Plausible deniability and the insulation of upper management
Michael K. Shaub, September 14th, 2016
Two scandals running in parallel have made me think more deeply about whether certain ethical trends are fixable in our society, and what role the auditors have in addressing them. I am following both the Wells Fargo and Volkswagen scandals with great interest, because each in their own way reflects the business environment that dominates developed countries. Both tell stories that outrage the average person, reflecting total disdain for honesty or for the impact of company policy on others. They involve huge penalties and fines. And their revelation will, in my opinion, do absolutely nothing to stanch the devolution of business behavior into unimpeded self-interest.
Volkswagen has more than 600,000 employees producing roughly 10 million vehicles a year for the world’s largest car company. Wells Fargo has about 265,000 employees; roughly 2 percent of them were fired for their participation in the scandal. Wells Fargo also has a 37-page ethics “vision & values” brochure. This allows for the plausible deniability we see in these situations by CEOs like Wells Fargo’s John Stumpf; how can we expect upper management to be aware of what’s happening at the branches? Mr. Stumpf said in his interview with The Wall Street Journal, “There was no incentive to do bad things.”
But of course there was, and the rampant cross-selling behavior across branches of the bank evidences this incentive. Actually, a better word is pressure. If you can put enough layers between yourself and the employee, you can pretend that it is not true. But that teller or “personal banker” has quotas for selling new accounts and new services from a supervisor, who has quotas from a branch manager, who has quotas from a regional manager, ad infinitum. And if there was no incentive, why is Wells Fargo announcing that they will no longer promote these practices?
There is nothing wrong with cross-selling products or services that add value to the customer. But the temptation is to take advantage of the leverage you have with an existing customer and use it to generate fees that provide little or no benefit to the customer. Wells Fargo is not the only bank doing this; in fact, my sense is that it is common practice. Wells Fargo went even farther by opening accounts and credit cards without the customers’ consent in order to meet quotas, subjecting the customers to fees they should have avoided. And the incentive to stop is small; the $185 million settlement for Wells Fargo is chump change. A recent story indicated that the bank’s three largest competitors have paid over $100 billion in fines in the last eight years for a variety of questionable practices. And the executive in charge of the Wells Fargo unit where the unauthorized accounts were opened, Carrie Tolstedt, retired in July with a pay package reported to be in excess of $124 million. Mr. Stumpf referred to her as “a standard-bearer of our culture.” Apparently, this was true.
Volkswagen’s leadership has tried to put similar distance between itself and the engineers who developed the technology that allowed them to detect when emissions testing was being done. But the conspiracy to cover up the fact that “clean diesel” engines could not be both clean and meet fuel efficiency targets extended almost nine years, according to the Justice Department. When upper management claims that it knew nothing of situations like these over such a protracted period, fines are not enough. The only effective way to find out is to prosecute from below and move up the executive food chain. That process began last week with the guilty plea of Volkswagen engineer James Liang.
So what can be done to detect this behavior other than to push for more prosecution? Auditors need to better understand these risks in their clients. I know that most of my audit partner friends will say “Not my job!” But the truth is that auditors of public companies have almost unlimited access to data, and the big data tools and analytical skills to evaluate it. That is one reason consulting services are such a growth area for accounting firms. What auditors need to do is bring those skills to bear in nontraditional audit applications if they want to have real insight into their clients. We used to call this “understanding the entity and its environment” in the auditing standards.
Auditors protect the public interest. Auditors who bring professional skepticism and data analytics skills to bear in the audit can serve as an early warning system for some of these scandals, instead of relying on customers to reveal them. For example, data analytics might well have signaled to the auditors that there was disparate growth in Wells Fargo’s new accounts in California, causing them to question the reliability of the bank’s revenue numbers.
Wells Fargo is a classic example of customers being used for profitability rather than served. If auditors really want to have value, they can stop focusing solely on cross-selling analytics services, and use them to detect fraudulent behavior in the audit. And they can remember that in the case of a large corporation, management will never say they knew what was going on.