Volkswagen Scandal – An Accounting Perspective

Introduction

Every public organisation is required to be accountable for its operations not only from financial but also social and environmental perspective (Crane & Matten 2010). There are many instances of failures due to non- compliance and non- accountability of the business. The impact of such dilemma is severe for trans- national organisations. This is reflected in the recent ‘diesel dupe’ scandal of Volkswagen (VW). The scandal is critically evaluated in this report in the context of the accounting issues, the impacted stakeholders, the motivation for the same, relevant accounting theories, and their comparison and rational.

Critical Evaluation

The scandal of Volkswagen is based on altering the performance of diesel vehicles while on test mode in order to show better results. The current scope of manufacturing includes the cars under Audi and Porsche along with some Volkswagen models like Jetta, Passat, Beetle and Golf. The software of all the diesel variants has been modified deliberately to show good performance subjected to the Environmental Protection Agency (EPA). But the EPA has proven that the models have such sophisticated software that can sense the testing scenario and enter the ‘safe mode’. Consequently, the emission of pollutants like nitrogen oxide is up by 40 times(Hotten 2015). This impacted approximately 8.5mn cars globally i.e. 8.5mn buyers spread across the globe. Volkswagen’s management consciously took the decision of changing the results through technology. This was least expected from a well- established, a German manufacturer that has been known for its valuable services and consistent and smooth- performing deliverables. The carmaker is no more a niche in the market.

Accounting Issues in Volkswagen

In the event of enhancing the test results of the diesel- based vehicles, VW has three major accounting issues related to risk management, corporate governance and internal control. The company’s focus to strengthen its double bottom line hit hard its triple bottom line which also includes the ethical compliance. Volkswagen failed to gauge the risk of damaging its own global reputation for it is tough to be quantified. From an internal control perspective, typically, this issue should have been highlighted in the operations control. But the management was driven by sales achieving the target in the US market. From the corporate governance perspective, the company’s annual report uses the words ‘ecological’ and ‘responsible’ carmaker. But the company fails to comply with the same.

Affected Stakeholders

Being a multinational company, Volkswagen has a widespread presence of the stakeholders due to conglomerates in the supply chain and customers. The impact of the crisis on the different stakeholders is as below (ASIC 2016)-

Customers: Customers are the most important stakeholders for they are the buyers and have a superior bargaining power. While they believed in Volkswagen for its performance, it is now replaced with the distrust.

Suppliers: Volkswagen has a strong affiliation with its suppliers to ensure smooth working cycle for the company. However, this defect in the cars will increase the costs of the company per the law. Suppliers in such case will not prefer to do business with Volkswagen for the unethical way of using the software device.

Investors: The scandal has reduced the credibility of Volkswagen amongst the investors like banks and financial institutions. The rating of the company has reduced after this company.

Employees: Not all the employees were involved in the scandal. In fact, it was the decision of higher management and confidants thereby. Thus, this will impact the employee trust, resulting in a turnover.

Cause or motivating driver for the dilemma

The main motivation of this dilemma was to increase the sales of Volkswagen in the US region. However, the implication of the unethical practice was worldwide. The misuse of the software resulted in increased emissions of harmful pollutants in the environment, thereby challenging at the global level (Harrison & Wicks 2013).

Relevant Accounting Theories

Audit of the company is important to assess the true and fair presentation of its financial, social and environmental accountability of the firm. But typically, audits are limited to the financial performance as that is quantifiable. For other factors accountability, it is important that the relevant CSR and SOX compliance theories are considered.

Although CSR is voluntary compliance for the organizations, given the importance of the same in the performance of the company, it is important that CSR audit is conducted to assess the CSR commitment by considering the disclosure of items related to composition of the board, its functions, compensation, CEO evaluation and their qualification, ethics, conflict of interest, monitoring of CSR and evaluation of the same (Bitner & Dasher 2007). The company has been cheating on the performance to project its vehicles to be eco-friendly with fewer emissions, thereby exhibiting unethical practices and conflict of interest.

