Jeff Walters, President
In this issue:
Lessons From The Wells Fargo Scandal
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December 13 |
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Pre-Dinner Technical Session (5:00 -
After-Dinner Technical Session (7:00
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Please note: Change in December meeting date.
Because our normal meeting date for December falls very close to the Christmas holiday, we have decided to move the meeting date up to the second Tuesday for the month of December. Please mark your calendars for December 13 as the date for our December regular meeting.
By Curtis C. Verschoor, CMA, CPA - Reprinted from Strategic Finance
The latest ethics scandal to hit the banking
world demonstrates the importance of ethical influences in regard to
company culture, risk evaluation, employee incentives, and more.
Fargo bank (WFB) reached an agreement with regulatory agencies to
pay $185 million in penalties for engaging in fraudulent marketing
practices. Bank employees are alleged to have used existing customer
names and accounts to (1) open new checking accounts and transfer
funds to them (known as “simulated funding”), (2) create new credit
cards, (3) enroll in online banking, and (4) order and activate
debit cards—all without customer knowledge, authorization, or
consent. Depositors who didn’t need or want these products were hit
with late fees, overdraft charges, annual fees, and other costs.
The wrongdoing appears to be spread throughout
the retail operations of the bank. Blame is being placed on the
bank’s marketing incentive plan, which set extremely high sales
goals for employees to cross-sell additional banking products to
existing customers whether or not the customers needed or wanted
them. WFB management had knowledge of the existence of the
potentially unethical and illegal problem since 2013 but failed to
make any public disclosures since, as WFB CEO John Stumpf told a
U.S. Senate panel, the amounts involved were seen to be immaterial
to the bank’s size. Senior management also failed to make any
changes to the incentive program before the regulatory actions.
Sen. Richard Shelby (R.-Ala.), chair of the
Senate Banking, Housing and Urban Affairs Committee, said, “In a
2010 letter to shareholders, WFB CEO and Chairman John Stumpf wrote
that Wells Fargo’s goal was eight products per customer because
eight rhymed with great. The result was a corporate culture that
drove company team members to fraudulently open millions of accounts
using their customers’ funds and personal information without their
permission.” Since metrics like new accounts opened are relied upon
by sell-side stock analysts, this practice helped to double Wells
Fargo’s stock price between 2012 and 2015, greatly impacting
executive bonuses. Lawmakers at a Congressional hearing called WFB a
According to the settlement agreement with the
U.S. Consumer Finance Bureau, WFB employees submitted approximately
564,000 credit card applications, enrolled customers in online
banking, and created and activated debit cards. WFB terminated
around 5,300 employees for these unethical and allegedly unlawful
California and Illinois have announced one-year
suspensions of business relationships with WFB. California Treasurer
John Chiang stated: “Wells Fargo’s fleecing of its
customers…demonstrates, at best, a reckless lack of institutional
control and, at worst, a culture which actively promotes wanton
An October 12 Wells Fargo press release
announced Stumpf’s immediate retirement. A previous release had
reported he will forfeit unvested awards of stock valued at $41
million. Carrie Tolstedt, the senior executive vice president and
group head of community banking, resigned from the company in
advance of her planned retirement at year’s end. She will receive no
severance compensation and forfeits unvested awards of stock valued
at $19 million, but she will retain existing awards valued at $124
million. Neither Stumpf nor Tolstedt will receive a bonus for 2016.
The marketing practices in question conflict
substantially with the publicly expressed Vision and Values of Wells
Fargo, which states that Wells Fargo strives to set “the standard
among the world’s great companies for integrity and principled
performance.” One of the five shared values states: “We value what’s
right for our customers in everything we do.”
The unethical behavior also differs greatly
from WFB’s Code of Ethics and Business Conduct, which notes that “At
Wells Fargo, holding ourselves to the highest standards of ethical
behavior is nothing new.” The Code states the bank doesn’t tolerate
retaliation, yet numerous media reports have surfaced about
whistleblowers who spoke up about employees gaming the system and
were fired for other reasons.
The events at Wells Fargo provide a number of
lessons for management accountants. For example, the WFB experience
demonstrates a failure in risk evaluation and management, a key
responsibility of senior management accountants. Managers in more
senior levels need to keep in mind the critical requirement to
consider ethical compliance issues when evaluating implementation of
strategic initiatives. For example, would the events at Wells Fargo
have occurred had the goals and metrics connected to selling more
products to existing customers included more managerial oversight to
ensure that customers truly needed and wanted them or that employees
couldn’t game the system?
It’s important to think through the potential
for unintended consequences and take steps to prevent, avoid, or
address unethical and potentially illegal actions. Incentive systems
must be carefully crafted to avoid the possibility that employees
will be motivated to act in their own best interest rather than that
of their employer.
An important part of the effort to prevent
wrongdoing is the presence of an ethical culture permeating the
company at all levels. An established ethical culture helps ensure
that employees will resist any pressure or temptations to compromise
When aware of unethical and potentially illegal
practices, management accountants shouldn’t ignore them but should
take appropriate steps to help resolve the issue while considering
the risks of reporting the practice and of remaining silent.
Established organizational policies should be followed, including
use of an anonymous helpline or hotline if available.
IMA ETHICS HELPLINE
For clarification of how the IMA Statement of Ethical Professional
Practice applies to your ethical dilemma, contact the
Helpline. After a preliminary discussion of the problem to
determine the kind of ethics matter being reported, an ethics
counselor can respond to the caller, or callers may remain
anonymous. The counselor will not provide a specific resolution but
will explain how the dilemma relates to the provisions of IMA's
Statement of Ethical Professional Practice.
You will earn CMA and CPE credits when you attend any live webinar. Replay webinars are available in the archive but do not earn credits. Advance registration is recommended—IMA webinars are popular and fill up quickly.
The CMA Exam: Navigating Multiple Choice Questions
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Leadership Development: A Lifelong Journey
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