Essay On Volkswagen's Emission Scandal And Accounting Theory.

Impacts of VW Emission Scandal

Discuss about the Accounting Theory for Scandal of Volkswagen.

This report is made to cover the happening of emission scandal of Volkswagen which was disclosed by the US authorities in 2015. This incident created huge negative impact on the image and goodwill of the eminent automotive company of Germany. The incident is with the allegation of wrong engine installed in the diesel run automotives which causes green gas emission ruining the environment and the health and hygiene of human being. The allegation was proved and the company ahs to face different level financial losses in the form buy back of the defective automobiles and other penalties imposed by several authorities. The allegation and subsequent admittance by the Volkswagen management is the worst level of impact faced by the esteemed company while this fiasco has several effect on the operation of the company including its accounting principle with the perspective of the literature published by Parker, Guthrie & Linacre in 2011 (Parker, Guthrie, & Linacre, 2011).  

The company had broken the social contract by its faulty operation process of selling and marketing the cars with high level of emission of green gas. Being a responsible business entity, all companies have social responsibilities which they should honor by ensuring compliance of the basic social needs of environment maintenance. It had been observed that due to this episode, the company had proved its deliberate negligence for the sake of more revenue with operating profit generation which is not expected from a company like Volkswagen.

So far the subsequent accounting steps to be taken by the group management of Volkswagen to manage the damage already caused by the disclosure of the fact of emission scandal by the cars marketed by the company globally. It is the jurisdiction of the company to ensure the accounting policies to manage the damage. The necessary steps of the group management towards financial accounting would be in the form of devaluation of intangible asset like goodwill and absorption of different subsequent incidental expenses to be borne by the company related this scandal.

The company is practicing the world wide acclaimed accounting policies named GAAP which is practiced in USA. This accounting policy of GAAP is being approved by IASB and AASB accounting theories through the system of convergence and endorsement of this happening is being accepted by the group management as the elements of profit reduction and devaluation of the company assets. Measurement of assets is being done on the basis of conventional historical policies. (Muldoon, 2009).

Violation of social contract and subsequent consequences in accounting

The basic concept of accounting theory is equipped with tow methods-a) deductive method and b) inductive method. Deductive method initiates its process of operation from the principles of accounting to reach the logical result of the theory and inductive method starts its journey from observation and measurement to reach the expected result.

The practice of inductive model should be followed by VW management post-scandal by capturing the data through observation and subsequent measurement and conclude the effects on financial accounting reports for the stakeholders of the company to help them deciding thir future course of action. (scribd, 2015).

The prevalent accounting theory known as IFRS Rookies developed by International Accounting Standard Board or IASB played a vital role for the elements of creating provision, contingent assets and liabilities which are components of accounting disclosure of VW after the scandal. This accounting theory proves to helpful for determining the future losses in different heads by providing proper amount in different heads in the practice of financial accounting system of VW. (IFRS, 2016).

When the fiasco was published by the media, the Volkswagen had found no option but to accept it as it is no fake claim but justified by the technological tests. It is also observed that the inference had been drawn after the happening of emission scandal had been disclosed to the media with subsequent emission tests made by different authorities. The subsequent reaction by the management showed that they had accepted the fact of this scandal after the vigilance had been made by different authorities in different countries. The then CEO, Martin Wintrkorn had taken the entire responsibility related to this scandal which had resulted to the declaration of 11 million cars run in the market with defective device which was named as defeat device but he had denied the fiasco as personal wrongdoing putting the blame on the Board and the group company of Volkswagen (Farrell & Ruddick, 2015). 

While the emission scandal was in the media, the other car manufacturers immediately reacted with their press release to convince the buyers that they are not practicing the same strategy for maximization of profit. The eminent car manufacturers like Toyota, Mercedes-Benz, Renault, Peugeot, and more in the row had clearly declares that they are complying the basic requirement of emission tests and had never indulged in such activities which may cause impact on the environment and human health and hygiene (Swaminathan & Mah, 2016).

Media announcement and subsequent reaction of Volkswagen management

When the emission scandal of Volkswagen had been publicized through different media, there was found immediate negative impact on the share price of Volkswagen in the share market globally. The company was the prestigious automotive manufacturer of Germany and had reached a sustainable position in the global share market with its eminent traditional status of the industry. But when the defeat device scandal was flashed out in the media, the immediate impact was observed in the share market.

There was a steady declination in the price of shares of Volkswagen. The company was comfortably placed in the share market with the price of US $ 262.84 in April 2015. The scandal had hit it in the worst way so far the share price had declined just after the press flash resulting to immediate price slashed to us$ 183.57 on 18.09.2015 when the formal notice had been received by the company from US Environmental Protection Agency for not complying the basic norms of Clean Air Act with deliberate attempt of flouting the act. The declination of share prices was followed in steady succession coming down to one-third of the opening price of the shares as on 18.09.2015.     

