Read the case and answer the following questions

Your case analysis submissions should include the following:
• Section 1: A brief summary of the key facts of the case – this should be no longer than a paragraph.
• Section 2: A list of the professional standards applicable to the case. Each of your listings should include the codification number and title of the standard as well as a reference to the pertinent paragraph(s) within the standard if appropriate. E.g. PCAOB AS 2401: Consideration of Fraud in a Financial Statement Audit paragraphs .13-.52
• Section 3: Responses to all the questions required for the case study. Be sure to support your response with cites of applicable standards (which you would have listed above) as appropriate. Organize your responses in the same order the questions are asked in the case study. Start each response by first restating the question.
• Section 4: Reflect on all of the questions/responses in section three. Given your critical analysis of the case materials, think about any other relevant questions about the case you would like to have answers to that weren’t asked as part of the required case study questions. List 1-3 questions you would like to pose to the group leading the case study presentation in class. Posing your questions live during our case discussions in class will help stimulate further discussion of case issues and contribute to your participation grade in the class.

For the section 3, only answer the question 2 and 4.
Requirements: N/A
3CASE 1.1Wells Fargo & CompanyHenry Wells and William Fargo, two East Coast businessmen, recognized that the California Gold Rush in the Sierra Nevada Mountains east of San Francisco had cre-ated a wealth of lucrative business opportunities for investors willing to accept a high risk of failure. After raising $300,000 from friends and business associates, the two adventurous entrepreneurs established San Francisco-based Wells Fargo & Company in 1852. At the time, San Francisco was a rapidly growing and largely lawless boom-town populated by 35,000 residents, including a ragtag collection of con artists, hus-tlers, and other neÕer-do-wells with shady backgrounds. Just four years earlier, San Francisco had been a sleepy fishing village with fewer than 500 residents. A Wild West MindsetHenry Wells, William Fargo, and their partners decided the two business services most needed by San Franciscans were transportation and banking. After acquiring a building near the intersection of present-day California and Montgomery Streets, the new company plunged headfirst, if not blindly, into those lines of business. Despite the lack of considerable forethoughtÑor a comprehensive business planÑhard work and ingenuity allowed Wells Fargo to thrive. Wells Fargo initially made a name for itself in the San Francisco Bay Area by provid-ing rapid and reliable freight, courier, and mail delivery services. In the late 1850s, the companyÕs founders helped organize the famous Butterfield Overland Mail Route that connected San Francisco with St. Louis. In a little more than three weeks, the compa-nyÕs stagecoaches could deliver mail, freight, and bone-weary travelers from the banks of the Mississippi River to the City by the Bay. Prior to the development of the first inter-continental railroad in 1869, Wells FargoÕs fleet of six-horse stagecoaches served as the largest and most important transportation network west of the Mississippi River. (In 1862, the business assumed control of the iconic but short-lived Pony Express.)Wells FargoÕs banking operations expanded more slowly than its transportation services. However, the federal governmentÕs decision to nationalize major inter-state freight and transportation lines during World War I forced Wells Fargo to focus almost exclusively on the banking industry. An aggressive acquisition strategy and the success of other key strategic initiatives implemented by successive generations of opportunistic, if not freewheeling, senior executives made Wells Fargo the larg-est banking firm globally in terms of collective market value by 2015. At the time, the company operated nearly 9,000 retail branches in 35 countries and had over 70  million customers.In addition to its impressive size and unparalleled growth in the banking industry, Wells Fargo ranked, until recently, among the most admired and respected compa-nies in both the United States and around the globe. In 2015, for example, Wells Fargo placed seventh in BarronÕs annual survey of the worldÕs most respected multinational companies. Disaster struck in late 2016 when a federal agency revealed Wells Fargo had been fined $185 million for Òunfair, deceptive, and abusiveÓ banking practices. The resulting headline-grabbing scandal caused Wells Fargo to plummet to the bot-tom of BarronÕs annual survey.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
4 SECTION ONE COMPREHENSIVE CASESGrowth at All CostsDuring the early years of the twenty-first century, two strategic initiatives contributed heavily to Well FargoÕs dramatic growth: a continually expanding product line of financial services and the Òcross-sellingÓ of those services to the companyÕs existing customers. In fact, cross-selling eventually became the lynchpin of Wells FargoÕs industry-leading business model.ÒFinancial products per customer householdÓ rates among the most important met-rics in the retail banking industry. By 2013, Wells Fargo provided an average of 6.15 financial products to each of its customer households, four times greater than the industry average. A noted bank consultant reported that ÒWells Fargo is the master of this . . . no other bank can touch them.Ó1 The bankÕs long product line of services for retail consumers included checking and savings accounts, credit card accounts, automobile loans, student loans, retirement accounts, mortgage services, investment portfolio management services, among others. Wells FargoÕs cross-selling of its products was particularly successful from 2000 through 2013 when the companyÕs financial-products-per-customer-household measure rose by approximately 50 percent. During this time frame, published reports in the Los Angeles Times and various business publications suggested that intense pressure imposed by Wells FargoÕs branch managers on lower-level employees to reach unrealistic sales quotas accounted for the companyÕs cross-selling success. The branch managers, them-selves, also faced heavy pressure from Wells FargoÕs regional managers and senior exec-utives to reach or surpass the sales goals for their operating units each reporting period.A 2013 Los Angeles Times article entitled ÒWells FargoÕs Pressure-cooker Sales Culture Comes at a CostÓ prompted federal and local regulatory officials to begin investigating the companyÕs marketing tactics. A former Wells Fargo entry-level employee quoted in the article recalled how superiors had belittled subordinates who failed to reach their assigned sales quotas. ÒWe were constantly told we would end up working for McDonaldÕs. If we did not make the sales quotas . . . we had to stay for what felt like after-school detention, or report to a call session [to telephone customers] on Saturdays.Ó2 A former Wells Fargo branch manager reported that if his branch failed to reach its periodic sales goal, he was Òseverely chastised and embar-rassed in front of 60-plus managersÓ3 from his sales region.Even more troubling was an allegation that the extreme pressure exerted by Wells Fargo management on the companyÕs entry-level salespeople drove them to rou-tinely sign up customers for unwanted services. In one case, a former Wells Fargo employee described how a homeless woman had been goaded into opening six accountsÑthose accounts produced $39 in monthly fees for the given Wells Fargo branch. Another former employee told a Los Angeles Times reporter she resigned her position rather than continuing to force Òunneeded and unwantedÓ financial prod-ucts on customers Òto satisfy sales targets.