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The exposure to operating risks grows mostly as a function of the opportunities for theft, machine, or procedural errors. As a result, specialists have devised a number of techniques that can be used in tandem to mitigate potential operating threats. These approaches include financial risk management policies, transparent and effective process reporting, risk analysis, and employee division of duties and responsibilities. There should also be considerations for workforce benefits, worker recruitment, and schooling, holiday provision, and, most importantly, work rotation. Failure to consider all or most of these risk management aspects can lead to significant failures an example for which Wells Fargo experienced in the recent past.
The Wells Fargo Risk Management Failure
Wells Fargo, a company popularly known for its diverse services of banking mortgage, investment, insurance, credit cards as well as financial services is an example of the impacts of poor risk management. The Wells Fargo scandal turned out to be quite adverse costing the firm $185 million in penalties, an amount that is considered the highest fine charged to a company by Consumer Financial Protection Bureau (CFPB). The main issue surrounding the scandal involves the setting up of millions of accounts by the company without consent from the respective customers. These accounts led to the generation of overdraft charges among other fees. Upon the realization of this problem, the CEO of the firm claimed a lack of awareness concerning the accounts, an indication of failure in risk management. At the end of the day, the scandal led to the dismissal of 5,300 employees as well as fines charged to the company (Minsky, 2016).
If at all there was a well-planned risk management plan, then there was no way such a scandal would have escaped the attention of the CEO for close to 5 years. Likewise, there could have been a compensation oversight for such practices coupled with the proper internal audits that inform the management about management processes as well as the governance oversight. As such, the example of this company serves as a warning to all risk managers that there is a responsibility to inform the board on the various risk management systems and processes. Any adverse occurrence that takes place during the watch of the risk executives means that they will be held accountable. Some of the outstanding obligations include disclosure of the effectiveness of the risk management, risk oversight and knowledge, and compensation analysis (Minsky, 2016). As such, Wells Fargo failed to put in place risk management protocols that protect customers against account manipulation.
Risk Management Strategies that would Prevent the Scandal
All these problems that Wells Fargo is experiencing at the moment would have been avoided had the organization put in place operational considerations that minimize such risks. Keeping in mind the fact that operation risk involves employees, processes and technology, there is the need to adhere to the primary considerations. First and foremost, maintenance of cash forecasts ensures that currencies are up to date while marking to market is a tool that facilitates the monitoring of large gains or losses which can be assessed and followed up to verify possible inconsistencies. Also, monitoring of exposures is an approach that the company could use to update itself concerning regulatory changes (Stafford Borough Council, 2016). Furthermore, another aspect that Wells Fargo did not take seriously is cash forecasting, a tool that manages liquidity and obligations. In this way errors related to the customer accounts as well as transactions would be detected and addressed appropriately.
One of the most important strategies in risk management is allowing employees to attain sufficient training and skill enhancement. When employees understand the financial activities of the company, they become significant assets. Also, cross training broadens employee skills and avoids the reliance on a few individuals. Therefore, employee rotation can also serve the purpose of reducing instances of fraud, intentional dishonesty as well as unauthorized transactions similar to the ones made by Wells Fargo. On top of that, fair reporting, management involvement, and proper communication between the teams, the managers, and the board is paramount. Information dissemination is the key to policy development, compliance monitoring, and realization of deviations, deficiencies, and unusual activities as well as improve risk assessment. Since employees operate the system, it is important for them to ensure that network access is controlled as well as access locations, data protection backups and the possibility of remote site accessibility in case of evacuations (Horcher, 2005).
As was the case of Wells Fargo, appropriate controls that protect an organization against illegal activities has to be put in place. Internal controls can be implemented appropriately. Also, the aspect of personnel compensation should be considered coupled with screening for the likelihood of fraud perpetration for instance gambling addiction, drugs and so on. Potential conflicts of interest must also be discovered together with an understanding of the financial risks (Horcher, 2005). Once the risks are comprehended, policies are developed to deal with the potential risks effectively and efficiently. Where necessary, professional assistance can be sought to further improve on the countermeasures against the possible risks identified.
The process of managing operational risks is embedded on the ability to develop and implement contingent processing capabilities, effective internal controls, adequate internal audits and excellent reporting of errors, and noteworthy events or observations by the staff. Failure to take care of risks eventually leads to regulatory penalties, punitive damages, lawsuits and criminal charges among other repercussions. Wells Fargo is an example of the role of the board, senior management and the employees in risk management effectiveness. All companies are burdened with the obligation to ensure that management programs, software systems, and other preventive measures are put in place to avoid such scandals.
Horcher, K. A. (2005). Essentials of Financial Risk Management. Hoboken, New Jersey: John Wiley & Sons, Inc.
Minsky, S. (2016, September 20). The Wells Fargo Scandal is a Failure in Risk Management. Retrieved from Logic Manager: http://www.logicmanager.com/erm-software/2016/09/20/wells-fargo-scandal-risk-management/
Stafford Borough Council. (2016). Risk Management Strategy. Stafford: Stafford Borough Council.
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