• Will KPMG Join Wells Fargo in its Walk of Shame?

    By | September 15, 2016

    In 2011, Going Concern speculated about potential issues with internal controls at Wells Fargo that prompted the then CFO, Howard Atkins, to abandon ship. Just a little foreshadowing of what is happening to good ol’ Wells this month.

    If you haven’t been following the news, here’s the scoop:

    Over the last 5 years a handful (actually 5,300!) employees went rogue and made millions of bogus deposit and credit card accounts to meet sales targets. Most of the accounts were completely fabricated and 100% unauthorized. The kicker is that they started charging unsuspecting customers fees out of the blue. Super sketchy.

    The company’s systemic problem finally hit the fan last week.The WSJ reports:

    Federal prosecutors are in the early stages of an investigation into sales practices at Wells Fargo & Co. that led to the bank being hit last week with a $185 million fine.

    If you do the math, the timing works out with Mr. Atkins’ departure. Again, I’m speculating but the company admits to firing dishonest employees for the past 5 years. Hey, look at that, it’s been five years since Atkins left. Don’t tell me they didn’t see this iceberg coming…

    Is the bank too big to care?

    But don’t worry, the current CEO John Stumpf doesn’t seem super upset. And why should he? He let go of the “bad apples” already (or so he says). And that “hefty” fine is actually more like a slap on the wrist representing “only about 3% of the bank’s second-quarter profits” according to WSJ.

    But, it may be a deep rooted issue. As quoted by Compliance Week in 2015, the former CEO Richard Kovacevich (who retired in 2009) doesn’t see much value in internal control and compliance spending:

    I think what’s happening today, is that they [banks in general] are getting rid of sales staff and investing in technology and so on, in order to pay for compliance. It is staggering. In our bank there are probably close to 10,000 compliance people. You have to offset those costs somewhere because revenue growth is non-existent in the banking business.

    I find it very interesting that the former CEO admits that revenue growth is “non-existent” in the industry. In that case, why not force employees to meet aggressive sales targets after the worst recession in 80 years? That will go over swimmingly.

    Someone has some explaining to do

    All of this leads me to believe that Wells Fargo must have known it wasn’t a handful of isolated events. The sheer size of the issue had to have triggered some red flags. We are talking about roughly 1.5 million deposit accounts and a half-million credit card accounts not authorized by consumers per the Customer Financial Protection Bureau’s press release. "How does a bank that is supposed to have robust internal controls permit the creation of over a half-million dummy accounts?" asked a Georgetown Law Professor in one CNN article. You know, that’s my question too…

    Lots of people had to have known and kept their mouths shut. Mortgage News Daily has an analysis of the tangled web of lies:

    There is just no way that Wells wasn't getting thousands of calls from consumers who were charged fees on accounts they never opened.  Customer service had to know about all the complaints.  Quality control in their account opening process had to know what was going on in the documentation. HR or whoever paid the bonuses had to know there was inflated reports and the terminations because of that. Compliance had to know. Risk management had to know. Upper management had to know.

    Afterall, when you think of identity theft… a bank employee is the last person I would expect to catch from a credit monitoring alert. That would warrant a nasty phone call to Wells Fargo.

    KPMG’s blindspot

    What does KPMG have to say about all of this? After all, they issued at squeaky clean ICFR opinion in the Wells Fargo 2015 annual report. No comment, yet. Although, I really wouldn’t want to be part of that audit team this week. Ick. (Oh, and I’ll pass on the Wells Fargo audit intern program too.)

    This is the sort of stuff that makes people question the integrity of the banking system (in case we didn’t already….cough, cough) but also compliance and internal control audits in general. It’s too soon to tell if KPMG stamped an a-ok on any relevant account controls and didn’t pick up on obvious design flaws. Either way, this is a pretty big skeleton in the closet to miss regardless of whether or not it was in scope for testing.

    The good news for KPMG is that the unauthorized accounts did exist — so it’s not like Wells made up the revenues and KPMG didn’t catch it.

    Do you think there will be implications for KPMG after all is said and done? Let's talk it out.

    Image: iStock/2jenn

    • Nuhammad Irfan

      Have never been a week at GC without some FS company hit the fan

    • N.E.R.D.

      “Do you think there will be implications for KPMG after all is said and done?”

      Don’t make me laugh.

      A group of people collapsed the world economy in 2008 and nobody in the US went to jail over it. No auditors saw it. Nobody was held responsible. They paid their fines, said they’re “sorry”, and in some cases a few smaller companies collapsed.

