CASE ANALYSIS 1
Wells Fargo Case Analysis
Katherine Salazar
School of Accounting, Liberty University
CASE ANALYSIS 2
Abstract
The purpose of this case analysis is to research, review, and analyze internal controls policies,
internal control over financial reporting, auditing policies and procedures, and auditors’
responsibilities. After reading the case chosen, research will be conducted and analyzed. I will
also provide an opinion about the scandal Wells Fargo in 2016 case due to my personal
experience while working in the banking industry.
CASE ANALYSIS 3
Wells Fargo Case Analysis
The case analysis is in relation to the Wells Fargo’ scandal of 2016. The following case study
questions will be answering based research and opinion.
1. Identify the different types or classes of internal controls. How do internal controls over financial
reporting (ICFR) differ from the other types or classes of internal controls?
The main purpose of internal controls is to prevent, detect, and correct potential errors or
fraudulent activities within the business. “Internal controls refer to those measures and
procedures designed and implemented by an entity’s board and management, to improve
operational efficiency, financial reporting, compliance objectives and expectation of key
stakeholders in matters of safeguarding assets and investments” (Lartey, Kong, Bah, Santosh, &
Gumah, 2020). According to the University of Florida, the three basic categories are
preventative, detective, and corrective control. An effective process of internal control in a
company must combine all three types of controls. Preventative control’s objective is to reduce
the chances of error before anything fraudulent occurs (University of Florida, 2024). Detective
controls are designed to locate or find errors after the transaction has occurred (University of
Florida, n.d.). Corrective controls are actions taken to rectify the problem and to prevent it from
happening again. Internal controls over financial reporting focus on the procedures to ensure
precision and reliability of the company’s financial statements. Other internal controls supervise
other company’s areas to improve and maximize efficiency and risk management.
2. Do you agree with KPMG’s position that Wells Fargo’s improper sales practices did not involve
the company’s ICFR? Defend your answer.
No, I don’t agree with KPMG’S position that Wells Fargo’s improper sales practices did not
involve the company’s ICFR. I personally was part of the banking industry before the Wells
CASE ANALYSIS 4
Fargo scandal occurred. The banking company I worked for is one of the leading banks
internationally. This company demanded employees to have a certain number of new credit
cards, new loans, new checking and saving accounts, and new investment and mortgage referrals
quarterly. These quarterly demands or so-called “goals” are overseen by the branch manager but
not initiated by them. The market directors and regional directors are responsible for putting
pressure on the branches to meet these goals. Now, the improper sales practices come from the
pressure put on the bankers, tellers, and branch managers. Back in 2013, I remember if a banker
or teller didn’t meet these quarterly “goals”, there was a written warning given, and if there was
no improvement would be put on probation. Probation didn’t allow promotions or relocations,
and it was a step closer to being fired. For many people, there is no excuse for doing something
wrong, but when the employee and the employee’s family depend on the employee’s salary to
survive, the employee’s integrity can be blinded. After the scandal in 2016, these corrective
actions for not meeting the quarterly goals were removed. The demand to meet the quarterly
goals was reduced, and all transactions were digitally monitored. As Jeremy 17:11 states, “Like a
partridge that hatches eggs it did not layEare those who gain riches by unjust means. When their
lives are half gone, their riches will desert them, and in the end, they will prove to be fools”
(New Living Translation, 2019). The verse describes those individuals or corporations that earn
money dishonestly and harm others are foolish and destined to lose their richness. Wells Fargo
was penalized with a substantial amount of money and many employees lost their jobs. Including
Carrie Tolstedt was facing criminal charges due to the fraud scandal. As Jeremy 17:11 states,
“Like a partridge that hatches eggs it did not layEare those who gain riches by unjust means.
When their lives are half gone, their riches will desert them, and in the end, they will prove to be
fools” (New Living Translation, 2019). The verse describes those individuals or corporations that
CASE ANALYSIS 5
earn money dishonestly and harming others are foolish and destined to lose their richness. Wells
Fargo was penalized with a substantial amount of money and many employees lost their jobs.