Ó4A common deceptive practice used by Wells Fargo sales staff was transferring a modest amount of funds from an existing customer account, such as, a checking account, to a new, unauthorized account, a practice referred to internally as Òsimu-lated funding.Ó This tactic helped employees reach their periodic sales quotas while also generating additional fees for Wells Fargo.1. E. S. Reckard, ÒWells FargoÕs Pressure-cooker Sales Culture Comes at a Cost,Ó Los Angeles Times (online), 22 December 2013. 2. Ibid.3. Ibid.4. Ibid.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 1.1 WELLS FARGO & COMPANY 5The pressure on Wells Fargo salespeople to market additional financial services or products to customers was exacerbated by the companyÕs incentive compensa-tion program.5 Employees in entry-level sales positions earned significant bonuses each year if they met or surpassed their assigned sales quotas. In turn, Wells FargoÕs branch managers and the companyÕs more senior managers and executives received large bonuses if their subordinates achieved their sales goals. Inattentive customers who did not monitor their Wells Fargo accounts became unwilling accomplices of their bankÕs scheming employees. If customers complained about unauthorized accounts opened in their names, branch managers would typi-cally step in and assuage their concerns with disingenuous explanations. ÒWhen customers complained about the unwanted credit cards [or other unauthorized accounts], the branch manager would blame a computer glitch or say the card had been requested by someone with a similar name.Ó6In early September 2016, the Consumer Financial Protection Bureau (CFPB), a federal watchdog agency created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, announced Wells Fargo had been fined $185 million. That figure included a $35 million fine imposed by the Office of the Comptroller of the Currency and a $50 million fine levied by the County of Los Angeles. The fines stemmed from ÒillegalÓ business practices employed by the banking giant, principal among them signing up customers for financial services and products they had not requested. The CFPB sanctions required Wells Fargo to refund customer fees linked to the unauthorized accountsÑthe refunds were expected to be no more than $5 mil-lion. Wells Fargo was also required to hire an independent consultant to identify meas-ures to prevent self-serving employees from taking unfair advantage of customers.Wells FargoÕs senior management responded to the CFPB announcement by reveal-ing that the individuals who had created the unauthorized customer accounts had been fired. In total, the bank had dismissed 5,300 individuals involved in the scamÑthe companyÕs workforce included more than 250,000 employees. Nearly all of the fired employees occupied entry-level positions in Wells Fargo branches. The com-pany also announced it was discontinuing the controversial cross-selling policy as of January 1, 2017.ÒNothing Could Be Further from The TruthÓThe CFPB reported that between 2011 and 2016, alone, Wells Fargo employees had issued 600,000 credit cards and established 1.5 million bank accounts for customers who had not requested them. Those figures shocked and enraged not only the Wells Fargo customers who had been directly impacted by the scandal but also elected officials and the general public. The response of Wells FargoÕs senior executives to the scandal further infuri-ated the companyÕs critics. In the days and weeks following the CFPBÕs stunning announcement, company spokespeople rejected insinuations that the underhanded banking practices were attributable to a high-pressure sales culture cultivated by top management. Similar denials had been made in 2013 when the Los Angeles Times leveled accusations of misconduct against Wells FargoÕs sales staff. The companyÕs chief financial officer (CFO) at the time had bluntly claimed he was Ònot aware of any overbearing sales cultureÓ7 within the firm. 5. To stress the importance of branch employees ÒsellingÓ new services to customers, Wells Fargo began using the term ÒstoresÓ rather than ÒbranchesÓ when referring to its operating units. 6. Reckard, ÒWells FargoÕs Pressure-cooker Sales Culture Comes at a Cost.Ó7. Ibid.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
6 SECTION ONE COMPREHENSIVE CASESJohn Stumpf, Wells FargoÕs chief executive officer (CEO), angrily dismissed allegations that the deceptive banking practices emerged from a mercenary, if not corrupt, internal culture within the company. In one statement, he insisted those activities were not the result of an Òorchestrated effort, or scheme as some have called it, by the company.Ó8 In responding to a 2015 lawsuit alleging improper sales practices by Wells FargoÕs branches, Stumpf snapped, ÒNothing could be further from the truth on forcing products on custom-ers . . . Did some things go wrong Ð you bet and that is called life. This is not systemic.Ó9Following the announcement of the CFPB sanctions, a former Wells Fargo branch manager said he was ÒdisgustedÓ by John StumpfÕs effort to divert responsibility for the scandal from the companyÕs senior management to the 5,300 lower-level employees fired by the company. ÒCorporate executives designed the sales quota systems and created the culture of harassment and fear when we did not meet them. When John Stumpf blamed the frontline workers for the unauthorized accounts, I was disgusted.Ó10Critics of John Stumpf were quick to point out that he had maligned the new bank-ing regulations prompted by the massive financial crisis of 2008Ð2009 that had under-cut the stability of the U.S. banking system. That crisis had been attributed, in part, to high-risk, if not reckless, policies implemented by the nationÕs largest banks, includ-ing Wells Fargo. While accepting the 2013 ÒBanker of the Year AwardÓ from a major trade publication, Stumpf, the nationÕs highest-paid banker, denounced the Òplethora of new banking regulationsÓ11 that he believed were inconsistent with a free market economy. Ironically, Stumpf had failed to criticize the federal governmentÕs decision a few years earlier to suspend free-market conditions by providing Wells Fargo with $25  billion in ÒbailoutÓ funds to help it weather the enormous economic crisis. As the controversy over Wells FargoÕs unlawful banking practices continued to grow, the U.S. House Financial Services Committee and the U.S. Senate Banking Committee held hearings in late September 2016 to investigate the scandal. In his tes-timony before those committees, John Stumpf Òstuck to the same script he had used throughout the crisis. The problem, he explained, was an ethical lapse limited to the 5,300 employees, most of them low-level bankers and tellers, who had been fired for their actions since 2011.Ó12 Members of both political parties verbally battered Stumpf during the congres-sional hearings. His most relentless critic was U.S. Senator Elizabeth Warren. Senator Warren pointed out that in addition to the tens of millions of dollars in salary and other compensation benefits Stumpf had received during the time frame covered by the CFPB investigation, the value of his ownership interest in Wells Fargo had increased by $200 million during that five-year period. After telling Stumpf he should resign, Warren added angrily, ÒYou should give back the money you took while this scam was going on, and you should be criminally investigated by the Department of Justice and the Securities and Exchange Commission.