Question

How did the Wells Fargo account fraud scandal affect the company financially?

Please provide a financial ratio analysis

Answer 1

The Wells Fargo account fraud scandal is an ongoing controversy brought about by the creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent. News of the fraud became widely known in late 2016 after various regulatory bodies, including the Consumer Financial Protection Bureau (CFPB), fined the company a combined US$185 million as a result of the illegal activity. Wells Fargo clients began to notice the fraud after being charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit. Initial reports blamed individual Wells Fargo branch workers and managers for the problem, as well as sales incentives associated with selling multiple "solutions" or financial products. This blame was later shifted to a top-down pressure from higher-level management to open as many accounts as possible through cross-selling. The company has faced and faces additional civil and criminal suits reaching an estimated $2.7 billion by the end of 2018. Employees were encouraged to order credit cards for pre-approved customers without their consent, and to use their own contact information when filling out requests to prevent customers from discovering the fraud. Employees also created fraudulent checking and savings accounts, a process that sometimes involved the movement of money out of legitimate accounts. The creation of these additional products was made possible in part through a process known as "pinning". By setting the client's PIN to "0000", bankers were able to control client accounts and were able to enrol them in programs such as online banking.

Wells Fargo Account Fraud Scandal affect the Company’s Management, Non-Management Employees, On Consumers and On Wells Fargo Costs.

The CFPB fined Wells Fargo $100 million in September 8, 2016 for the "widespread illegal practice of secretly opening unauthorized accounts." The order also required Wells Fargo to pay an estimated $2.5 million in refunds to customers and hire an independent consultant to review its procedure.

Wells Fargo incurred additional costs due to refunds and lawsuits:

$6.1 million in customer refunds due to inappropriate fees and charges;

$142 million in customer compensation due to a class-action settlement;

$480 million settlement for a shareholder class-action lawsuit; and

$575 million 50-state Attorneys General (AG) settlement for a combination of opening unauthorized accounts and charging for unnecessary auto insurance and mortgage fees.

The December 2018 AG settlement announcement indicated that Wells Fargo had already paid $2.3 billion in settlements and consent orders, so its $575 million settlement brought the total to nearly $3 billion.

Financial Ratio Analysis for last few years are as follow:-

Ratio	31-12-2019	31-12-2018	31-12-2017	31-12-2016	31-12-2015
Long Term Debt/ Capital	0.5483	0.5375	0.5196	0.5599	0.5072
Debt/Equity Ratio	1.7698	1.6991	1.5777	1.7549	1.5321
Pre-Tax Profit Margin	29.3751	33.7074	31.8853	38.0132	40.2332
Net Profit Margin	21.7758	24.4366	23.9387	24.1109	25.6772
Assets Turnover	0.0427	0.0447	0.044	0.0438	0.0468
ROE-Return on Equity	12.0413	13.1583	12.292	12.5294	13.558
Return on Tangible Equity	13.4823	14.8011	13.4941	13.8266	15.0518
ROA-Return on Assets	1.0397	1.2066	1.1508	1.1422	1.3021
ROI-Return on Investment	4.8155	5.3686	5.1859	4.839	5.9162
Book Value Per Share	45.468	43.0157	42.5379	39.9706	38.0766
Operating Cash Flow Per Share	1.5208	7.4556	3.711	0.1973	3.0527
Free Cash Flow Per Share	1.5208	7.4556	3.711	0.1973	3.0527