value of these audits was limited. This was due in no small part to the lack of transparency in accounting. Since accounting was based on the principle of the highest valuation, it implicitly allowed for the undervaluation of assets and thus the accumulation of so-called hidden reserves, whose existence did not have to be disclosed to shareholders. The principle of highest valuation was intended to prevent fictitious balance sheets. This piece of legislation was a response to the “founding boom” in Germany and Austria, which had ended in a stock market crash in 1873. However, the efficacy of these audit departments was seen as doubtful, not least because the audits were performed on a purely imputed rather than on a substantive basis. This means that the audit checked only whether the financial statements had been transferred correctly from the company’s accounts, but not, usually, the valuation of the assets. Last but not least, as the audit department’s staff did not have to be experts, it appears that this line of work attracted people who “lacked the intellectual capacity to practice the profession as it was meant to be practised”. In 1911, an article appeared in the Zurich-based newspaper NZZ describing the case of a Zürcher Handelsbank shareholder appointed auditor who did not trust himself to sign the auditors’ report for 1907 because he “did not have enough banking experience”. Experts also bemoaned that the audit department was effectively a function of management and all too often was seen as no more than a “springboard to membership of the Board of Directors”. The confusing situation was typical for a young industry. It lacked standards, penalties, training courses. To deal with the problem of untrained auditors, the first professional association for independent advisors was set up in 1913 in the form of the “Verband schweizerischer Bücherrevisoren”. New applicants for membership were required to undergo a professional examination. Slowly but surely, the audit industry began to gain respect.
In its initial years, Verwaltungs-, Revisions- und Treuhand AG operated on a distinctly modest scale. The premises of Basler Handelsbank (BHB) at Freie Strasse 90 in Basel served as its office. The share capital of the new company was CHF 1,000,000; 915 of the total 1,000 registered shares belonged to Basler Handelsbank. The remaining 85 were divided among three members of the Board of Directors, the company’s two in-house auditors and a handful of people close to Basler Handelsbank. These included the founder of chemical company Hoffmann-La Roche, Fritz Hoffmann, who was related by marriage to BHB Chairman Rudolf Albert Koechlin-Hoffmann.
The three members of the institution’s Board of Directors were Dr. Alfred Wieland-Zahn (Member of the Board of Directors of BHB), August Morel-Vischer (Delegate of the Board of Directors of BHB) and Emil Frey (Managing Director at BHB). One of the body’s first acts was to appoint Alfred Wieland-Zahn as Chairman. An army colonel, notary and member of cantonal parliament, he also served on the Board of Directors of chemical company Geigy, silk processing firm Schappe Basel, BHB subsidiary Indelec and, later, Roche. As the company’s first Managing Director, the Board of Directors chose Josef Kaufmann from Ballwil, who was recruited through a newspaper advertisement. Kaufmann was appointed Delegate of the Board of Directors in 1923. The business purpose of Verwaltungs-, Revisions- und Treuhand AG was described in the Commercial Register of the Canton of Basel-Stadt as follows: “1. The foundation and administration of syndicates, consortia, companies, etc.; 2. The performance of supervisory and auditing functions of all kinds, in particular the examination of financial accounts, returns, inventories, ledgers, etc.; 3. The performance of asset management, liquidations of all kinds, the executions of wills, collateral agent functions, etc.; 4. Bank and financial transactions, with the exception of the granting of unsecured loans; 5. The establishment of branch offices and agencies and participations in other companies.”
Of these five points, auditing constituted the primary activity in the 1920s. This included, alongside the performance of the audit department’s mandate at public limited companies, periodic audits , the organisation of company accounts, and the establishment of industrial operations costing. While the Board of Directors discussed the intense competitive environment in Zurich and the poor earnings opportunities in auditing as early as 1927, Chairman of the Board of Directors Wieland-Zahn did not want to scale back this side of the business “because it brings to light a whole host of other issues, and in the process retains the client for Treuhand over the long term, i.e. for purposes other than auditing.”
Although it wasn’t mentioned by name in the firm’s corporate purpose, tax advisory also developed into a key area of focus in the first financial year. The Swiss tax landscape had taken on new dimensions due to increased public expenditure in the wake of World War I. The war tax imposed in 1916/1917 and the various cantonal and municipal taxes had, in the opinion of the Treuhandinstitut, “grown into such a complicated and sometimes incongruous web of regulation that it had become almost impossible for businessmen to understand it” and were happy to enlist external advice.
A third important area of activity in the 1920s was advice on the founding or restructuring of companies, usually public limited companies (Aktiengesellschaft, or “AG” for short). This was because the “AG” company form experienced a boom in the first third of the 20th century; the total capital of Swiss public limited companies increased five-fold between 1903 and 1931.
Asset management accounted for only a small portion of business at that time, measured in terms of mandates. It was primarily carried out by the Gesellschaft für Finanzierungen und Beteiligungen, a subsidiary headquartered in Chur founded in 1922. Besides this, Allgemeine Treuhand AG provided business administration and succession advice and was soon also earning fees from asset management mandates.
