Why didnt the Watchdaogs Bark? Internal Auditing and The Wells Fargo Scandal

Abstract

How can we explain the silence of internal auditing amid signs that fraud is arising and spreading within an organization? Internal auditors are supposed to be “watchdogs” (Roussy, 2013), entrusted with the formal responsibility of sounding the alarm about the risk of fraud, corporate misconduct and wrongdoing. However, internal auditing seems to have remained remarkably quiet as the cross-selling fraud at Wells Fargo’s Community Bank Division unfolded and grew over the years, finally blossoming into a massive, wide-open scandal in 2016 that is still reverberating in 2019. Here we build on this example to examine issues that transcend individual responsibility and may impair the “watchdog” function of internal auditing as a profession. We examine internal auditing as an emerging profession where shifting and contested boundaries create tensions that may result in blind spots towards corporate misconduct and wrongdoing. We explore how the application of three classic tenets of accounting -- scope, compliance and materiality – may inadvertently contribute to blind spots, leading even well-meaning and well-trained “watchdogs” to be sidetracked. We conclude with implications for the socialization and practice of internal auditors, emphasizing the need for alertness and practical wisdom in the application of tenets so deeply ingrained in the profession.