Wells Fargo Fraudulent Accounts Scandal

Wells Fargo Fake Account Crisis

A crisis is defined as the perception of an unprecedented event/incident that threatens shareholders’ valuable expectations in relation to economic, health, environmental, and safety issues (Coombs, 2014). Since organizations operate in a challenging and highly competitive environment, they are likely to undergo crises. An example of an organization that has experienced a crisis in the recent past is Wells Fargo. The company recently experienced a scandal relating to fake accounts, which has plagued its operations for approximately a year. Given that the crisis is still ongoing, Wells Fargo needs to develop a suitable crisis management plan that will help resolve the issue. This paper focuses on examining the crisis using the three-stage approach articulated by W. Timothy Coombs.
Factual Summary
Wells Fargo fake account crisis is an ongoing scandal regarding the creation of millions of fake savings and checking accounts on behalf of its clients, but without their consent. Wells-Fargo, the third-largest bank in the United States, opened 3.5 million fraudulent accounts from 2009 to September 2016 (Dugan, 2017). Based on a summary by an auditor, the number of opened accounts during this period exceeded the previously estimated 2.1 million accounts by the bank, which represented 70% increase. The company also admitted to have opened fraudulent accounts from 2002 to 2009. As a result, Wells Fargo has been under investigations by several regulatory agencies including the Consumer Financial Protection Bureau, which fined the bank a combined $185 million due to its illegal activities. Since the company is still under investigation, it faces more criminal and civil lawsuits. For instance, Wells Fargo is facing a pending $32 million civil class-action settlement lawsuit for its engagement in illegal activities by opening fraudulent accounts (Dugan, 2017).
The bank responded to the crisis through admitting its wrongdoing, which has deepened its woes. However, an explosive report conducted on Wells Fargo by Pricewaterhouse Coopers did not include its fraudulent accounts that were opened between the years 2002 and 2009. This was primarily because of the difficulties in conducting a comprehensive analysis for this period of time. The bank has been accused of potentially lessening restitution for customers through omitting that time period from the report despite admitting its involvement in fraudulent activities. Through omitting that time period, Wells Fargo prevented an actual size and reflection of fraudulent accounts from being known. This ongoing crisis was uncovered by Los Angeles Times in 2013 and has continued to have significant impacts on its operations.
Precrisis
According to Coombs (2014), the first step towards effective crisis management is examining the precrisis stage, which includes signal detection, prevention, and crisis preparation. This is an important stage because it can help in preventing a crisis or preparing for it if it’s deemed inevitable.
Signal Detection
Similar to many crises, Wells Fargo fraudulent accounts scandal had some early warning signs that could have been addressed to prevent the crises. The early warning sign of this crisis was the mounting pressure on Wells Fargo bank managers and individual bankers to generate sales despite the extremely aggressive and mathematically impossible quotas (Morrell, 2017). Throughout the years, Wells Fargo has been utilizing a sales culture and cross-selling strategy, which is a concept of trying to sell several products to customers. This company has played a critical role in the growth of this bank in the recent past to an extent that it’s regarded as the most successful cross-seller in the modern business environment. Despite contributing to its success, cross-selling became the underpinning practice for this scandal through creating a corporate culture where bank managers and individual bankers were under intense pressure to generate sales. While the impact of this culture on the firm’s managers, employees, and customers were brought to its attention in 2011, Wells Fargo ignored its potential negative impact and denied the existence of any overbearing sales culture.
Probing and Prevention
By ignoring the potential negative effects of its sales culture and cross-selling strategy, the firm did not adopt any measures to prevent the problem from developing into a scandal/crisis. The firm’s Chief Financial Officer, Timothy Sloan, denied the existence of an overbearing sales culture, which implied that issues management and risk management approaches were not undertaken to deal with the early warning signs. The company did not probe the potential effect of this strategy, which became pervasive and pernicious under John Stumpt, the then Wells Fargo’s Chief Executive Officer (Morrell, 2017). The potential scandal was not averted, but instead employees were encouraged to order credit cards for some customers without their knowledge or consent because of the pressure-cooker sales environment.
Crisis Event
This is the second stage of a crisis, which refers to the trigger incident that marks the commencement of the crisis/scandal (Coombs, 2014). During this stage, crisis managers need to acknowledge that the firm is in a crisis and take necessary actions to contain it. Crisis event basically entails crisis recognition and crisis containment.