The concept of market efficiency prevails in the stock price impact on Volkswagen when the defeat device episode was published through the press conference of the VW management. The impact was instant and just after the media meet by the group management of VW related to acceptance of the emission scandal, the share price of the company had slashed down with the bottom line reached to one-third of the opening price of the shares on 18.09.2015. This proceeding had exposed the sensitiveness of the market as the shareholders reacted instantly to degrade the price of the company in response to their impact on emission scandal for which Volkswagen was found responsible (Investopedia, 2016).

 Normally it is found that when one of the industry leaders are jeopardized by their performance or act, the total industry faces the hit, in any respect. Main impact is found in the domain of stakeholders’ interest with the share price gets worst effected. In case of Volkswagen, after the emission scandal comes out from the press release of the management of the company, the instant impact was found in their share prices with substantial declination of share price. It had hit the other industry leaders too in the form of share price declination of Daimler’s who is the parental company of Mercedes-Benz. The share price of that company had decrease by 5.8% while the share price of Volkswagen had been decreased by 4.9% due to this fiasco.      

Reaction of other car manufacturers

The basic accounting theory shows that the share in the stock exchange market representing the capital of the company is getting affected by any such incident. It is obvious that the non-confidence on the company is being portrayed through the decrement of share price in the stock exchange market which is the element to show the declination of the credential of the company.  Hence the decrement of the share price of VW had direct impact on the stock market refer to same industry and Mercedes Benz was also affected with this incident (EWING J. , 2015).

It is being observed that successful companies are measured with the profit making which is directly related to the dividend declaration by the company and subsequently the credit of the company is being derived. The companies are involved in different activities so far their operations re concerned. It is mostly found that the companies are insisting most on the issues of increment of profit by whichever means that can sustain their existence in the market. In case of VW, the company had performed well in 2014 with accomplishing different parameters with successful entrepreneurship by proving their existence through profit generation, diversification and global appearance. But the company had not though twice to take the advantage of making the global population by adopting such steps which was responsible for damaging the global environment with direct threat to the human health. When all the corporate are willingly take part in the global environmental compliance, VW was deliberately ignored the issue for their mere material interest of accomplishing profit margin in the high standard and subsequently declared them as one of the most successful automotive giants in the world (Lyons, 2015). 

Conclusion

The accounting impact of the fiasco named as emission scandal of VW had proved its impact in different aspects while the company was reluctant to insist on the bad business practices which caused severe damage to the mankind with fatal impact. The company has to face the music and had faced different turmoil which made the company affected by means of financial and credential losses in the global business scenario and had proved them as the back starter to meet the corporate objectives.

References:

EWING, H. T. (2013). Volkswagen to Pay $14.7 Billion to Settle Diesel Claims in U.S. The New York Times .

EWING, J. (2015, October 06). VW’s New Chief Says Scandal Will Cost It More Than Expected. Retrieved October 08, 2016, from nytimes: https://www.nytimes.com/2015/10/07/business/international/vw-diesel-emissions-job-cuts.html?_r=0

Farrell, S., & Ruddick, G. (2015, September 23). Volkswagen CEO Martin Winterkorn quits over diesel emissions scandal. Retrieved October 08, 2016, from https://www.theguardian.com/business/2015/sep/23/volkswagen-ceo-martin-winterkorn-quits-over-diesel-emissions-scandal

IFRS. (2016). OUR TEACHING PHILOSOPHY. Retrieved September 15, 2016, from https://www.ifrsrookies.com/teaching-philosophy.html

Investopedia. (2016). Market Efficiency. Retrieved October 08, 2016, from investopedia: https://www.investopedia.com/terms/m/marketefficiency.asp

Lyons, S. (2015, December 07). Road to recovery: How does Volkswagen bounce back from emissions scandal? Retrieved October 08, 2016, from Jhu: https://hub.jhu.edu/2015/12/07/volkswagen-scandal-explained-sylvia-long-tolbert/

Muldoon, R. (2009, April). Diversity And The Social Contract. Retrieved October 08, 2016, from Sas: https://www.sas.upenn.edu/~rmuldoon/DiversityandtheSocialContract.pdf

Parker, L. D., Guthrie, J., & Linacre, S. (2011). The relationship between academic accounting research and professional practice. Accounting, Auditing & Accountability Journal , 24 (1), 5-14.

scribd. (2015). Introduction to Accounting Theory. Retrieved September 15, 2016, from https://www.scribd.com/doc/19010247/Accounting-theories-and-practices

Swaminathan, V., & Mah, S. (2016, September 02). What 100,000 Tweets About the Volkswagen Scandal Tell Us About Angry Customers. Retrieved October 08, 2016, from Hbr: https://hbr.org/2016/09/what-100000-tweets-about-the-volkswagen-scandal-tell-us-about-angry-customers