In the first few years, Verwaltungs-, Revisions- und Treuhand AG opted not to place any advertisements for the company since it received enough orders thanks to its close relationship with BHB. However, a lack of staff quickly hampered the favourable order situation. On the one hand, in 1917 military service was still making itself “disruptively felt”, while, on the other, younger employees first had to be trained in the profession, which took a lot of time. It was also noted how difficult it was to recruit competent, independent auditors from the external workforce.
The staffing problem was soon compounded by a space problem. As early as December 1918, there was discussion that the premises at Basler Handelsbank in Basel were no longer adequate if the company wanted to make optimal use of the existing workforce. This prompted the move to Aeschengraben 7 – a property inherited in 1920 from Adèle La Roche, the widow of Fritz Hoffmann, who died the same year. Four years later, the firm purchased the neighbouring building at Aeschengraben 9. EY Switzerland maintains its head office here to this day. The initially very modest business volume quickly gained ground. Fee revenues saw a continual rise from CHF 24,802 in the first financial year to CHF 348,391 in 1922, and had doubled again to CHF 699,715 by 1930. The profit earned in the first financial year (CHF 9,537) was increased more than three-fold within three years. Dividends were raised from 3.75 percent to 8 percent during this time, and left at this level until World War II. In 1920, using the assets of a fund set up specifically for that purpose, the entire workforce – at that time, 15 people – was bought into the pension fund of Basler Handelsbank.
“Treuhand”, as the company was referred to internally after it was renamed Allgemeine Treuhand AG , suffered a minor setback from 1920 to 1923 when a short yet severe recession gripped Switzerland and caused unemployment to spike to over 8 percent. To begin with, Treuhand thought that the crisis would have a positive impact on the course of business. In its 1921 Annual Report, it wrote that it was “quite natural during times of crisis, when businessmen and private individuals are increasingly faced with unfamiliar and difficult decisions, for such services [(of a trust company)] to be subject to even greater demand.” Just two years later, however, Managing Director Josef Kaufmann noted that business was in decline and “it would seem appropriate to keep the work done for clients to a minimum to avoid having to bill them too much.” Nonetheless, the tight personnel situation meant that no jobs had to be cut, as they evidently had to be at STG and Fides.
During this economic slump, Allgemeine Treuhand AG was presented with an opportunity for expansion. Back in 1918, the Board of Directors had discussed opening a second branch at the Geneva subsidiary of BHB. Now, however, the focus shifted to Zurich, which, at the turn of the 20th century, had begun to pull ahead of Basel and Geneva as Switzerland’s major financial centre. The move was triggered by an enquiry from Fides Treuhand-Vereinigung proposing a merger with Allgemeine Treuhand AG. Fides was privately owned; this meant it lacked the backing of a major bank and the “advantages this brought with it,” as Josef Kaufmann explained to the Board of Directors of Allgemeine Treuhand AG. Kaufmann was initially very sceptical about expanding the company – with or without Fides. In his opinion, the advantage of Allgemeine Treuhand AG lay in its small size, meaning it was able to nurture very close and trusting relationships with its clients. “A major expansion risks giving employees the freedom to do as they wish, and thus the intimacy Allgemeine Treuhand AG enjoys with its clientèle will be lost,” he argued to the Board of Directors. Chairman Wieland-Zahn, who was responsible for the expansion of Allgemeine Treuhand AG, was of the opposite mind, not least because he did not want to leave the way open for STG, which was controlled by the Swiss Bank Corporation, to gain a monopoly outside of the City of Basel. Treuhand could be of good service to Basler Handelsbank in Zurich, Wieland-Zahn said.
The firm negotiated with Fides on multiple occasions. The managing directors of both companies discussed the possibility of a merger, which ultimately did not materialise. The Swiss economy recovered, Fides’ business picked up again towards the end of the year, and any plans for a merger were shelved as the economic recovery gained momentum. The Board of Directors of Allgemeine Treuhand AG was now persuaded that “Zurich has a lot of potential” and voted unanimously to open up a branch office in the city on the banks of the Limmat. And so, on 1 November 1924, the company moved into its new office in Zurich at Bahnhofstrasse 20, in the building occupied by Basler Handelsbank. Allgemeine Treuhand AG – which in 1930 had 46 employees – underwent a few changes in management as the 1920s drew to a close. Josef Kaufmann, the first Delegate of the Board of Directors, retired from the Management Committee at the end of 1927 for health reasons, but remained active on the Board of Directors. When Alfred Wieland-Zahn stood down as Chairman of the Board of Directors in 1934, Kaufmann took his place. On an operational level, Dr. Manfred Hoessly, Dr. Otto Pinösch and Ernst Wälti were elected Managing Directors with signing authority for the Zurich and Basel offices.