Ó13 8. M. Corkery, ÒWells FargoÕs John Stumpf Has His Wall Street Comeuppance,Ó New York Times (online), 19 September 2016. 9. W. Frost and D. Giel, ÒWells Fargo Board Slams Former CEO Stumpf and Tolstedt, Claws Back $75 Million,Ó www.cnbc.com, 10 April 2017. 10. L. Shen, ÒFormer Wells Fargo Employees to CEO John Stumpf: ItÕs Not Our Fault,Ó http://fortune.com, 19 September 2016. 11. Corkery, ÒWells FargoÕs John Stumpf Has His Wall Street Comeuppance.Ó 12. S. Cowley, ÒWells FargoÕs Reaction to Scandal Fails to Satisfy Angry Lawmakers,Ó New York Times (online), 29 September 2016. 13. J. Puzzanghera, ÒSen. Elizabeth Warren Rips into Wells Fargo CEOÕs ÔGutless Leadership,ÕÓ Los Angeles Times (online), 20 September 2016.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 1.1 WELLS FARGO & COMPANY 7In early October 2016, shortly after he testified before Congress, John Stumpf resigned as Wells FargoÕs CEO. A few months later, the company dismissed four other executives linked to the cross-selling scandal.Senators Take Aim at KPMGAfter berating John Stumpf, congressional investigators turned their attention to other parties associated with Wells Fargo, who they believed shared some measure of responsibility for the companyÕs massive scandal. KPMG, Wells FargoÕs independ-ent audit firm since 1931, soon found itself in CongressÕs crosshairs. Because independent auditors serve as the final line of defense against short-sighted corporate executives, legislative and regulatory authorities often examine the role auditors playedÑor failed to playÑin high-profile financial scandals. In the decade prior to the Wells Fargo fiasco, the spectacular collapses of Enron and WorldCom within 12 months of each other cost investors and creditors $200 billion. Andersen & Co., which had served as the audit firm of both companies, faced fierce criticism from numerous parties, including Congress, for not warning the public of the criminal conduct that had undermined those two well-known companies.14 In the summer of 2002, public outrage stemming from the Enron and WorldCom disasters spurred Congress to hurriedly pass the Public Company Accounting Reform and Investor Protection Act, commonly referred to as the SarbanesÐOxley (SOX) Act. Among other wide-ranging corporate reformsÑincluding the creation of the Public Company Accounting Oversight Board (PCAOB)ÑSOX requires large public compa-nies to have their internal control over financial reporting (ICFR) audited annually by their independent accounting firm.15 The existence of one Òmaterial weaknessÓ in a companyÕs ICFR mandates the issuance of an ÒadverseÓ opinion on those controls. Congress expected that annual ICFR audits would discourage unscrupulous busi-ness practices such as those that had brought down Enron and WorldCom. Beginning in 2004, when the SOX-mandated ICFR rules went into effect, KPMG issued an unqualified or ÒcleanÓ opinion each year on the effectiveness of Wells FargoÕs ICFR, including 2011Ð2015, the time period covered by the CFPBÕs investiga-tion. Those unqualified ICFR opinions stood in stark contrast to harsh indictments of Wells FargoÕs internal controls by other parties. The New York Times reported that the Òwidespread nature of the illegal behavior [within Wells FargoÕs operations] showed that the bank lacked the necessary controls and oversight of its employees.Ó16 In an apparent reference to KPMGÕs reports on Wells FargoÕs ICFR, a former federal regula-tor asked, ÒHow does a bank that is supposed to have robust internal controls permit the creation of [a large number of] dummy accounts?Ó17Wells FargoÕs apparent internal control deficiencies caused several U.S. sena-tors to demand KPMG explain why it had issued a clean opinion each year on the 14. A criminal conviction stemming from the Enron bankruptcy effectively forced Andersen & Co. to cease operations. Although the U.S. Supreme Court subsequently overturned the conviction, the former Big Five firmÕs reputation had already been undermined.15. SOX requires the management of each large public company to issue an annual report on the effec-tiveness of the organizationÕs ICFR. Technically, auditors are required to then issue a report commenting on the accuracy of client managementÕs ICFR assessment. Since the adoption of these requirements, the auditing profession has treated the latter mandate effectively as a requirement to ÒauditÓ a clientÕs ICFR.16. M. Corkery, ÒWells Fargo Fined $185 Million for Fraudulently Opening Accounts,Ó New York Times (online), 8 September 2016. 17. M. Egan, Ò5,300 Wells Fargo Employees Fired Over 2 Million Phony Accounts,Ó www.cnn.com, 9 September 2016.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
8 SECTION ONE COMPREHENSIVE CASEScompanyÕs ICFR while the CFPB was finding evidence of pervasive fraud. Those four senators, which included Senator Elizabeth Warren, sent a letter to KPMGÕs CEO in late October 2016Ñsee Exhibit 1. In the letterÕs prologue, the senators suggested that KPMGÕs failure to report Wells FargoÕs Òillegal behaviorÓ cast doubt on the ÒqualityÓ of the firmÕs annual audits of the companyÕs ICFR. The senators asked KPMG to respond to five questions. The key issue raised by those questions was whether KPMG was Òaware of any of the illegal sales practices committed by Wells Fargo employees.Ó If KPMG had not been aware of those activities, the senators Lynne Doughtie Chairman and Chief Executive Officer KPMG U.S. 345 Park Avenue New York, NY 10154Dear Ms. Doughtie:We are writing regarding KPMGÕs role as the independent auditor of Wells FargoÕs financial statements from 2011-2015, years in which the company was unable to detect and prevent illegal sales practices by thousands of employees. Wells Fargo recently settled with federal regulators for the companyÕs misbehavior in this massive fraud involving the creation of more than one million unauthorized deposit accounts and over 560,000 fraudulent credit card applications.Wells Fargo dismissed 5,300 employees over a five-year period for these actions. But each year during what the Consumer Financial Protection BureauÕs (CFPB) investigation concluded to be Òfraudulent conduct . . . on a massive scale,Ó KPMG conducted audits assessing Wells FargoÕs internal control over its financial statements. These detailed audits were conducted by Òobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.Ó But none of KPMGÕs audits identified any concerns with illegal behavior that resulted in the creation of over two million unauthorized accounts by thousands of employees Ð and that ultimately resulted in the resignation of Wells FargoÕs CEO and a decline in the companyÕs stock price of more than 10% in the days after the settlement with federal regulators. In fact, in each of your audits, your firm concluded that Wells Fargo Òmaintained . . . effective internal control over financial reporting.