Describe about the Accounting Theory for Leading Automobile Company.
Introduction and purpose
Volkswagen group is considered to be the leading automobile company in the world, headquartered in Wolfsburg, Germany. The firm specializes in the design, making and the distribution of passenger and commercial cars, motorcycles, engines, and also turbo machineries (Bebbington, Unerman, and Dwyer, 2014 pp 20). In the past year, the company experienced the emission scandal that resulted to decline in its share prices and sales.
1 (i). VW Group Emission
The social contract notion can be used to accentuate the relationship between the organization and the stakeholders pragmatically. The social contract allows the societies who are the principal to monitor the firm activities to ensure that the company operations are carried out in acceptable ways. The contract can be viewed to be an agreement between the corporations and the wider community who provide the entities to use various resources in exchange the society expects the benefits outnumber the costs to the stakeholders. VW is involved in an emission scandal that causes environmental damage through emission of nitrogen oxides to the environment which is unacceptable to the society hence implying that VW has failed the first test of test of relevance. The outcome has an A bearing on the monetary, civil and communal benefit to the society from which it derives the right to function (Meiners, 2011). VW appears to carry out its activities beyond the bounds to what the society deems to be a behavior that is socially acceptable. The company hence loses its legitimacy and the Society ultimate may revoke the contract for VW to continue the operations. Under the legitimacy perspective, VW emission scandal will motive the company to change the level of their social and environmental disclosures as a response to the perceived legitimacy treat to the emission scandal. In the subsequent periods, VW will consider to include the appropriate social and environmental disclosures in the annual reports. The annual report is chosen as a statutory document and is a document that VW seek to establish its social imagery. The report addresses the stakeholders and is considered a way the firm managed the external impression and indicated the corporate social responsiveness.
1 (ii). Application of relevant systems based theories
The management for VW Group will react following the media announcement of the emission scandal to attain legitimacy in ways such as
- VW Group management will seek to pragmatically educate and inform the society about the actual changes to the performance of the firm and the activities
- The management will strive to modify the community perception but not change the behavior (Moore, 2013).
- The management would manipulate the perception of the society by deflecting the attention from the issue of emission to other related matters.
- The management at VW Group would also provide information that seeks to offset the negative news which has been made public through the reports from the media and also draw attention on its strengths (Onuf, 2012).
1 (iii) Application of specific systems based theories
The other companies in the automotive industry will increase the level of environmental and social disclosures to demonstrate that their activities will continue to be acceptable pragmatically. However, the adverse event articulated by the emission scandal is unlikely to happen to them (Barnes, 2013). Studies accentuate that the threat of legitimacy in the automotive industry may not be caused by direct involvement in the incident but rather to the overall impact of the of the VW emission scandal on the society perception toward the entire industry. The emission scandal is a major environment incident, and it results in legitimacy threat. Therefore according to legitimacy theory companies that operate in the automotive sector would change their social and environmental disclosures.
2 (i) How the share market reacted to the media announcement of the emission scandal
Following the company’s media announcement of the emission scandal, there was a significant reaction and implication on the VW’s Group share price. Volkswagen AG lost an approximately quarter of its market value after the company admitted to cheating on the United States of America air pollution tests for several periods of time thus putting significant pressure on Chief on the Chief Executive Officer, Martin Winterkorn to repair the company reputation of the world biggest car manufacturers. Volkswagen Company share price basically dropped by 23% from $262.84 to $183.57 after admitting the diesel emission cheat because it was determined that the company was only fixing the chemicals compounds into the car fuel tank only when there was a testing (Bonin, 2013). The company share price dropped to $123.80 in September, 2015, When a Volkswagen car was on the road the control for smoke emission is switched off which resulted in the vehicles emitting up to 40 times more nitrogen oxide, pollutants that what the United States of America legal limit in the real world driving.
Another reaction and an implication that arise from the scandal is that the overall company share price lost approximately one-third of its total value after 18th September 2015 and also more than 50% immediately after its peak which was April 2015. This aspect led to the company CEO to resign because of the enormous pressure from the United States of America to pay back a large amount of fines imposed on the company. In general, other German car manufacturers also felt the dropped in share prices by the emission scandal. BMW share price dropped by at least 4.9% and Daimler’s share price dropped by 5.8%.