      This is just business as usual. Sometimes they get their hand caught in the cookie jar and have to pay a “fine” equal to “only about 3% of the bank’s second-quarter profits”. These fines are just the cost of doing business. Gotta spend money to make money, after all.

      I don’t believe an Enron level story could damage the existing players after the 2008 crash.

      • Point and Clique

        In a perverse way, this is why the system limps on. Everyone wants to believe it can keep going, even unconsciously, and are willing to accept ever-increasing levels of inequality, hardship, and damage to the environment to keep the dream going. We can’t take a critical look at it or reshape the system, as it might finally destroy the false vacuum. Plus, we’re so locked into it now that our conveniences would be severely impacted by trying to rework the system.

        So yeah, no one will be punished. It’s not consistent with the need to keep things running. It’ll take some external event (like pressure that finally overcomes QE) to finally pop the bubble again and kill the zombie.

    • keepin_it_real

      My brother worked at WF as a personal banker for a couple of years during this time period and he said everyone knew what was going on. WF management knew there were a shit ton of accounts that would have 0 activity for months on end and would automatically close them because they already knew why there was no activity in the accounts. P

      My brother used to ask me to open a checking or savings account with WF one quarter, close it for me the next quarter, and then reopen it the quarter after so he could meet his sales goal. He hated working there and said it was such a shitshow.

    • George Hartzman

      Wells Fargo defrauded and recommitted fraud on thousands of Wells Fargo clients governed by The Investment Advisors Act of 1940 via misleading Envision financial plans updated without matching Envision financial plan asset allocation models to investment accounts, so Financial Advisors could qualify for the 4front incentive bonus’ after the Wells Fargo Wachovia merger.

      In 2009, while in possession of TARP monies, Wells Fargo initiated a pattern of the use of a device and scheme to defraud the U.S. government and Defendant’s clients with more than $250,000 held at Wells Fargo, by omitting to state material facts necessary in order to make statements made by hundreds if thousands of Envision plan reports delivered by wire and the mail, created by thousands of financial advisors, in the light of the circumstances under which they were made, not misleading via the 4front Envision plan related financial advisor retention bonus program…in violation of federal laws.

      Many of the households whose accounts were/are governed under the Investment Advisors Act of 1940 were used to get the 4front bonus’, which makes it illegal, as Financial Advisors were compensated over and above what was disclosed to clients via the use of misleading information.

      Section 206 of the Investment Advisors Act of 1940 states “It shall be unlawful for any investment adviser, …to employ any device, scheme, or artifice to defraud any client or prospective client; to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; or… to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative.”

      If about 10,000 Financial Advisors had to do a minimum of 25 Envision Investment Plans on households worth at least $250,000 to receive Wells Fargo 4Front compensation retention bonus’ after Wells acquisition of Wachovia, and the average assets held by households that received 4Front Envision plans was/is about $450,000, and the average number of qualifying for 4Front Envision Plans was/is about 35 per Financial Advisor, and if about 10,000 FA’s created about 35 plans each = 350,000 4Front Envision Plans, and about 350,000 x what could be about $450,000 of assets held for each household = $157,500,000,000, meaning it looks like it happened to more than $150 billion of Wells Fargo Advisors client assets, much of which was covered by fiduciary obligations under the Investment Advisors Act of 1940, which made the scheme illegal.

      As a fiduciary, Wells Fargo is currently defrauding and recommitting fraud on what appears to be hundreds of thousands of clients, many with accounts governed by The Investment Advisors Act of 1940, via misleading Envision financial plans created to qualify for the 4front incentive bonus and updated without including charged investment costs in projected minimum client goals.

      I believe Wells Fargo violiated the following laws;

      29 U.S. Code § 1104 – Fiduciary duties

      8 U.S. Code § 1343 – Fraud by wire, radio, or television

      17 CFR 240.10b-5 – Employment of manipulative and deceptive devices

      15 U.S. Code § 77q – Fraudulent interstate transactions

      15 U.S. Code § 80a–35 – Breach of fiduciary duty

      15 U.S. Code § 80a–47 – Liability of controlling persons; preventing compliance

      15 U.S. Code § 80b–6 – Prohibited transactions by investment advisers

      17 CFR 240.10b-3 – Employment of manipulative and deceptive devices by brokers or dealers

      15 U.S. Code § 78t – Liability of controlling persons and persons who aid and abet violations