ÓThe Sarbanes-Oxley Act of 2002 was passed into law in part to address the problem of companies like Enron whose internal auditorsÕ lack of independence enabled them to produce unreliable public financial reports and obscure problems with their companies. That is why the Act requires financial statements of public companies to be audited by an independent accountant and filed with the Securities and Exchange Commission (SEC). But your firmÕs failure to identify the illegal behavior at Wells Fargo raises questions about the quality of your audits and the effectiveness of the implementation of these Sarbanes-Oxley requirements by the Public Company Accounting Oversight Board (PCAOB). Therefore, we request answers to the following questions:1) Was KPMG aware of any of the illegal sales practices committed by Wells Fargo employees from 2011-2015 and addressed in the CFPB settlement? If yes:a. Did KPMG communicate this knowledge with top executives at Wells Fargo? If so, please provide electronic or paper copies of any and all communications.EXHIBIT 1OCTOBER 27, 2016, LETTER SENT BY MEMBERS OF U.S. SENATE TO KPMG CHAIRMAN(continued)Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 1.1 WELLS FARGO & COMPANY 9EXHIBIT 1Ñ continuedOCTOBER 27, 2016, LETTER SENT BY MEMBERS OF U.S. SENATE TO KPMG CHAIRMANb. Did KPMG have any internal discussions about Wells FargoÕs illegal sales practices and their potential impact on the companyÕs financial statements and on the outcome of the annual audits? If so, please provide all electronic or paper documents relating to these discussions. If no:a. Please provide a detailed explanation of why KPMG failed to contemporaneously identify or otherwise learn of Wells FargoÕs illegal activity during your audits.b. Did you assess whether Wells Fargo had controls in place to prevent this illegal activity? What was your assessment about the quality of these controls and how well they were executed?2) Did any employee of Wells Fargo mislead any employee of KPMG about the extent and impact of the unauthorized account creation addressed in the CFPB settlement during your audits?3) Has KPMG conducted any internal reviews, reexaminations, or reassessments of its Wells Fargo audits in light of the information revealed in the settlement?4) Has KPMG faced any disciplinary action or queries from the Public Company Accounting Oversight Board (PCAOB) in relation to your audits of Wells Fargo? If so, please provide details on these actions or queries.5) Based on your present knowledge of the creation of unauthorized accounts at Wells Fargo, does your firm stand by its conclusions from 2011-2015 that ÒWells Fargo maintained, in all material respects, effective internal control over financial reporting?ÓPlease provide complete answers to these questions by November 28, 2016. Thank you for your attention.Sincerely,U.S. Senator Elizabeth Warren U.S. Senator Bernard SandersU.S. Senator Mazie K. Hirono U.S. Senator Edward J. MarkeyNote: The original letter from the U.S. senators included extensive footnotes identifying the sources of the quoted passages. Those footnotes can be found in the original version of the letter that is available online. (https://www.warren.senate.gov/files/documents/2016-10-27_Ltr_to_KPMG_re_Wells_Fargo_Audits_FINAL.pdf)asked the firm to explain why its Wells Fargo auditors had ÒfailedÓ to identify them. The senatorsÕ final question asked KPMG to indicate whether it stood by Òits conclusions from 2011Ð2015Ó that Wells Fargo had Òmaintained, in all material respects, effective internal control over financial reportingÓ given the subsequent findings of the CFPB.After multiple news services published the letter sent by the four U.S. senators to KPMG, several parties came to the accounting firmÕs defense. A Forbes article enti-tled ÒElizabeth Warren Sends Misguided Letter to KPMG about Wells FargoÓ insisted that Senator Warren, her colleagues, and certain elements of the press did not under-stand the nature and purpose of the independent auditorÕs ICFR-related responsibili-ties. The article took particular issue with a statement by CNN that ÒEach year, KPMG put a stamp of approval on the procedures that Wells Fargo had in place to guarantee the integrity of its financial statements.Ó18 Rather than ÒguaranteeingÓ the reliability of 18. R. Berger, ÒElizabeth Warren Sends Misguided Letter to KPMG about Wells Fargo,Ó www.forbes.com, 31 October 2016. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
10 SECTION ONE COMPREHENSIVE CASESa clientÕs financial statements, the Forbes article stressed that auditors only provide Ò reasonable assuranceÓ that an entityÕs ICFR are operating effectively. The Forbes article also rejected the premise that Wells FargoÕs improper sales prac-tices were de facto evidence of a material weakness in the companyÕs ICFR. The financial statement impact of those activities, which the article implied was limited to the few mil-lion dollars of customer fees Wells Fargo was forced to refund, was clearly Ònot materialÓ because it was Òpocket changeÓ19 compared to the companyÕs key financial benchmarks. Those benchmarks included the $90 billion in revenues and the $22.9 billion net income reported by the company for 2015. The article went on to reason that because Wells Fargo had fired 5,300 employees who engaged in the illicit sales practices, the companyÕs internal controls, in fact, appeared to have been Òeffective,Ó as reported by KPMG.KPMG responded to Senator Warren and her colleagues in a letter dated November 28, 2016Ñsee Exhibit 2. In that letterÕs opening paragraph, KPMG stressed its com-mitment to Òaudit qualityÓ and assured the senators it took Òvery seriously its role as independent auditor of Wells FargoÕs financial statements and internal controls over financial reporting.Ó KPMG then made an important observation that was reinforced later in the letter: ÒAt the outset, it is important to emphasize that not every illegal act has a meaningful impact on a companyÕs financial statements or its system of inter-nal controls over financial reporting.Ó 19. Ibid.The Honorable Elizabeth Warren The Honorable Bernard Sanders317 Hart Senate Office Building 332 Dirksen Senate Office BuildingUnited States Senate United States SenateWashington, DC 20510 Washington, DC 20510The Honorable Mazie K. Hirono The Honorable Edward J. Markey330 Hart Senate Office Building 255 Dirksen Senate Office BuildingUnited States Senate United States SenateWashington, DC 20510 Washington, DC 20510Dear Senators Warren, Sanders, Hirono, and Markey: Thank you for your letter dated October 27, 2016.KPMG is committed to audit quality and to preserving the integrity of our capital markets and takes very seriously its role as independent auditor of Wells FargoÕs financial statements and internal controls over financial reporting. KPMG also takes very seriously the conduct described in the Consumer Financial Protection Bureau (CFPB) settlement and other reports. At the outset, it is important to emphasize that not every illegal act has a meaningful impact on a companyÕs financial statements or its system of internal controls over financial reporting. From the facts developed to date, including those set out in the CFPB settlement, the misconduct described did not implicate any key control over financial reporting and the amounts reportedly involved did not significantly impact the bankÕs financial statements. Most importantly, KPMG is confident that its audits and reviews of Wells FargoÕs consolidated financial statements were appropriately planned and performed in accordance with applicable professional standards.Listed below are your questions and our responses to your questions.1) Was KPMG aware of any of the illegal sales practices committed by Wells Fargo employees from 2011-2015 and addressed in the CFPB settlement?EXHIBIT 2NOVEMBER 28, 2016, LETTER SENT TO MEMBERS OF U.S. SENATE BY KPMG CHAIRMAN(continued)Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 1.1 WELLS FARGO & COMPANY 11EXHIBIT 2Ñ continuedNOVEMBER 28, 2016, LETTER SENT TO MEMBERS OF U.S. SENATE BY KPMG CHAIRMANAs part of KPMGÕs audits of Well FargoÕs financial statements, KPMG performed procedures to identify instances of unethical and illegal conduct. The audit team interviewed the companyÕs chief auditor, members of the companyÕs primary investigative department known as the Corporate Investigations Unit, the companyÕs controllerÕs office, attorneys in the legal department, and, at times, outside counsel. KPMG also inspected regulatory reports and interviewed the banking regulators, and reviewed reports provided to executive management and board members. These included the chief compliance officerÕs report to the audit committee, and reports to the bankÕs Audit & Examination Committee (A&E Committee) containing investigations that related to accounting, internal accounting controls, auditing, whistleblower claims and claims of retaliation under the Sarbanes-Oxley Act of 2002. [The A&E Committee consists of a minimum of three Board members and meets regularly at least nine times per year.]As a result of these procedures, KPMG became aware of instances of unethical and illegal conduct by Wells Fargo employees, including incidents involving these improper sales practices, and we were satisfied that the appropriate members of management were fully informed with respect to such conduct. In 2013, the company initiated an investigation into potential sales misconduct (referred to as Òsimulated fundingÓ) in Southern California. The investigation into this Òsimulated fundingÓ continued into 2014, and led to the termination of a number of employees, including branch managers and an area manager. In 2015, KPMG became aware that the City Attorney of Los Angeles had initiated a lawsuit over improper sales practices, and that the company had hired an outside consultant to review its entire sales incentive program. The audit team monitored the progress of this lawsuit and reviewed the consultantÕs report and the conclusions therein.a) Did KPMG communicate this knowledge with top executives at Wells Fargo? If so, please provide electronic or paper copies of any and all communications.KPMG has not identified any information known to us that was not also known to executive management through its internal processes. Importantly, the banks A&E Committee received reports describing instances of employee misconduct, including the sales practices issues. The A&E Committee meetings were attended by the bankÕs executive management, and the materials KPMG auditors obtained were provided to executive management as well. Moreover, the 2013 investigation and the 2015 lawsuit were widely reported in the press and well known to the bankÕs executives.b) Did you assess whether Wells Fargo had controls in place to prevent this illegal activity? What was your assessment about the quality of these controls and how well they were executed?As the independent auditor of Wells FargoÕs financial statements and management assessment of its internal controls over financial reporting, KPMG considered the bankÕs controls over these practices from a financial reporting perspective. And, from a financial reporting perspective, the improper sales practices did not involve key controls over financial reporting. From the financial statement perspective, its effects were not financially significant.The opening of an unauthorized account did not itself have an impact on Wells FargoÕs financial statements. If a bank employee placed a customerÕs funds in one authorized account, or in many unauthorized accounts, the total amount of deposits remained constant. Only the total amount of deposits is reported in the bankÕs financial statements. KPMG analyzed the potential impact on the financial statements of setting up unauthorized accounts, whether caused by an improper sales practice or otherwise. The audit team concluded that the potential impact of any such errors would likely be insignificant. They received additional support for this conclusion when an outside consultant calculated the potential financial impact of the improper sales practices. That consultant concluded the fees associated with unauthorized accounts were less than $5 million, and that amount had accumulated over a five-year period. (continued)Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
12 SECTION ONE COMPREHENSIVE CASESKPMGÕs audit team, however, did not limit their consideration to the numbers. They also looked at who was involved in the improper sales practices. None worked in financial reporting or had the ability to influence the financial reporting process. It should be noted that a special committee of independent directors of the Board is conducting an investigation into this matter. In accordance with our professional responsibilities, KPMGÕs audit team is closely monitoring this investigation to determine its impact on our assessment. 2) Did any employee of Wells Fargo mislead any employee of KPMG about the extent and impact of the unauthorized account creation addressed in the CFPB settlement during your audits?KPMG has not reached a conclusion as to whether any Wells Fargo employee misled our auditors about the extent and impact of the conduct described in the CFPB settlement. Any conclusion on that question will be made on the basis of all the facts developed in this matter, including the results of the special committee investigation.3) Has KPMG conducted any internal reviews, reexaminations, or reassessments of its Wells Fargo audits in light of the information revealed in the settlement?In accordance with our professional obligations, we have evaluated the information in the CFPB settlement and other reports and continue to monitor new information to determine the impact on our prior and current audits. To date this information supports KPMGÕs conclusions with respect to the effect that improper sales practices had on the companyÕs financial statements and internal controls over financial reporting. The CFPB found that the fees improperly charged to customers amounted to less than $2.5 million over a five-year period, and directed Wells Fargo to place $5 million in reserve for all affected customers. These numbers are to be considered in context of the bankÕs reported results, which included approximately $23 billion in net income in 2015 alone. Furthermore, the CFPB settlement attributed the misconduct to employees seeking to obtain credit under the incentive-compensation program, and did not identify any person involved in the improper sales practices who was involved in or had influence over financial reporting.As stated above, the special committeeÕs investigation into the issues raised by the CFPB is currently ongoing. Any conclusions that KPMG reaches, including any reconsideration of the prior work, will be informed by the facts developed by that investigation. Even prior to the completion of that investigation, the facts described in the CFPB settlement and ensuing investigation are being closely monitored by KPMGÕs audit team and will inform KPMGÕs ongoing audit approach.4) Has KPMG faced any disciplinary action or queries from the Public Company Accounting Oversight Board (PCAOB) in relation to your audits of Wells Fargo? If so, please provide details on these actions or queries.KPMG has not been subject to any discipline by the PCAOB with respect to the Wells Fargo audit engagements. The Wells Fargo audit engagements are covered by the PCAOB inspection program. Since the announcement of the CFPB settlement, KPMG has had appropriate and relevant communications with the PCAOB consistent with what I have described in this letter. 