Wells Fargo 2011 Annual Report Download - page 112

Risk Factors (continued)
understanding our financial results and condition. As described
below, some of these policies require use of estimates and
assumptions that may affect the value of our assets or liabilities
and financial results. Any changes in our accounting policies
could materially affect our financial statements.
From time to time the FASB and the SEC change the financial
accounting and reporting standards that govern the preparation
of our external financial statements. In addition, accounting
standard setters and those who interpret the accounting
standards (such as the FASB, SEC, banking regulators and our
outside auditors) may change or even reverse their previous
interpretations or positions on how these standards should be
applied. Changes in financial accounting and reporting standards
and changes in current interpretations may be beyond our
control, can be hard to predict and could materially affect how
we report our financial results and condition. We may be
required to apply a new or revised standard retroactively or apply
an existing standard differently, also retroactively, in each case
resulting in our potentially restating prior period financial
statements in material amounts.
Our financial statements are based in part on
assumptions and estimates which, if wrong, could cause
unexpected losses in the future, and our financial
statements depend on our internal controls over
financial reporting. Pursuant to U.S. GAAP, we are required
to use certain assumptions and estimates in preparing our
financial statements, including in determining credit loss
reserves, reserves for mortgage repurchases, reserves related to
litigation and the fair value of certain assets and liabilities,
among other items. Several of our accounting policies are critical
because they require management to make difficult, subjective
and complex judgments about matters that are inherently
uncertain and because it is likely that materially different
amounts would be reported under different conditions or using
different assumptions. For a description of these policies, refer to
the “Critical Accounting Policies” section in this Report. If
assumptions or estimates underlying our financial statements
are incorrect, we may experience material losses.
Certain of our financial instruments, including trading assets
and liabilities, available-for-sale securities, certain loans, MSRs,
private equity investments, structured notes and certain
repurchase and resale agreements, among other items, require a
determination of their fair value in order to prepare our financial
statements. Where quoted market prices are not available, we
may make fair value determinations based on internally
developed models or other means which ultimately rely to some
degree on management judgment. Some of these and other
assets and liabilities may have no direct observable price levels,
making their valuation particularly subjective, being based on
significant estimation and judgment. In addition, sudden
illiquidity in markets or declines in prices of certain loans and
securities may make it more difficult to value certain balance
sheet items, which may lead to the possibility that such
valuations will be subject to further change or adjustment and
could lead to declines in our earnings.
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) requires
our management to evaluate the Company’s disclosure controls
and procedures and its internal control over financial reporting
and requires our auditors to issue a report on our internal
control over financial reporting. We are required to disclose, in
our annual report on Form 10-K, the existence of any “material
weaknesses” in our internal controls. We cannot assure that we
will not identify one or more material weaknesses as of the end of
any given quarter or year, nor can we predict the effect on our
stock price of disclosure of a material weakness. Sarbanes-Oxley
also limits the types of non-audit services our outside auditors
may provide to us in order to preserve their independence from
us. If our auditors were found not to be “independent” of us
under SEC rules, we could be required to engage new auditors
and file financial statements and audit reports with the SEC. We
could be out of compliance with SEC rules until new financial
statements and audit reports were filed, limiting our ability to
raise capital and resulting in other adverse consequences.
RISKS RELATED TO ACQUISITIONS
Acquisitions could reduce our stock price upon
announcement and reduce our earnings if we overpay
or have difficulty integrating them. We regularly explore
opportunities to acquire companies in the financial services
industry. We cannot predict the frequency, size or timing of our
acquisitions, and we typically do not comment publicly on a
possible acquisition until we have signed a definitive agreement.
When we do announce an acquisition, our stock price may fall
depending on the size of the acquisition, the type of business to
be acquired, the purchase price, and the potential dilution to
existing stockholders or our earnings per share if we issue
common stock in connection with the acquisition.
We generally must receive federal regulatory approvals before
we can acquire a bank, bank holding company or certain other
financial services businesses depending on the size of the
financial services business to be acquired. In deciding whether to
approve a proposed acquisition, federal bank regulators will
consider, among other factors, the effect of the acquisition on
competition and the risk to the stability of the U.S. banking or
financial system, our financial condition and future prospects
including current and projected capital ratios and levels, the
competence, experience, and integrity of management and
record of compliance with laws and regulations, the convenience
and needs of the communities to be served, including our record
of compliance under the Community Reinvestment Act, and our
effectiveness in combating money laundering. As a result of the
Dodd-Frank Act and concerns regarding the large size of
financial institutions such as Wells Fargo, the regulatory process
for approving acquisitions has become more complex and
regulatory approvals may be more difficult to obtain. We cannot
be certain when or if, or on what terms and conditions, any
required regulatory approvals will be granted. We might be
required to sell banks, branches and/or business units or assets
or issue additional equity as a condition to receiving regulatory
approval for an acquisition. In addition, federal bank regulations
prohibit FRB regulatory approval of any transaction that would
create an institution holding more than 10% of total U.S. insured
deposits, or of any transaction (whether or not subject to FRB
approval) that would create a financial company with more than
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