Including Carrie Tolstedt was facing criminal charges due to the fraud scandal.
3. How does the AICPA’s Auditing Standards Board define a material weakness in internal
control? How does the PCAOB define a material weakness in ICFR? What factors should
auditors consider in deciding whether an ICFR deficiency qualifies as a material weakness in
ICFR?
Material weakness is defined as a deficiency, or combination of deficiencies, in internal control,
such that there is a reasonable possibility that a material misstatement of the entity's financial
statements will not be prevented or detected and corrected on a timely basis (University of
California, 2024). For AICPA, material weakness is a misstatement that couldn’t have been
prevented. The deficiency or combination of deficiencies couldn’t have been detected or
corrected in a timely manner. For PCAOB, the misstatement would not be prevented or detected
in a timely manner. According to the Public Company Accounting Oversight Board, “In this
section, a reasonable chance exists that the likelihood of the event is either reasonably possible or
probable as those terms are defined in the Financial Accounting Standards Board Accounting
Standards Codification” (Public Company Accounting Oversight Board, 2024). The reasonable
possibility or probable cause exists for the misstatement could occur. According to the Public
Company Accounting Oversight Board, “The auditor should be aware of and consider auditing
interpretations applicable to his or her audit. If the auditor does not apply the auditing guidance
included in an applicable auditing interpretation, the auditor should be prepared to explain how
he or she complied with the provisions of the auditing standard addressed by such auditing
guidance” (Public Company Accounting Oversight Board, 2024). When performing an audit, the
CASE ANALYSIS 6
auditor must evaluate the business nature, the timing when the audit is being performed, and
other elements that could alter the audit results before starting. The auditor’s awareness before,
during, and after the audit is crucial for the performance and quality of the audit.
4. Wells Fargo’s independent board members concluded that the bank’s “decentralized corporate
structure” was “one root cause of the scandal.” Do you believe the decentralized nature of Wells
Fargo’s corporate structure qualified as a “material weakness” in Wells Fargo’s ICFR? Why or
why not?
Most large companies opt in for decentralized structures. “Decentralization enables a distributed
and autonomous approach to decision-making and management, enabling an agile ecosystem”
(World Economic Forum, 2024). Decentralization provides a more self-directed environment
which helps when adjusting to different ecosystems when a company works worldwide. I don’t
believe decentralization should qualify as a material weakness. Although in the Wells Fargo
case, decentralization might affect the company’s internal controls. In this case, I do believe
Wells Fargo's decentralized structure was the company’s material weakness. “Decentralization
needs to be balanced with centralization to ensure clear guidance, an overarching strategy, and a
joint platform for the organization” (World Economic Forum, 2024). For a company to work
well with a decentralized structure, the company must ensure clear and detailed guidance for all
its structures to avoid misunderstanding and misuse of certain policies. The management team
must execute internal controls along with constant training about what’s considered fraud.
Particularly, Wells Fargo employees, after the scandal, must have a clear meaning of what’s
considered fraud and how these malpractices are penalized.
5. Does an audit firm of a public company have a responsibility to apply audit procedures intended
to determine whether the client has committed illegal acts that don’t directly impact its financial
CASE ANALYSIS 7
statements? Explain. What responsibility does an auditor of a public company have if the auditor
discovers such illegal acts by the client?