SOX compliance act was initiated to establish control over the internal operations and presentation of the financial report of the firm. There exist varying interpretation of GAAP and hence lead to creative accounting, thereby annual reports falling short of critical data. The Act, therefore, requires structuring of the report to meet SOX compliance and CSR requirements (Holmes & Neubecker 2006). The accounts of Volkswagen lack true and fair presentation of the fact as required by the Company Act (Stickney 2010). The company did not disclose about the ‘defeat device’ as it wanted to back the sales of Volkswagen.

What Management Should Do

The management is responsible for taking this decision and not the entity, however, the impact has to be borne by the stakeholders of the company. There was no internal stakeholder that reported about this but the EPA (Cavalieri 2007).

After the revelation of this dilemma, the concerned authorities resigned from the company. But the new management now is struggling to restore the brand image and replace the cars of the customers who are faced with the emission problem.

Comparison and Rational

CSR compliance is the code of conduct that the organisation should exhibit while doing business from the perspective of the society. The organisation should account for the fact that it is a part of the eco- system and has to reciprocate to the society by adding value through its products/ services. Volkswagen was known to deliver economic and ecological car models that are safe on roads and safe for the environment too. On the other hand, SOX compliance is related to the internal operations control of the organisation. It is SOX Act’s implication is to increase the effectiveness of the internal operations of the organisation such that it enhances the verifiability, accountability and reliability of the data. It is the only Act that excises control over the internal operations of the company (Grinstein & Chhaochharia 2007). One of the root causes of scandal at Volkswagen is a lack of internal control over the operations and disclosure of the same.

Rational to use these two accounting theories is – There are many accounting theories that study CSR impact – some consider it wastage of resources whereas some consider compliance with all the Acts, laws, authorities itself as CSR as these acts are all meant for the social and environmental benefit (Broomhill 2007). But CSR importance is increasing for many reasons as below-

  • Stakeholders find credibility in companies with an ethical record
  • Increasing awareness of environmental and threats
  • Varying eco- systems that result in differing levels of acceptance for the same product

SOX compliance ensures internal control. Both these theories are relevant to the given case of Volkswagen scandal which was caused due to the failure of the company to reciprocate to the society what it promised. Also, it failed to exert control over its internal operations or else it would have been able to unleash the use of the software as a malpractice.

Conclusion

CSR basically implies the ‘codes of conduct’ of the organisation towards the environment and society (Utting 2005). Although the implementation of CSR varies across organisations, in recent times, the reason for most of the failures/ scandals or scams has been placing the financial objective above the social objective. This change of priority influences the internal control breaching and violation of laws and regulations. This consequently impacts the stakeholders by and large. Thus a violation of CSR and SOX non- compliance are the root causes for Volkswagen and many other organisations. It is important that the Government intervenes to mandate CSR compliance.

 

 

References

ASIC 2016, Users of Financial Reports, viewed 16 September 2016, <http://asic.gov.au/regulatory-resources/financial-reporting-and-audit/users-of-financial-reports>.

Bitner, L & Dasher, A 2007, ‘Examining Corporate Governance Policies as a part of Financial Analysis’, Commercial Lending Review, pp. 3 – 9.

Broomhill, R 2007, ‘Corporate Social Responsibility: Key Issues and Debates’, Dunstan Paper, pp. 1 – 60.

Cavalieri, E 2007, ‘Ethics and Corporate Social Responsibility’, Emerging Issues in Management, pp. 24 – 34.

Crane, A & Matten, D 2010, Business Ethics, Oxford University Press Inc, New York.

Grinstein, Y & Chhaochharia, V 2007, ‘Corporate Governance and Firm Value: The Impact of 2002 Governance Rules’, Johnson School Research Paper Series No. 23-06.

Harrison, J & Wicks, A 2013, ‘Stakeholder Theory, Value and Firm Performance’, Business Ethics Quarterly, pp. 97 – 124.

Holmes, M & Neubecker, D 2006, ‘The impact of the Sarbanes- Oxley Act 2002 on the Information systems of the public companies’, Issues in Information Systems, pp. 24 – 28.

Hotten, R 2015, ‘Volkswagen: The scandal explained’, BBC, 10 December 2015.

Stickney, C 2010, Financial Accounting: An Introduction Concepts, Methods and Uses, Cengage Learning, South-Western.

Utting, P 2005, ‘Corporate Responsibility and the Movement of business’, Development in Practice, pp. 375 – 388.

 

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