Siño, Ferl Diane S.

BSA31

WELLS FARGO CASE STUDY

Guide Questions:

1. What risk exposures were present in the company?

Many risk exposures were present in the company, such as the compliance risk. The
company failed to abide by the existing laws and regulations regarding customers' data and
privacy protection. Their non-compliance resulted in significant fines and penalties of $185
million. They used their customers' information to do something illegal, which causes them
to get exposed to security and fraud risks. Wells Fargo's employees opened millions of
unauthorized customer accounts, falsified bank records, forged customer signatures, and
contact information. They even manipulated the transferring of funds between accounts to
charge overdraft fees, all without customer knowledge or consent. The company has also
been exposed to reputation risk because what they've done indeed damaged their reputation.
That scandal they've got involved in causes the customers to leave and choose other
companies that are much safer. After that incident, no one trusts them, and no one wants to
transact with them anymore as it created a massive doubt to customers even if they
continually apologize and try hard to regain their damaged/tainted reputation.
Moreover, the company was also exposed to operational risk. What the employees did, and
their leaders' response to the issues greatly affected Wells Fargo's operations in a much
negative way. Their scandal involvement triggered the company to lose its business
continuity, affecting their operations. Also, I think they had been exposed to financial risk
because of everything that has happened; it truly affects the company's financial performance
and status. They have a lot of fines to pay to settle their criminal and civil liabilities, and they
lose a lot of customers due to that scandal, which harmed their cash flows, and they have to
keep up with these unexpected losses. Lastly, they are also exposed to competition risk
because fierce competition emerged in the banking industry on where they belong. The
competitors are growing stronger, leaving Wells Fargo behind. And because they faced a big
scandal that ruined their reputation, they've missed a lot of opportunities, their strong market
 position was threatened, and they lost their market share in lending to commercial and
industrial customers to JP Morgan and Bank of America.

2. How did the company failed to mitigate/avoid risk?

The company failed to mitigate or avoid the risk because they do not do something about it
until it is too late or not until the scandal was exposed. The management, who is responsible
for overseeing its employees and their work, did not do the job correctly. Instead of guiding
its employees to do their tasks right, they pressure them to reach the unrealistic sales quotas
that created a toxic culture in the workplace. Such extreme pressure naturally fostered a
culture of fear. Employees think that they could face disciplinary actions or even get fired if
they won’t meet their sales target, leaving them with no choice but to adopt fraudulent
practices, including fraud, identity theft, falsification of bank records, etc.
Furthermore, the company has poor leadership. The leaders were aware of the issues and
misconduct inside their company, but they chose to turn a blind eye to such incidents and do
nothing. These leaders failed to assess and solve the problem/risk because they are too much
focused on pursuing short-term needs (increasing sales). They forgot about the future
prospects of the company and failed to ensure the appropriate management of risks. The firm
did not have an effective firm-wide risk management framework in place that covered all key
risks. In short, Wells Fargo completely ignored their risk management that is why everything
had happened. Further, the company adopted a strategy or mantra of “eight is great,”
meaning employees have to get eight Well Fargo products/services into the hands of
customers since it’s their quota. But even though the company has a good intention to
increase its sales through using such strategy, it is still not enough. We know that strategies
entail risks, even one as seemingly innocuous as organic growth. If we fail to address the
risks involved in the strategy/process we want to apply to the organization, then
implementing it is such a huge risk. And that is what happened to Wells Fargo, they neglect
to manage the risks associated with their strategies to achieve its goals and objectives; that is
why they failed to mitigate or avoid such risk.

3. What should have been done to avoid the scandal?

 To avoid the scandal, the company should have had proactive risk management measures to
protect its many stakeholders. It should have invested time, effort, money, etc., to have a
robust ERM system that will increase risk visibility for the entire corporation, which helps
mitigate against activities that don't align with business goals or policies and procedures.
Also, if they only had ethical and capable leaders, they could have seen the risks that their
company will face and address them right away so it won't affect the achievement of their
goals and objectives. Besides, suppose only the company has a positive and inclusive culture
and the right and committed management overseeing its people. In that case, the employees
won't resort to doing such unethical and fraudulent acts. Also, if only Wells Fargo
implemented its existing compliance policies and procedures and put it into practice, not only
on paper, then they could have a guide on how to effectively achieve the goals and objectives
without doing anything illegal. Moreover, if they only gave importance to integrity and ethics
and had the right mindset to achieve the organization's goal, then they could have avoided
getting involved in such a big scandal.

References:

https://www.ethicalsystems.org/wp-
content/uploads/2013/07/files_WellsFargoCaseStudy_EthSystems_May2018FINAL.pdf’
https://www.americanexpress.com/en-us/business/trends-and-insights/articles/7-business-risks-
every-business-should-plan-for/
https://ethicsunwrapped.utexas.edu/video/wells-fargo-fraud
https://www.logicgate.com/blog/how-an-integrated-risk-management-program-could-have-
prevented-it-all-for-wells-fargo/
https://www.riskmanagementmonitor.com/wells-fargo-what-should-have-happened/
https://www.casehero.com/the-wells-fargo-banking-scandal/
https://bstrategyhub.com/wells-fargo-swot-analysis/