Wells Fargo: Materiality, Fraud, and Illegal Acts
The Wells Fargo unauthorized accounts scandal first became public in an LA Times
article in December 2013. After investigating, the Los Angeles City Attorney determined that it
was not just a few rank and file employees as Wells Fargo claimed, but systemic, pervasive fraud
by the senior executives of Wells Fargo, and on May 4, 2015 filed a lawsuit. On August 31,
2017, Wells Fargo announced in a press release that its employees created 3.5 million
unauthorized bank and credit card accounts without customers’ knowledge in pursuit of industryhigh cross-selling metrics related to the number of accounts per household. It is estimated that
190,000 of the unauthorized customer accounts were assessed illegal fees of about $6.1 million.
In addition, millions of people were illegally charged fees for mortgage interest rate lock
extensions or automobile insurance (related to auto loans). These actions violated numerous
laws and thus were illegal.
To settle the lawsuits (many in addition to that by the Los Angeles City Attorney were
filed), Wells Fargo has paid the following:
Settlement
$50,000,000
$1,000,000,000
$480,000,000
$142,000,000
$394,000,000
$98,000,000
$575,000,000
$2,739,000,000
Settlement Plaintiff
City of Los Angeles
CFPB and Office of the Comptroller of the Currency
Stockholders of Wells Fargo
Customers of Wells Fargo (phantom accounts)
Customers of Wells Fargo (deceptive unneeded car loan insurance)
Customers of Wells Fargo (deceptive unneeded mortgage rate lock extension fees)
Fifty states and District of Columbia
Lawsuits brought by thousands of wrongfully terminated rank and file employees are still
pending. Thus, in total, Wells Fargo has probably about a $3,000,000,000 liability related to
unauthorized accounts.
1
Management pushed high sales goals and incentivized employees and managers who met
these goals. Top bank executives sought to meet CEO John Stumpf’s sales targets (number of
accounts, products and services per customer) in order to tout the bank’s success to stock
analysts, enabling upper management to receive millions of dollars in bonuses tied to financial
performance and stock price gains and allowing lower level employees to keep their jobs.
Stumpf paid $17,500,000 to settle with the Office of the Comptroller of the Treasury.
In Chapter 3 we learn about Illegal Acts (p. 77-78) and Materiality (p. 83-87) [11th ed.]
and in Chapter 4 we learn about Fraud, as if they are separate topics. Like so many things in
Auditing, you have to multitask and concurrently think about all three of them. A fourth thing,
Contingent Liabilities (Chapter 17, p. 560-563) also must be considered! Pending lawsuits are a
type of Contingent Liability (and thus usually get footnote disclosure instead of line item
treatment).
A search of Wells Fargo’s SEC filings shows that no disclosure of the lawsuits was made
in the 10-Q’s filed May 6, 2015, August 5, 2015, or November 4, 2015. No mention was made
in the 10-K filed February 24, 2016. Nothing was stated in the 10-Q’s filed May 4, 2016. Wells
Fargo made its first disclosure of the unauthorized accounts scandal, in a September 8, 2016
press release. It was also disclosed that day that 5,300 Wells Fargo employees had been fired
since 2011 for their involvement in the unauthorized accounts scandal.
$22,894,000,000 is the amount of Net Income shown on page 133 of the Wells Fargo
financials for the year ended December 31, 2015. $3,000,000,000 divided by $22,894,000,000 =
13%. This is a rough approximation – a 13% overstatement of Net Income. There are several
ways we could examine the performance of KPMG’s audit of Wells Fargo.
2
1.
The CEO of KPMG, despite pushback from Senators Warren and Markey, stated in
testimony before the US Senate that KPMG was aware of the unauthorized accounts scandal
at least as early as 2013 and the related lawsuits as they were filed. Do you believe that the
unauthorized accounts and lawsuits were not material (and thus no disclosure was required in
the 10-Q’s filed in 2015 and 2016 or the 10-K filed in 2016)? What were his arguments at
the bottom of page 2 and top of page 3? Are they credible? Consider AS 2105:
Consideration of Materiality in Planning and Performing an Audit.
2. If KPMG had insisted on disclosure of the unauthorized accounts scandal and related
lawsuits in the 10-Q’s filed in 2015 and 2016 or the 10-K filed in 2016, and Wells Fargo
management refused, what could KPMG have done to force the issue? Note that since Wells
Fargo is a public company, a law on illegal acts, Section 10A of the Securities Exchange Act
of 1934 applies. Read that, as well as AS: 2405 Illegal Acts by Clients.
3

Purchase answer to see full
attachment