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5-1 Case Study 3: Financial Statement Fraud
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SNHU
September 25,2022
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Summary of the case
A major financial fraud incident that took place involved Wells Fargo & Company, a
reputed U.S.-based multinational financial services firm. A fraud was discovered in the company
involving the creation of millions of checking and savings accounts on behalf of the clients and
customers of the company without their knowledge or consent. The fraudulent practice that had
been going on in the company gained public attention in 2016 when the business was fined a
total of $ 185 million by several government regulatory agencies (Kelly, 2022).
The fraudulent practice began when the executives of Wells Fargo put pressure on the
rank-and-file bank staff members to adopt an aggressive approach to cross-sell the products.
They pressurized the personnel so that the revenue and sales of the company could get enhanced
and specific quotas could be fulfilled. As a result, the bank personnel created millions of
fraudulent accounts for their customers.
Role of accountant in discovering fraud
When fraudulent financial activities take place in an organization, an accountant can play
an instrumental role in discovering and detecting such inappropriate practices. The professional
has to make sure that all the necessary systems of control are appropriately adhered to so that the
possibility of corrupt practices and unprofessional conduct can be minimized. It is the
fundamental responsibility of an accountant to prepare and maintain vital financial records of a
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business. Moreover, he also has to ensure that the best practices are adopted while carrying out
financial activities. In case any suspicious activities are identified by the professional, it is
instrumental in conducting an in-depth investigation and collecting appropriate pieces of
evidence to uncover the situation (Knežević et al., 2019). The role of the accountants was
restricted within the organization to discover the malpractice that was going on within the
organization due to the creation of fake customer accounts. The accountants failed to realize that
one of the core functions that they must perform in the business context relates to fraud
detection, which led to the escalation of fraudulent practices (Bierstaker et al., 2006).
Illustration of the fraud triangle
The fraud triangle refers to a model that is used for explaining the factors that come into
play and cause an individual to commit fraud in the occupational setting (Sujeewa et al., 2018).
This framework is commonly used while performing financial auditing functions so that it can
help to understand someone’s decision to commit fraud. The fraud triangle is made up of three
elements, including opportunity, incentive and rationalization.
Opportunity – Opportunity involves the circumstances that allow a fraudulent activity to take
place (Saluja et al., 2021). In the case of the Wells Fargo accounting fraud incident, there existed
an opportunity for fraud because of unrealistic pressure that the top management put on the staff
members to achieve intended sales targets.
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Incentive – The incentive component refers to the mindset of the staff towards taking part in
fraudulent activity. In order to meet the expectations of the executives of Wells Fargo relating to
sales goals, the employees decided to open millions of fake accounts on behalf of their customers
(Kelly, 2022). The staff received bonuses for opening new accounts for customers and boosting
the company sales.
Rationalization – Rationalization relates to the justification that individuals use when they
involve in fraudulent activity. In the specific case of the Wells Fargo accounting scandal, the
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rationalization that was used was that the staff had no other alternative to achieve the extremely
high sales goals that had been set by the marketing incentive plan of the bank (Curtis, 2016).
Case evaluation using three prongs of the fraud triangle
The fraud triangle focuses on several elements that may help to understand as well as
analyze a fraudulent incident that has taken place. The three prongs of the fraud triangle include
a perceived need or pressure, a perceived opportunity to indulge in the activity and
rationalization (Lederman, 2019).
In the case of Wells Fargo, the top management pressurized the employees of the
company to sell its cross-selling products and services to customers whether they had a need for
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them or not. The investigation into the case revealed that the leadership of the organization
created a high-pressure sale environment that pushed the staff to create millions of fake customer
accounts.
The employees were intimidated by their managers, and a sense of fear was created so
that the organizational personnel would reach the high sales target, even if the law had to take the
backseat. To meet the unrealistic demands of the managers, employees resorted to unethical and
fraudulent practices and created millions of customer accounts without their permission (Curtis,
2016). The CEO tried to rationalize it by saying that he did not oversee the misconduct, and thus,
it was not his fault. It was considered by him to be an ethical lapse on the part of around 5300
staff members (Cowley, 2016). The actions were justified by the employees due to the high
pressure that the executives exerted on them to fulfill the sales goals.
Conclusion
The Wells Fargo accounting scandal is one of the major incidents that shed light on the
serious consequences of fraudulent accounting or financial practices. In the financial services
company, the top management team pressurized the employees to reach extremely high sales
targets. As a result, the staff created millions of fake customer accounts, including savings
accounts and checking accounts. The fraud triangle has been used to evaluate the factors that
contributed to the fraudulent practices, which cost the company millions of dollars after
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discovering the scandal. The internal controls that could have prevented this fraud include
detection of fraud using risk indicators, regular monitoring of activities, and adherence to
corporate policies.
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References
Bierstaker, J. L., Brody, R. G., & Pacini, C. (2006). Accountants' perceptions regarding
fraud
detection and prevention methods. Managerial Auditing Journal.
Curtis, V. (2016). Lessons from the wells fargo scandal. Strategic Finance, 98(5), 19-20.
Cowley, S. (2016, September 29). Wells Fargo's reaction to scandal fails to satisfy angry
lawmakers. The New York Times. Retrieved September 23, 2022, from
https://www.nytimes.com/2016/09/30/business/dealbook/wells-fargo-ceo-john-stumpf-
house-hearing.html
Kelly, J. (2022, April 14). Wells Fargo forced to pay $3 billion for the bank's fake account
scandal. Forbes. Retrieved September 23, 2022, from
https://www.forbes.com/sites/jackkelly/2020/02/24/wells-fargo-forced-to-pay-3-billion-
for-the-banks-fake-account-scandal/
Knežević, S., Mitrović, A., & Cvetković, D. (2019). The role of auditing profession in detecting
frauds in financial statements. NBP-Journal of Criminalistics and Law, 24(2).
Lederman, L. (2019, January). The fraud triangle and tax evasion. In Proceedings. Annual
Conference on Taxation and Minutes of the Annual Meeting of the National Tax
Association (Vol. 112, pp. 1-54). National Tax Association.
Sujeewa, G. M. M., Yajid, M. S. A., Azam, S. M. F., & Dharmaratne, I. (2018). The new fraud
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triangle Theory-Integrating ethical values of employees. International Journal of
Business,
Economics and Law, 16(5), 52-57.
Saluja, S., Aggarwal, A., & Mittal, A. (2021). Understanding the fraud theories and advancing
with integrity model. Journal of Financial Crime.
