Describe about the Business Section Accounting for Bank Employee.
1. The article selected is from Sydney Morning Herald dated 9 September 2016 under the Business Section titled “Wells Fargo to pay $240m for unauthorized accounts.”
It is a well-known fact that the bank employees given targets for the number of new account opening and receive incentives on the achievement of such targets. The issue came to limelight when Carrie Tolstedt announced her sudden retirement in July 2016 whereas the scheduled retirement was at the end of the year. She is reportedly retiring with a severance agreement of $124.6 million and her unit has created 2 million unauthorized customer accounts. The CEO appreciated her leadership qualities and stated that she was a standard carrier of the culture of the bank (Corkery, 2016).
The main issue highlighted in this case is the lender along with thousands of employees was involved in the opening of fake accounts and unauthorized transactions of moving funds were carried out which resulted in customers being charged for services that they had opted for nor had any idea about (Goldstein, 2016).
The Customer Financial Protection Bureau (CFPB) slapped a fine of $US 100 million, the Office of Comptroller of Currency raised a fine of $the Los Angeles City Attorney and US 35 million settled for $US 50 million. This is possibly the largest penalty ever imposed by the CFPB as it received over 3000 complaints.
Apart from this, the bank is also said to have agreed to compensate customers who were laid unauthorized fees and charges and Wells Fargo has set aside $US 5 million for the same.
The employees had secretly opened accounts in the names of the existing customers’ in order to hit sales and achieve target account opening bonuses. As thousands of employees were involved in this fraud, Wells Fargo has laid off more than 5300 employees in the last five years (Goldstein, 2016). One of the driving factors behind this activity is found to be the high pressure targets given to the employee that leads to adoption of such means (Davidson, 2016). A former employee claimed that he was facing the threat of being fired for not meeting the everyday target and this was on a routine basis.
This scandal proves to be revelation as such practices can be manage by other banks as well. The CFBC has thousands of complaints lodged against major big and small lenders and institutions. One such complaint lodged by a customer about Wells Fargo narrated that the customer was being persuade to re-open a savings account that was not previously opened by the customer. Such were the kind of deceptive practices used by the bank (Egan, 2013). At Wells Fargo, a majority portion of the fraud is said to have taken place in the retail banking and credit card divisions that are classified under Community Banking Division.
As CFPB has not made a specific mention about Tolstedt in connection with this fraud, she is reportedly retiring with a lucrative bonus despite being in-charge of the Community Banking Division.
According to CNN, it is not the hackers that scare the customers for their accounts rather bankers themselves. The fact of sacking 5300 employees clearly throws light on the institutionalized extraction that has been taking place at Wells Fargo from almost a decade. A former employee of Wells Fargo thus claims that they would open accounts in the names of their family and friends to leave for the day (Rushkoff, 2016).
If growth is target by the bank, then is there real growth in this? It would be better though if the banks stop aiming for extreme aggressive growth. As technology has advanced, it has given easy access to the customers’ details for the creation of fake bank accounts. The mad drive for opening accounts is due to the incentives given to the employees and the incentives given to the banks under the pretext of financializing the economy without the slightest thought about the impact of the same on customers’ lives and the world (Hamilton, 2016). It is not just a fraud but a showcase of extreme capitalism where banks do not aim at value creation but just volume creation in the form of transactions and accounts. In a growing economy, banks can achieve real growth as businesses expand and require capital for the same. However, when economies are in crisis or depression, banks find such illegitimate ways to still exhibit growth, retain a higher share price, and ensure capital gains for its shareholders (Miles, 2011). Thus, it is totally fabricated.
To create this synthetic growth, banks look at extracting money from the same customer in different ways like issuing a new credit card with higher fees, issuing new loans with high origination costs, or just making the existing terms of the accounts and debts worse and costlier.
At Wells Fargo since thousands of employees were involved, it can be said to have become a company culture and it will not come as a surprise if this becomes and industry culture (Hrushka, 2016). One of the possible ways to save from such instances is when banks realize their responsibilities towards public good and exist for the same rather than aiming blindly for mad synthetic growth. Making existing customers, pay more will drain the economy and lead to a downfall in the long run. Banks have to appreciate the fact that they do not get to grow at all times.
2. The Exposure Draft on Consolidation (Topic 810) with specific reference to Interest held through Related Parties that are under Common Control issued on June 23, 2016 is selected for this assignment.
a) Introduction of the major issues in the new standard
The Exposure Draft requires six questions to be answer by the respondents. The issues raised in these questions are as below:
Where the Reporting entity is the single decision maker of the Variable Interest Entity, The Exposure Daft requires the reporting entity to include all direct interests in the VIE and on a proportionate basis, all the indirect variable interests to determine whether the reporting entity is the primary beneficiary of the VIE (Pwc, 2015). This approach would require consolidation of all those under common control with the single decision maker. Will this approach gain wide acceptance and agreement?
Will the interests of the shareholders be addressed as in certain situations requiring consolidation of the entities under common control even if there is little or no direct interest n the VIE?
Is the proposed transition approach considered appropriate or is there an alternative transition approach that would be more appropriate?
Are transaction disclosures required to be follow by the reporting entity or any other disclosures are required?
Are the proposed amendments immediately applicable upon the issuance of the final update?
In cases where entities have not adopted amendments in Update 2015-02, should these amendments be adopt at the same time when the entities decide to adopt amendments in Update 2015-02?
b) Consensus or disagreement between the commenting parties.
The comments of four parties from different fields is selected and studied for research. The comments of parties namely Ernst & Young, Ford Motor Company, ACLI and Certified Credit Research Analyst (CCRA) Global Community and AIWMI reviewed and discussed. On comparison of the response given by the parties, it is understood that there is a consensus among the parties with reference to all the points. There is no major disagreement with reference to the same. Only a few suggestions are given.
Ernst & Young’s response states that more clarity is required on determination of the primary beneficiary when the decision maker and the related parties are under common control and appear to have characteristics that are under common control. ASU has also included the fact that indirect interests held through parties under common control is consider equivalent to the direct interest in entirety. Ernst & Young expresses concerns about how this is interpreted by the decision makers and service providers while implementation. SEC Staff had stated in one meeting that the decision maker or service provider should not include such interests while considering the significance of the interests. As the related parties under common control in the determination hold, it whether a fee is a variable interest, unless circumstances warrant a consolidation is cases where the structure is design to avoid the consolidation (Mansell, 2014). This view is contrary to the requirement as per the exposure draft. Hence, clarification is sought on the same to ensure that consistent practices are being followed during the implementation in such cases.
The response from Ford comes with an illustrative example and encourages the presentation of more illustrations to clarify the practical applicability of the proposed amendments. Examples on how to apply these amendments for the identification of the primary beneficiary and the preparation of separate financial statements could promote a more consistent implementation across the preparer communities.
Suggestions have been given about the effective date for the implementation of the proposed amendment for entities that have either already adopted amendment in Update 2015-02 or not. While Ford suggests the allowing of early adoption by entities if they wish to, ACLI suggests that one year time period is required to be given for the implementation.
c) Assumptions behind public interest, private interest and capture theories
With reference to public interest, the question rose on the benefits to the shareholders as a result of this proposed amendment and the disclosure requirements assumptions could be analyze. The transition disclosures are requiring to be made by the reporting entity and all the parties’ that have commented have seconded to the same. Also in their opinion, no additional disclosures are required.
With reference to the addressing of stakeholder concerns, the response given by Ernst & Young better explains the point with the help of an illustration. The illustration throws light on the satisfaction of the primary characteristics by two different wholly owned subsidiaries. Both the corporation is under the common control of a single parent. In certain cases, it is stated that in the control or existence of a relationship on a proportionate basis might not be evident in terms of figures or numbers but still the consolidation has to be done as the parent has the power to direct the activities of the VIE and has a significant impact on the VIE’s economic performance. Another crucial point highlighted is that because of the consolidation, the reporting entity could either bear the losses of the VIE or enjoy the profits of the VIE.
The comments by ACLI on this question are also narrative and explain the concept of measurement of proportionate share of interest during indirect control with a simple example. The assumptions behind these propositions could be to keep the shareholders better informed and knowledgeable about the direct and indirect interests of the reporting entity even where there appears to be little or no control (AICPA, 2016). The fact that currently there is no control does not dismiss the power of the reporting entity to exercise its control anytime in future. Hence, these levels of consolidations and disclosures are proposed.
