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'Tone at the Top' is a term heard in connection with fraud prevention

Tone at the Top

“Tone at the Top” is a term many have heard in connection with fraud prevention.  It is one of the requirements of an effective internal control environment followed by auditors and outlined in the COSO framework.  So what does it really mean and why is it so important?  Tone at the top refers to an organization’s ethical climate.  It is management’s leadership and commitment to openness, honesty, integrity and ethical behavior.  If the tone set by management is to uphold ethical behavior, employees will be more inclined to follow with similar behavior.  However, if management is more concerned with the bottom line than ethical conduct, employees are more likely to commit fraud.  The best way to understand the importance of setting an ethical tone at the top is to look at a real case example, Wells Fargo.

Just a few months ago, Wells Fargo was a well-respected financial institution.  Today it faces an uncertain future. Wells Fargo’s questionable corporate sales culture has led to the termination of 5,300 employees and managers for knowingly opening millions of unauthorized accounts.  So far, Wells Fargo has been fined $185 million, Wells Fargo (WFC) stock has dropped approximately 10% since the scandal was announced and CEO John Stumpf was forced to resign.  So what went wrong?  What could cause 5,300 Wells Fargo employees to all commit fraud?   

According to a complaint filed against Wells Fargo by the Los Angeles City Attorney in 2015, Wells Fargo’s aggressive sales culture was to blame.   Wells Fargo has strict sales quotas that regulate the number of daily “solutions” that a banker must reach including the opening of new bank and credit card accounts.  The complaint states:

“In order to achieve its goal of selling a high number of “solutions” to each customer, Wells Fargo imposes unrealistic sales quotas on its employees, and has adopted policies that have, predictably and naturally, driven its bankers to engage in fraudulent behavior to meet those unreachable goals.” 

According to the complaint, managers would constantly “hound, berate, demean and threaten employees to meet these unreachable quotas.  Managers often tell employees to do whatever it takes to reach their quotas.” 

The result is a culture of “gaming” at Wells Fargo. Gaming consists of opening and manipulating customer accounts through various unlawful practices.  Such practices included adding unwanted secondary accounts to primary accounts without permission and/or misrepresenting the costs, benefits or fees for services on an account to meet quotas.  The Wells Fargo bankers even had terms used internally for the fraudulent business practices including “pinning” and “bundling.” Pinning involves assigning a PIN number to customer ATM cards without customer authorization for the intention of impersonating the customers on Wells Fargo computers to enroll in online banking products.  Bundling refers to the Wells Fargo practice of incorrectly informing customers that certain products could only be obtained in packages with other products when in fact the product was available individually.  

Wells Fargo’s leadership has been criticized for doing too little to address these known internal practices.  Per the complaint, Wells Fargo had previously terminated a small number of employees for engaging in these gaming activities while other employees were rewarded for such practices and even promoted.  Wells Fargo continued to promote company-wide goals of attaining as many accounts as possible at any expense.  The tone had been set at the top.  The result was a culture that promoted fraud. 


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Tammy Hersh is a Director in the firm’s Forensic, Litigation and Valuation Services Group consulting in complex commercial litigation, business valuation matters, fraud investigations, and matrimonial proceedings.

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