26 Jun ANALYZE THE STRUCTURE OF THE RISK MANAGEMENT PROGRAM IN TERMS OF ERM COVERAGE
ERMC 5250 PS Section 2External Stakeholder Requirements Group Assignment #1: Risk Factor Analysis Wells Fargo vs. Lehman
OverviewThe primary source of risk information for external stakeholders of a publicly traded U.S. company is the “Risk Factors” section of its annual financial report (“Form 10-K”) filed with the Securities and Exchange Commission (SEC). This disclosure of a company’s risks is required under Item 503(c) of Regulation S-K, which was crafted in 1964. The regulation provides five specific examples of such factors:
the company’s lack of operating history, lack of profitable operations in recent periods, financial position, business or proposed business, andlack of a market in the company’s securities
Other than these examples, the disclosure is principles-based and not prescriptive. Over the years, “Risk Factors” disclosures have evolved to parallel the increasing complexity of the modern business environment. The SEC has voiced concerns about the true value of the disclosures to investors and whether the “spirit” of Item 503(c) is being complied with by filing companies. Assessing risk is a critical input into any investment decision. As you read the risk factor sections you should be forming an opinion if they are materially helpful or just ‘check-the-box’ exercises.
Assignment
You are a high profile enterprise risk management (ERM) consultant previously employed as Senior Legal Counsel of a multi-national conglomerate. Your specialty is review of regulatory risk disclosures across multiple industries. You have been retained by the SEC to review the Risk Factors (Section 1-A) from the 2016 10-K’s of a handful of Fortune 500 companies. The one that crossed your desktop today is for Wells Fargo (2016/2017). You were also asked to analyze the 2007 10-K from Lehman Brothers.
Wells Fargo is an American international banking and financial services holding company headquartered in San Francisco, California. It is ranked as one of the top banks in the world in assets ($1.9 trillion), deposits ($1.3 trillion), and market capitalization ($264 billion as of 9/1/2017). For many years, Wells Fargo has been a highly regarded financial institution, until a recent scandal erupted in 2016 involving unauthorized cross-selling and the creation of fake accounts. This resulted in the company losing its accreditation with the Better Business Bureau, and the launching of several regulatory investigations and lawsuits.
Lehman Brothers Holdings Inc was a global financial service company. Founded in 1850, it was the fourth-largest investment in the United States in 2008, with total assets ($0.7 trillion), long-term borrowing ($123 billion), and stockholder’s equity ($22 billion) as of Nov 30, 2017. Lehman Brother has global business in investment banking, equity and fixed-income sales and trading, investment management, private equity, and private banking. On September 15, 2008, Lehman Brothers filed for bankruptcy protection, the largest one in US history.
SEC staff has asked you to prepare a report analyzing the risk factor disclosures of each firm. The purpose of the analysis is to determine if the risk disclosures in the Annual Reports of these firms provide enough evidence of the subsequent problems that occurred at both firms.
Your report should address:
1. Analyze the structure of the risk management program in terms of ERM coverage across the firm and the extent to which clear lines of accountability existed to monitor risks at each firm. (10/100)What does the organizational structure of risk management tell you about the priorities of each firm?What should regulators look for in evaluating the Three Lines of Defense at each firm. (look up “three lines of defense” if you are unfamiliar with this term)
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