Private interest is said to be satisfied as the reporting entity can itself either strengthen or weaken its Balance Sheet depending upon the circumstances (Mallin, 2011). This again creates an issue where entities might try to play with the interpretations of the standards to use it for its own benefit (Moutchnik & Edward, 2013). The company needed to interpret the standards in a fashion that helps to strengthen the financial statements (Monaharan, 2016). The decision to consolidate or not depends upon the satisfaction and measurement of a number of factors but this exposure draft warrants the consolidation of all entities under common control even if virtually control does not exist (Lucas, 2014). Hence, there is not much room to escape from the amendments and the reporting entity has to use it to the best of its ability while reporting and disclosures (FASB, 2016). Moreover, the amendments and disclosures are beneficial in the sense that it helps a better compliance activity and the company is able to provide the disclosures that are relevant (Leisyte, & Westerheijden, 2014).
Private interest is best explain by the comments given by Ford Motor Company as it explains the current stand taken with the help of examples and poses questions with reference to the grey areas (Deegan & Unerman, 2011). Hence, a better presentation provided that helps in providing an evaluation of the current situation.
References:
AICPA. (2016). Exposure Draft of a Proposed Accounting Standard. Retrieved September 16, 2016 from https://www.aicpa.org/InterestAreas/PrivateCompaniesPracticeSection/QualityServicesDelivery/KeepingUp/TICCommentLetters/DownloadableDocuments/fasb-consolidation-of-interests.pdf
Corkery, M. (2016). Wells Fargo Fined $185 Million for Fraudulently Opening Accounts. Retrieved September 16, 2016 from https://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html?_r=0
Davidson, A. (2016). How Regulations failed with Wells Fargo. Retrieved September 16, 2016 from https://www.newyorker.com/business/currency/the-record-fine-against-wells-fargo-points-to-the-failure-of-regulation
Deegan, C., Unerman, J. (2011). Financial Accounting Theory. Maidenhead: McGraw-Hill Education.
Edward F, Moutchnik, A. (2013). Stakeholder management and CSR: questions and answers. Oxford Press
Egan, M. (2013). $124 million payday for Wells Fargo exec who led fake accounts unit. Retrieved September 16, 2016 from https://money.cnn.com/2016/09/12/investing/wells-fargo-fake-accounts-exec-payday/
FASB. (2016). 2016-20 Interets held through related parties thtat are under common control, Retrieved September 16, 2016 from https://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=2016-260
FASB. (2016). Consolidation interest held through related parties that are under common control. Retrieved September 16, 2016 from https://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176167820069
Goldstein, S. (2016). Thousands of complaints suggest account issues are not limited to Wells Fargo. Retrieved September 16, 2016 from https://www.marketwatch.com/story/thousands-of-complaints-suggest-account-issues-not-limited-to-wells-fargo-2016-09-12
Hamilton, J. (2016). Wells Fargo to pay $240m for unauthorised account. Retrieved September 16, 2016 from https://www.smh.com.au/business/banking-and-finance/wells-fargo-to-pay-240m-for-unauthorised-accounts-20160908-grcc6f.html
Hrushka, J. (2016). Wells Fargo faces $185 million fine for massive fraud and theft scheme, 5,300 employees fired. Retrieved September 16, 2016 from https://www.extremetech.com/internet/235382-wells-fargo-faces-185-million-fine-for-massive-fraud-and-theft-scheme-5300-employees-fired
Leisyte, I, Westerheijden, D.F. (2014). Stakeholders and Quality Assurance in Education. Oxford University Press.
Lucas, K.H. (2014). What is a variable interest entity (VIE)?, Retrieved September 16, 2016 from https://www.quora.com/What-is-a-variable-interest-entity-VIE
Mallin, C.A. (2011). Handbook on International Corporate Governance: Country Analyses, Edward Elgar Publishing.
Mansell, S. (2013). Capitalism, Corporations and the Social Contract: A Critique of Stakeholder Theory. Cambridge: Cambridge University Press.
Miles, S. (2011). Stakeholder Definitions: Profusion and Confusion. EIASM 1st interdisciplinary conference on stakeholder, resources and value creation, IESE Business School, University of Navarra, Barcelona.
Monaharan, M. (2016) FASB Exposure Draft, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. Retrieved September 16, 2016 from https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175833661915&blobheader=ap2plication%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=551700&blobheadervalue1=filename%3DCONICC.ED.0012.ACLI_MICHAEL_MONAHAN.pdf&blobcol=urldata&blobtable=MungoBlobs
Pwc. (2015). Accounting for variable interest entities. Retrieved September 16, 2016 from https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-guide-variable-interest-entities-second-edition-2015.pdf
Rushkoff, D. (2016). Real reason Wells Fargo scandal should scare you. Retrieved September 17, 2016 from https://edition.cnn.com/2016/09/08/opinions/wells-fargo-fine-rushkoff/
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