5) Based on your present knowledge of the creation of unauthorized accounts at Wells Fargo, does your firm stand by its conclusions from 2011-2015 that ÒWells Fargo maintained, in all material respects, effective internal control over financial reportingÓ?Yes. Accordingly, KPMG has not withdrawn its reports on the bankÕs financial statements or managementÕs assessment of the effectiveness of its internal controls over financial reporting. EXHIBIT 2Ñ continuedNOVEMBER 28, 2016, LETTER SENT TO MEMBERS OF U.S. SENATE BY KPMG CHAIRMAN(continued)Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 1.1 WELLS FARGO & COMPANY 13EXHIBIT 2Ñ continuedNOVEMBER 28, 2016, LETTER SENT TO MEMBERS OF U.S. SENATE BY KPMG CHAIRMANAs detailed above, the facts developed thus far with respect to the improper sales practices do not implicate the effectiveness of internal controls over financial reporting. Of course, in accordance with our professional obligations, KPMG will continue to monitor the situation, with particular attention to the investigation by the special committee.Thank you for your letter. I appreciate the opportunity to respond to your questions.Sincerely,Lynne M. Doughtie Chairman and CEO KPMG LLPIn the November 2016 letter, KPMG revealed that its Wells Fargo auditors had learned of Òinstances of unethical and illegal conductÓ within the company involving Òimproper sales practices.Ó The auditors had also been aware of an internal investigation of Òsimu-lated fundingÓ that had resulted in the dismissal of several employees. The auditors did not report those matters to Wells FargoÕs senior management because they determined that the executives had already obtained the relevant information via Òinternal [com-pany] processesÓ and from related disclosures Òwidely reported in the press.Ó KPMG explained in the letter that the improper sales practices identified by the CFPB and other parties did not involve key financial reporting controls and thus were not relevant to the annual ICFR audits performed for Wells Fargo. To support this argument, the audit firm pointed out that none of the employees involved in those activities Òworked in financial reporting or had the ability to influence the financial reporting process.Ó KPMG also maintained that the financial statement impact of the unauthorized sales practices had been insignificant, meaning that they were not a source of material errors in the companyÕs financial statements. The final question that had been posed to KPMG by the group of U.S. senators was whether the firm continued to stand by its conclusions that Wells Fargo had main-tained effective ICFR from 2011 through 2015. The firm responded definitively to that question in the November 28, 2016, letter.Yes. Accordingly, KPMG has not withdrawn its reports on the bankÕs financial state-ments or managementÕs assessment of the effectiveness of its internal controls over financial reporting. As detailed above, the facts developed thus far with respect to the improper sales practices do not implicate the effectiveness of internal controls over financial reporting.Senators Encourage PCAOB to Investigate KPMGIn April 2017, five months after receiving the KPMG letter shown in Exhibit 2, Senator Elizabeth Warren and Senator Edward Markey wrote a letter to the PCAOB encour-aging the federal agency to examine KPMGÕs role in the Wells Fargo scandalÑsee Exhibit 3. The senators reminded the PCAOB chairman that his organization had been created Òto oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports.Ó They suggested that ÒKPMGÕs failureÓ to publicly report Wells FargoÕs illegal sales practices raised Òsignificant questionsÓ about the conduct of the Big Four firm as well as the ÒPCAOBÕs role as overseer of public company auditors.Ó In their letter to the PCAOB, the two senators characterized as ÒtroublingÓ much of the information conveyed to them by KPMG, including the firmÕs awareness Òfor several yearsÓ of the ongoing Òillegal activityÓ by a large number of Wells Fargo employees. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
14 SECTION ONE COMPREHENSIVE CASESThe Honorable James R. Doty Chairman Public Company Accounting Office [sic] Board 1666 K St. NW Washington, DC 20006Dear Mr. Doty:We are writing to you to bring your attention to questions raised by KPMGÕs role and findings as the independent auditor of Well FargoÕs financial statements from 2011-2015, years in which thousands of Wells Fargo staff engaged in fraudulent behavior affecting millions of accounts.The Sarbanes-Oxley Act of 2002, passed in the wake of the Enron scandal, established the Public Company Accounting Office [sic] Board (PCAOB) Òto oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports.Ó KPMGÕs failure to publicly identify the Wells Fargo scandal or its risk to investors raise significant questions about the conduct of both Wells Fargo and KPMG, and the PCAOBÕs role as overseer of public company auditors.We wrote to KPMG on October 27, 2016, to ask for an explanation of how, in its role as independent auditor of Wells FargoÕs financial statements from 2011-2015, KPMG failed to identify fraud and mismanagement that affected millions of customer accounts, cost the company billions of dollars in market capitalization, and resulted in the dismissal of over 5,000 Wells Fargo employees and the retirement of the Wells Fargo CEO.KPMG provided a response to our letter on November 28, 2016. This response explained that Wells FargoÕs Òmisconduct . . . did not implicate any key control over financial reporting and the amounts reportedly involved did not significantly impact the bankÕs financial statements. . . . KPMG is confident that its audits and reviews of Well FargoÕs consolidated financial statements were appropriately planned and performed in accordance with applicable professional standards.ÓThis response provided us with three pieces of troubling new information regarding the Wells Fargo scandal and KPMGÕs role as auditor. This new information reveals that (1) KPMG, for several years prior to the CFPB and DOJ settlement, became aware of and analyzed in detail the illegal activity at Wells Fargo; (2) that the Wells Fargo Board had extensive knowledge of the wrongdoing, and that KPMG was aware that the Board had obtained this knowledge; and (3) despite the fact that a detailed investigation conducted by Wells FargoÕs independent board members found that the problem was caused by the BankÕs basic corporate structure and the top executives responsible for it, KPMG continues to stand by its conclusion that the Òimproper sales practices do not implicate the effectiveness of internal controls over financial reporting.ÓFindings and Concerns from the KPMG ResponseThe response indicated that KPMG, as part of its routine audit activities, became aware and analyzed in detail the illegal activity at Wells Fargo as early as 2013. According to KPMG, the auditor Òinterviewed the companyÕs chief auditor . . . the Corporate Investigations Unit, the companyÕs controllerÕs office, attorneys in the legal department, and . . . outside counsel. KPMG also inspected regulatory reports, interviewed the banking regulators, and reviewed reports provided to executive management and board members. The letter continues, noting that Òas a result of these procedures, KPMG became aware of instances of unethical and illegal conduct by Wells Fargo employees, including incidents involving these improper sales practices.