No, the audit firm hired by the public company doesn’t have the responsibility to apply audit
procedures intended to determine whether the client has committed illegal acts that don’t directly
impact its financial statements procedures to prevent, detect, and resolve any committed illegal
acts. According to the Public Company Accounting Oversight Board, “The auditor has a
responsibility to plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether caused by error or fraud.” (Public
Company Accounting Oversight Board, 2024). A company hires an audit firm to have extra
reassurance that financial statements are free of misstatements. If misstatements are found, the
company’s reliability and integrity can be on the line. After the audit is performed, the auditor
has the responsibility to express an opinion about the financial statements and not to determine if
the misstatements found are fraud or error. The company’s management team is responsible for
the creation of the financial statements and adjustments after analyzing the auditor’s opinion
about the audit results. “The auditor has no responsibility to plan and perform the audit to obtain
reasonable assurance that misstatements, whether caused by errors or fraud, that are not material
to the financial statements are detected” (Public Company Accounting Oversight Board, 2024).
The management team has the responsibility to adopt the accounting policies and procedures
during internal control and when creating, recording, and presenting the financial statements.
Determining if the misstatements found on financial statements are fraudulent or errors is the
responsibility of the management team. After determining if the misstatements are fraud or
errors, the management team must implement internal control policies to prevent these
discrepancies from happening again.
CASE ANALYSIS 8
6. While the Wells Fargo scandal was unfolding, several parties pointed out that KPMG had served
as the company’s audit firm since 1931. Explain how the length of an audit firm’s tenure may
influence its ICFR assessment for a public company client.
According to KPMG, KPMG is a firm that was created in 1987. KPMG was formed when Peat
Marwick International and Klynveld Main Goerdeler merged along with their respective member
firms (KPMG, 2024). KPMG founders were the pioneer fathers of the accounting industry. 's
network expanded into emerging economies; the firm serves over 155 countries. There is no
doubt KPMG is a well-known and trusted audit firm. Now, KPMG has been serving Wells Fargo
since 1931, the familiarity with how Wells Fargo and its employees operate could have been part
of the distorted results. It is to be known that every rule has an exception. Not all rules apply to
all situations. Wells Fargo was a customer of KPMG for over 85 years. During all these years,
KPMG has performed auditing services and shares its opinion of a variety of findings. Over the
years, Wells Fargo must have learned about the accounting policies and how some exceptions
can apply to these policies. I do believe the length of KMPG’s tenure may influence its ICFR
assessment when providing its services to Wells Fargo.
CASE ANALYSIS 9
References
An audit of internal control over financial reporting that is integrated with an audit of financial
statements. (2024). Public Company Accounting Oversight Board. Retrieved on
November 9, 2024, from https://pcaobus.org/oversight/standards/archived-standards/pre-
reorganized-auditing-standards-interpretations/details/
Auditing_Standard_5_Appendix_A#:~:text=A%20material%20weakness%20is
%20a,detected%20on%20a%20timely%20basis
Decentralized but not fragmented: A new way to think about operations. (2024). World
Economic Forum. Retrieved on November 9, 2024, from
https://www.weforum.org/stories/2024/06/decentralized-not-fragmented-new-way-think-
about-operations/
History. (2024). KPMG. Retrieved on November 9, 2024, from
https://kpmg.com/dk/en/home/about/history.html
Internal controls. (2024). University of Florida. Retrieved on November 9, 2024, from
https://cfo.ufl.edu/administrative-units/finance-strategy-analytics/internal-controls-anti-
fraud-and-advisory-services/internal-controls/
Key internal controls. (2024). Business & Finance Solutions. University of California. Retrieved
on November 9, 2024, from https://www.finance.ucla.edu/corporate-accounting/sas-115-
key-internal-controls#:~:text=A%20material%20weakness%20is%20a,by%20those
%20charged%20with%20governance.
Lartey, P. Y., Kong, Y., Bah, F. B. M., Santosh, R. J., & Gumah, I. A. (2020). Determinants of
internal control compliance in public organizations; using preventive, detective,
CASE ANALYSIS 10
corrective and directive controls.EInternational Journal of Public Administration,E43(8),
711-723.
New Living Translation. (2019). Holy Bible New Living Translation. Retrieved on September
22, 2024, from https://www.biblegateway.com/versions/New-Living-Translation-NLT-
Bible/#copy
