- First, a digression into the ethics and audit issues of systemic faking of accounts and coding diesel engines to cheat.
- Next, pondering whether there will be any clawback of the $124M bonuses from the senior executive who managed the retail banking area.
- Finally, two articles describing the DoJ opening a preliminary investigation.
9/14 – Prof. Mike Shaub at Bottom Line Ethics – Plausible deniability and the insulation of upper management – Prof Shaub ponders two fiascos in the news for the deeper ethical issues. Both the Volkswagon diesel engine scheme and the Wells Fargo fake account fiasco reflect poorly not only on the companies and their culture, but the state of ethics in business and our society.
We, collectively, need to grapple with those issues.
The article raises unsettling issues for auditors. Let’s ponder for a moment…How can we detect corporate cultures and entity tone-at-the-top environments which allow building a cheating code into the core operation of a company’s software? How can we detect an environment that incentivizes staff to cheat customers or risk losing their jobs for not hitting sales targets? Those are sobering questions.
One may easily argue the $185M fine at Wells Fargo is immaterial. It is obvious the currently-known improper fees charged customers of $2.5M is immaterial, if not trivial.
Having said that, ponder the apparently frequent practice of opening unapproved accounts for real customers and then ponder one sliver of those reports which indicate accounts were opened for nonexistent customers. The risks from that behavior apparently being in place are severe. As an auditor, when one ponders a client environment where fake accounts are okay, one ought to then consider the risks of money laundering problems. The assessment of fraud risk due to embezzlement ought to go sky high. What other things of significant audit concern do multiple levels of management consider okay?
What if the real amount is 10 or 50 times larger? What if there is a deeper cutting of ethical corners than opening dummy accounts? (For non-auditors, please understand CPAs are supposed to brainstorm where a client could be doing things wrong and then consider how to modify audit procedures in response.)
If you want the theoretical concern, look at the Wells Fargo issue from the perspective of entity level controls. Ponder COSO.
9/14 – Francine McKenna at Market Watch – Why Wells Fargo is unlikely to clawback compensation from top executive – Taking back some of one particular executive’s compensation, referred to as a clawback, is unlikely. Even though the Senior Executive Vice Presidents in charge of Community Banking was responsible for the areas that generated the fake accounts, she is unlikely to give up any of the $124M bonuses she’s taking with her.
Article explains that clawback provisions typically require a restatement of the financial statements. With the total erroneous fees to customers of something in the range of $2.5M over five years, the impact on the financial statements is exquisitely trivial. Not a chance it could get close to the point of requiring restatement.
One other way clawback could be triggered, according to the article, is “significant reputational harm to the company.”
The “significant” in that description leaves wiggle room. However, consider the flood of harsh reporting this week, the massive publicity, the CEO getting hauled in front of the Senate Finance Committee, where every headline hungry politician on the committee will spend every waking moment in the next week figuring out creative ways to flail the CEO alive and appear to be more harsh than every other member of the committee, and a fiasco that is exquisitely easy to explain in 30 seconds.
Reputational harm is clearly present. Those factors and more would seem to create something that clears the threshold of significant in terms of reputational harm. On the other hand, that is a judgment call and is merely my opinion.
9/14 – Emily Glazer and Christopher Matthews at Wall Street Journal – Federal Prosecutors Investigating Wells Fargo Over Sales Tactics – The Feds have already opened a preliminary investigation of sales practices. The Southern District of New York and the Northern District of California offices are taking the lead.
Article points out DoJ involvement brings risk of larger penalties and possible criminal charges. Article points out this means the issue isn’t resolved and the bank can’t just move on, which is the more important implication of the story.
Sources for the article say the early considerations being addressed are whether anyone directed falsification of documents or whether any executives were willfully blind to the inappropriate sales tactics.
Making this fiasco even messier, the article points out the bank’s CEO will be testify next week to the Senate Banking Committee. Keep in mind that will probably be under oath and the DoJ will be parsing his words carefully.
The rock on one side of the CEO is DoJ looking at the bank. The hard place on the other side of the CEO is his attorneys telling him to shut up instead of going under oath in front of the Banking Committee. There is no way he cannot go to the hearing. Any individual syllable he says can be used against him and the bank in enforcement actions.
9/15 – Naked Capitalism – DoJ Opens Investigation Into Wells Fargo Fake Accounts; Why Top Execs Are Responsible – Article provides an extended quote from a comment on the preceding WSJ article. The commenter explains a path for criminal culpability by very senior executives.
The new accounts per customer and average accounts per customer is a metric reported to Wall Street used to justify stock price. That makes the metric material. That metric is watched very carefully by every level of management especially the very top.
Commenter points out since before there were any electronic records banks have had procedures in place to monitor no activity or low activity accounts. If a customer doesn’t use an account in a certain period of time, the account will be force-closed. With electronic records any force-closed accounts will be charged back to the statistics of whoever opened the account.
To continue gaming the system, CSRs can learn to have some minor follow-up with the customer linked to the account (which keeps it recorded as active) or cajole them into activating the ATM card.
The no/low activity reports are also monitored very carefully by all levels of management.
Commenter points out that because executive bonuses are so closely tied to stock performance and reported metrics, the fake account fiasco is even more important to them individually than the production levels are to the lowly teller who faces unemployment because not enough accounts were opened.
Fascinating discussion, which I recommend you read. This makes the whole fiasco of even higher risk for the bank.
Update: For your pondering: If new accounts per customer and total accounts per customer are reported to Wall Street and growth in those metrics is a driver of stock price and executive bonuses, does those non-GAAP measures are material to the GAAS audit? My little brain had not thought about that before.