ÓEXHIBIT 3APRIL 25, 2017, LETTER SENT BY MEMBERS OF U.S. SENATE TO PCAOB CHAIRMAN(continued)Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 1.1 WELLS FARGO & COMPANY 15EXHIBIT 3Ñ continuedAPRIL 25, 2017, LETTER SENT BY MEMBERS OF U.S. SENATE TO PCAOB CHAIRMANIn fact, the KPMG letter indicates that the auditor scrutinized the misbehavior in detail, including reviewing the work of an additional outside consultant: ÒKPMG analyzed the potential impact on the financial statements of setting up unauthorized accounts . . . [and] concluded that the potential impact of any such errors would likely be insignificant. [KPMGÕs audit team] received additional support for this conclusion when an outside consultant calculated the potential financial impact of the improper sales practices.ÓSecond, the KPMG response also indicates that the Wells Fargo Board had extensive knowledge of the wrongdoing. According to KPMG, the auditor did not provide key information about the scandal to top executives at the bank because these individuals already had the information: Òthe bankÕs A&E committee received reports describing . . . the sales practices issues . . . the materials KPMGÕs auditors obtained were provided to executive management as well.ÓThird, the KPMG response indicates that the auditor still continues to believe that the illegal sales practices were irrelevant to their charge of identifying problems with financial reporting. According to the company, Òfrom a financial reporting perspective, the improper sales practices did not involve key controls over financial reporting.Ó In fact, in the conclusion to their response, KPMG stated that Òthe facts developed thus far with respect to the improper sales practices do not implicate the effectiveness of internal controls over financial reporting.ÓThis response from KPMG raises numerous questions. Principally, it is difficult to comprehend the KPMG conclusion that the scandal Òdid not involve key controls over financial reporting.Ó In the month after the scandal broke, Wells FargoÕs stock valuation declined by 12%; in the first quarter after the news broke, Ònew credit card applications were down 43 percent in the fourth quarter of 2016 from a year ago, and . . . new checking account openings fell 40 percent.Ó Wells FargoÕs CEO retired shortly after news of the scandal broke, and four other senior executives at the bank were terminated for cause.Ó And according to an independent consultantÕs review, Òthe bank stands to lose $99 billion in deposits, $4 billion in revenue and a customer base that could dwindle by up to 30 percent,Ó because Ò[t]he breach of trust the scandal created has fundamentally changed the way that [Wells Fargo customers] think about . . . the bank.ÓMoreover, KPMGÕs conclusions about the integrity of financial reporting appear to conflict with the conclusion of a review conducted by Wells FargoÕs independent board members. This review, which was released in April 2017, found that one root cause of the scandal was the BankÕs basic corporate structure and the top executives responsible for it. A summary of the report noted that Òthe BankÕs decentralized organizational corporate structure gave too much authority and autonomy to the Community BankÕs senior leadership . . . Community Bank leadership resisted and impeded outside scrutiny or oversight, and when forced to report minimized the scale and nature of the problem.Ó The review also found that Ò[c]orporate control functions were constrained by the decentralized structure and a culture of substantial deference to the business units.Ó This was the same corporate structure that was deemed by KPMG to have Òmaintained . . . effective internal control over financial reportingÓ in every year between 2011 and 2015.We have attached a copy of the KPMG letter for your review.QuestionsKPMG, in its role as Wells FargoÕs independent auditor, failed to prevent or even publicly disclose the fraud that affected hundreds of thousands of customers, and cost the company CEO his job. In response to questions about this failure, KPMG denied any wrongdoing, standing by their conclusion that Wells Fargo Ð during the entire time the scandal was ongoing Ð Òmaintained effective internal control over financial reporting.Ó(continued)Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
16 SECTION ONE COMPREHENSIVE CASESThe PCAOBÕs role is to oversee and establish rules for independent auditors like KPMG. But the Wells Fargo incident raises significant questions about whether PCAOB is doing its job effectively. Given these concerns, we ask that you provide us with the following information:1. Has the PCAOB conducted any review of KPMGÕs conclusions with regard to its conclusions about Wells FargoÕs financial reporting from 2011-2015? If so, what were the findings of these reviews?2. In response to the Wells Fargo crisis, has the PCAOB established any updated rules or guidance to help auditors determine whether actions undertaken by employees of public companies result in incorrect financial reporting or undermine the integrity of financial reporting?3. In the case of Wells Fargo, KPMG indicated that the size of fraudulent accounts or the fines imposed by the CFPB and other regulators for the fraudulent accounts was the sole factor affecting the integrity of financial reporting. KPMG ignored factors such as the impact of the fraud on the companyÕs stock price, the reputational harm to the firm, and the flawed corporate structure that the independent board members identified as a root cause of the scandal. Were these decisions by KPMG appropriate and consistent with PCAOB rules and guidance?4. KPMG did not publicly report the widespread fraud, despite now acknowledging that its auditors were aware of it prior to the 2016 settlement. Do PCAOB rules or guidance indicate whether auditors have a responsibility to publicly report or otherwise act on their knowledge of illegal or inappropriate activity by their clients?We ask that you provide us with written answers to these questions no later than May 15, 2017. We also ask that you or your staff provide us with a briefing on this matter and our questions relating to it no later than May 26, 2017.Sincerely,Senator Elizabeth WarrenSenator Edward J. MarkeyNote: The original letter from the U.S. senators included extensive footnotes identifying the sources of the quoted passages. Those footnotes can be found in the original version of the letter that is available online. (https://www.warren.senate.gov/files/documents/2017_04_25_Letter_%20to_PCAOB.pdf)EXHIBIT 3Ñ continuedAPRIL 25, 2017, LETTER SENT BY MEMBERS OF U.S. SENATE TO PCAOB CHAIRMANGiven that knowledge, the senators were clearly dismayed by the clean opinions KPMG had issued on Wells FargoÕs ICFR and by the firmÕs  declaration in its November 2016 letter that it continued to stand by those opinions. Senators Warren and Markey found it Òdifficult to comprehendÓ KPMGÕs contention that the Wells Fargo scandal did not involve or ÒimplicateÓ the companyÕs internal control over financial reporting. The senators used several metrics to support their position that the failure of Wells Fargo and KPMG to report the illegal sales practices had concealed critical information from third parties relying on the companyÕs financial statements and accompanying disclosures. After the CFPB sanctions were announced, for example, the senators reported that Wells FargoÕs credit card applications and new checking accounts had plummeted by 40 percent. Even more compelling were the results of an independ-ent study by a consulting firm that projected the scandal would ultimately cost Wells Fargo $99 billion in deposits, $4 billion in revenues, and 30 percent of its customers. The two senators also argued that KPMGÕs decision to not reference Wells FargoÕs improper sales practices in its ICFR audit reports was inconsistent with a study released Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 1.1 WELLS FARGO & COMPANY 17EPILOGUEThe PCAOB quickly acknowledged the receipt of the April 25, 2017, letter from Senators Warren and Markey shown in Exhibit 3. A PCAOB spokesperson noted that ÒWe appreciate the SenatorsÕ continued interest in the important investor protection mission of the PCAOBÕs oversight of auditors of public companies.