Market reaction to Volkswagen Company
Based on the case study, the market reactions to the Volkswagen Company media announcement imply market inefficiency. Most of the company automobiles could not be purchased in several countries because of the fear of side effects that are caused by the emission of smoke that contains high nitrogen content (Deegan, 2013). The nitrogen oxides emitted by the company vehicles as a result of the defeat device cause several respiratory problems like bronchitis, asthma, and emphysema which led to more than 50,000 deaths in the United States of America. This aspect resulted in significant fines imposed by the United States of America as a result of cheating. Under the United States of America Clean Air Act, Volkswagen Group presently faces $18 Billion in penalties and fines up to $37.5 for every car owned by the group in the United States of America.
3 Why the share prices of other automobile companies changed following Volkswagen Company share price change
Basing on the efficient market theory, the share prices of other car manufacturers changed following VW share price change since the market was based o the general assumption that there were a large numbers of rational, profits making investors in the whole marketplace. The consumers’ perception changed following the information that the nitrogen oxide emitted by the car is harmful to their health (Kottasova, 2015). Customers basically declined using any German automobiles because of the perception that all of them were not healthy to be driven by their customers. Therefore, in this aspect, the stock price is an unbiased reflection of all available information and represented the best estimate of the stock price actual value. According to the market efficiency theory, it states that the securities prices usually reflect all the available information that includes private information.
The share prices of other automobile companies changed following the Volkswagen Company share price change because of the changes in customers’ preferences (Guidry, and Patten, 2012). Customers all over the world switched their tastes from the German made automobiles because of the Volkswagen Company scandal in the United States of America. Basing on the behavioral finance theory, there are vital behavioral and psychological variables that are involved in shareholders’ investment in the stock market that usually provides diverse opportunities for smart investors to profits. From the Volkswagen Company scandal in the United States of America, there was a significant fall in the market for German automobiles that led to the decrease in the share price of other companies because investors tried to avoid any loss of profit that results to low dividends and capital gains.
The share prices of other companies declined because of negative information collected by the investors concerning the Germany automobiles (Schroeder, Clark, and Cathey, 2011). According to the rational expectation theory, the theory is usually based on the assumption that several potential customers and investors are rational and make intelligent economic decisions after weighing up all available data and they used their intelligence in their own self-interest.
4. Problems that occur with the use of profit as unit of measurement of a company success
Even though profits is a clear goal for the management of VW Group it, however, should not be considered to be a unit of measure for the success of the entity (Shouhua, and Chunhua, 2012). Some of the problems when profit is seen as a measure of achievement of the company include;
Profits ignore the timing of returns. It equates a dollar that is acknowledged at the moment with the dollar that is set to be received in the future. In fact, the dollar that is received at present is priced more than the dollar that should be expected in the yet to come period which is an incorrect position.
The critics of profits argue that profits ignore the risk that is associated with a stream of the cash flow of the VW Group. For example, the total proceeds from the various activities may be same, but the profit for one business may fluctuate widely than the profit of the other activity.
VW Group is a large-scale corporate hence it has different stakeholders such as owners of stock, managers, the employees, the customers and the suppliers who are directly connected with the organization (Hawkins, Coney, & Best, 2015). The interest of each stakeholder colludes hence the sole objective of profit cannot be achieved.
Where a firm keeps profits as the only aim, the company might commit practices that are unfair to maximize the profits.
In conclusions, the scandal led to the company share price dropped from $262.84 to $183.57 after admitting the diesel emission cheat since it was determined that the firm was only fixing the chemicals components into the car fuel tank only when there was a testing. According to the company, the emission scandal was a greater environment event, and it led to legitimacy threat as firms that operate in the automotive sector would change their environmental and social disclosures. VW Group scandal led to decrease of prices of other car firms following the VW Group share price change since of the changes in consumers’ tastes and preferences.
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