Damage Containment
Wells Fargo fake accounts scandal was triggered when some customers realized that they were being charged unexpected fees. Moreover, it was triggered when some of its customers realized that they were obtaining unexpected credit/debit cards or lines of credit. As the bank encouraged its employees to order credit cards for some clients without their (clients) approval, customers started receiving unprecedented charges and services that eventually triggered the scandal. The Los Angeles Times then uncovered the fraud, which later received national attention after the Consumer Financial Protection Bureau fined the bank $185 million for involvement in illegal activity (Corkery, 2016). Wells Fargo sought to contain the crisis and its damage through giving newspaper advertisements in which it took responsibility for the scandal. However, the company refuted the idea that its sales culture and cross-selling strategy contributed to employees’ actions on the premise that the scandal was not intentional. The other damage containment strategy adopted by Wells Fargo was firing 5,300 employees and refunding millions of dollars to clients (Corkery, 2016).
Recovery
As part of its recovery plans, Wells Fargo agreed to refund millions of dollars to clients and settling civil lawsuits. These strategies were adopted as part of reputation management, which seeks to resolve a crisis through addressing issues relating to stakeholder-organization relationship (Coombs, 2014). However, the bank is yet to fully recover from the scandal since its ongoing and more fraudulent accounts are detected over time. Recently, the firm announced the discovery of 1.4 million additional fake accounts, which complicated its recovery efforts and increases the total number of fake accounts to 3.5 million (Conti-Brown, 2017).
Postcrisis
The final stage in crisis management as articulated by Coombs (2014) is postcrisis, which are steps undertaken by an organization after the crisis is resolved and considered to be over. Postcrisis actions are initiatives undertaken by a company/organization to better prepare for the next crisis, ensure stakeholders have a positive perception regarding its crisis management efforts, and ensure that the crisis is dealt with effectively. For Wells Fargo, postcrisis actions are relatively difficult to determine since the scandal is still ongoing and the bank is yet to fully recover from it. Since the scandal is still ongoing, there have been fears and suggestions that Wells Fargo may not survive its fraudulent accounts crisis (Conti-Brown, 2017). Nonetheless, some of the measures undertaken by the bank to fully recover and prepare for the next crisis include management changes. The bank recently appointed Elizabeth Duke, former Federal Reserve Governor, as the chair of its board. This appointment could play a crucial role in the bank’s future crisis management efforts and resolving the ongoing scandal given Duke’s experience and competence.
Learning
Wells Fargo’s fake account scandal has demonstrated the potential negative impacts of a sales culture and cross-selling strategy that exerts undue pressures on bank managers and employees. Since the crisis is ongoing, the bank has realized the importance of creating an effective crisis communication and management plan. Moreover, the company has learned to significance of crisis prevention through identifying early detection signs and taking necessary actions/steps to address them in order to prevent a problem from becoming a crisis/scandal.
In conclusion, Well Fargo fake account scandal is an example of a crisis that has faced an organization and had massive impacts on its operations/profitability. As evident in this analysis, the fraudulent accounts problem developed into a crisis following the bank’s failure to deal with the early warning signs. Additionally, the crisis was fueled by the increased involvement of Wells Fargo’s employees in illegal activities. Therefore, the company has learned the significance of establishing an effective crisis communication and management plan.
References
Conti-Brown, P. (2017, August 31). Why Wells Fargo Might Not Survive Its Fake Accounts Scandal. Fortune. Retrieved October 9, 2017, from http://fortune.com/2017/08/31/wells-fargo-fake-accounts-scandal-2017-tim-sloan/
Coombs, W.T. (2014). Ongoing crisis communication: Planning, managing and responding (4th ed.). Thousand Oaks, CA: Sage Publications Inc.
Corkery, M. (2016, September 9). Wells Fargo Offers Regrets, but Doesn’t Admit Misconduct. The New York Times. Retrieved October 9, 2017, from https://www.nytimes.com/2016/09/10/business/dealbook/wells-fargo-apologizes-but-doesnt-admit-misconduct.html
Dugan, K. (2017, August 31). Wells Fargo is Still Holding Back on its Fake-accounts Data. New York Post. Retrieved October 9, 2017, from http://nypost.com/2017/08/31/wells-fargos-fake-accounts-scandal-just-got-worse/
Morrell, A. (2017, January 6). ‘Without Fraud, the Math Didn’t Work’: Wells Fargo’s Cutthroat Culture Was Reportedly Simmering for Decades. Business Insider. Retrieved October 9, 2017, from http://www.pulselive.co.ke/bi/finance/finance-without-fraud-the-math-didnt-work-wells-fargos-cutthroat-culture-was-reportedly-simmering-for-decades-id6765571.html