Ó20 The spokesperson implied that the PCAOB would respond to the senatorsÕ letter more com-pletely in the future. To date, that response, if any, has not been released to the public.More pressing matters may have interfered with the PCAOBÕs dialogue with the U.S. sena-tors. On April 11, 2017, KPMG had shocked the business world and the accounting profession by announcing that it had dismissed five of its partners and one employee for failing to dis-close confidential information obtained illicitly from the PCAOB (see Case 5.5, ÒZero ToleranceÓ). Subsequent reports would reveal that at least three individuals who were former or existing PCAOB employeesÑtwo of whom had been hired by KPMGÑhad conspired to provide three longtime KPMG partners with advance notice of the KPMG audits that would be included in the PCAOBÕs annual inspection program. At the time, KPMG had the highest audit deficiency rates among the Big Four firmsÑthe PCAOB annually reports a deficiency rate for each of those firms. The intent of the KPMG partners involved in the scandal was, ostensibly, to lower their firmÕs annual deficiency rate. Several indi-viduals involved in the scandal were either con-victed or pled guilty to various criminal charges and received prison sentences. Those individu-als included David Middendorf, KPMGÕs former by the independent members of the companyÕs board of directors in early April 2017. Those directors found that a major cause of the scandal was Wells FargoÕs Òdecentral-ized corporate structure,Ó which undercut the companyÕs Òcorporate control functionsÓ and created a ÒcultureÓ of Òsubstantial deferenceÓ to Wells FargoÕs branch managers. That deference or lack of rigorous oversight apparently gave the branch managers the freedom to alter the companyÕs operating policies and procedures as they saw fit, including the use of the unauthorized sales practices. These conclusions by the inde-pendent directors suggested that Wells FargoÕs flawed Òcorporate cultureÓ impacted the effectiveness of its ICFR and the reliability of its periodic financial statements. Senators Warren and Markey concluded their letter to the PCAOB by urging the fed-eral agency to investigate KPMGÕs role in the Wells Fargo scandal. The senators asked the PCAOB to provide four items of information, including an indication of whether the agency had initiated an investigation of KPMGÕs Òconclusions about Wells FargoÕs financial reporting from 2011-2015.Ó They also asked the PCAOB to review KPMGÕs decision to ignore, in its Wells Fargo financial statement audit and ICFR reports, the potential impact Òof the fraud on the companyÕs stock price,Ó the Òreputational harmÓ that might be inflicted on the company by the fraud, and the Òflawed corporate struc-tureÓ that the independent board members identified as a Òroot cause of the scandal.Ó The final item of information requested by Senators Warren and Markey from the PCAOB addressed arguably their most important concern. ÒDo PCAOB rules or guid-ance indicate whether auditors have a responsibility to publicly report or otherwise act on their knowledge of illegal or inappropriate activity by their  clients?Ó No doubt, the senators would view a negative answer to that question as an indictment of the nature and scope of the independent audit function for public companies as well as the PCAOBÕs regulatory role in overseeing that function. 20. M. Cohn, ÒElizabeth Warren Questions PCAOB about KPMG Audits of Wells Fargo,Ó www.accountingtoday.com, 27 April 2017.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
18 SECTION ONE COMPREHENSIVE CASESQuestions1. 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?2. Do you agree with KPMGÕs position that Wells FargoÕs improper sales practices did not involve the companyÕs ICFR? Defend your answer. 3. How does the AICPAÕs 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? 4. Wells FargoÕs independent board members concluded that the bankÕs Òdecentralized corporate structureÓ was Òone root cause of the scandal.Ó Do you believe the decentralized nature of Wells FargoÕs corporate structure qualified as a Òmaterial weaknessÓ in Wells FargoÕs ICFR? Why or why not?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 donÕt directly impact its financial statements? Explain. What responsibility does an auditor of a public company have if the auditor discovers such illegal acts by the client? 6. While the Wells Fargo scandal was unfolding, several parties pointed out that KPMG had served as the companyÕs audit firm since 1931. Explain how the length of an audit firmÕs tenure may influence its ICFR assessment for a public company client. National Managing Partner of Audit Quality & Professional Practice,21 and three former PCAOB employees, including the two who had accepted positions with KPMG after leaving the PCAOB.In December 2017, the SEC unexpectedly announced that it was replacing every PCAOB member, including the organizationÕs chairman. In February 2020, President Donald Trump sug-gested that the PCAOB should be absorbed into the SEC, a move that would effectively make the organization an SEC operating unit and, apparently, eliminate the positions held by the PCAOBÕs five board members. In August 2017, the Wells Fargo scandal was reignited when the companyÕs new CEO reported that an additional 1.4 million unau-thorized customer accounts had been discov-ered. The CEO also reported that more than 500,000 of the bankÕs customers had been enrolled, without their permission, in an online bill payment service. When asked to comment on those new revelations, Senator Elizabeth Warren tersely responded, ÒUnbelievable.Ó22Wells Fargo officials negotiated settlements in late 2018 with all fifty states to end ongoing investigations and complaints involving the companyÕs Òretail sales practices.Ó23 The cost of those settlements was approximately $640 mil-lion. Two years later, in February 2020, the U.S. Department of Justice announced that it had reached a similar agreement with Wells Fargo. The total cost of that settlement for the company, including reparations to be paid to affected third parties, was $3  billion. Wells FargoÕs 2019 Form 10-K released in February 2020 revealed that the company still faced numerous pending civil lawsuits prompted by its improper business practices. 21. Despite an effort by certain Wells Fargo stockholders to convince the companyÕs board to replace KPMG with another audit firm, in the spring of 2020, KPMG still served as Wells FargoÕs auditor. The almost 90-year tenure of KPMG with Wells Fargo is among the longest in the auditing domain. 22. S. Cowley, ÒWells Fargo Review Finds 1.4 Million More Suspect Accounts,Ó New York Times (online), 31 August 2017. 23. The information in this paragraph was taken from ÒNote 17: Legal ActionsÓ that accompanied Wells FargoÕs financial statements in its 2019 Form 10-K and annual report.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

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