Possible Accounting Issues Faced by Volkswagen
Discuss about the Case Study Analysis Of Volkswagen.
The engine related scandal in relation of Volkswagen (VW) has major impacts on the accounting and financial reporting of the company. Accounting issues refer to the problems faced by a company in respect of its accounting practices that can even be highlighted in the auditors’ statement (Cucchiella et al. 2015). The engine scandal that came into light about VW has resulted in allocation of additional costs by the company to deal with the legal claims made by EPA. This allocation of additional funds requires separate accounting treatment by the company. Here, it is vital to understand if the company needs to show this additional costs in the income statement as a loss from business operations or in the form of administrative expenses or operational expenses. However, if the amounts are shown as an administrative or operational expenses then question can be raised as these payments are not recurring in nature. Similarly, unless the allocated expenses results in the outflow of cash it would not be shown in the cash flow statement (Kothari and Lester, 2012). In addition, allocation of such funds needs to be spread over the entire period proportionately in which it is used. Other accounting issues could involve provision for doubtful debts on debtors because the spread of the information in the market might make dealers of VW hesitant to make payment due to high chances of poor sales in the coming years (El Kasmioui and Ceulemans, 2013). Other issues include probable high inventory level due to product recall. All these aspects might actually affect the profitability and financial position of VW. Adherence to International Financial Regulatory Standards (IFRS) could become difficult as well (Zhuang and Luo, 2015). This can be explained by the complexities involving the nature of transactions indulged in by VW as a result of the scandal affecting it for the past couple of years.
Stakeholders refer to the parties holding certain interests and powers in a particular company (Wang, 2014). A company operates with the cooperation of all these stakeholders. Therefore, it is the responsibility of a company meet the expectations of stakeholders. In current scenario, the major stakeholders of VW are shareholders, creditors, suppliers, employees and customers. These stakeholders are affected by the decision making of VW and the scandal taken place recently. On the other hand, Joshi et al. (2013) mentioned that analyzing the impact of a decision on the stakeholders is the best way of ensuring that the stakeholders can be satisfied.
Impact of the Scandal on Stakeholders
Focus on short-term gains seems to be the main factor behind VW engaging in providing unethical software in engines to pass environmental tests in a fraudulent manner. On the other hand, the strategy of the company to recall a large number of vehicles seems to be following Toyota’s strategy earlier. On the other hand, VW seems to be regaining the trust of the customers and show that it cares for the customers and other stakeholders.
The impact of the scandal on each of the above mentioned stakeholders are discussed here. Shareholders are those people who have invested money in a company to get suitable returns from there. Shareholders provide the required capital to a company. Thus, no need to say that the shareholders of a company holds immense power and strong interest in a company because the decision making of a company impacts the wealth of shareholders. Shareholders are mainly concerned with Earnings per Share (EPS), dividend payouts and others. The scandal of VW and actions taken by the company has badly affected its financial performance which would further have a negative impact on the shareholders. On the other hand, creditors are the providers of debt capital to a company. As mentioned by Doucette et al. (2012), creditors expect timely payment, bulk orders and long-term business contracts with firms. However, in the current scenario, the operations and financial position of VW has experienced a setback through additional costs to deal with the scandal and recall of a large number of vehicles. This might lower the purchase requirements of the company which would affect the suppliers. Similarly, weak cash flow position of VW can result in increase in the payment period to creditors (Stubbs et al. 2013). Good quality products is the principle expectation of customers and that customers hold considerable power to VW as customers are the source of direct revenue generation. In present context, VW has failed to keep with the trust of the customers. This can also cause customers to switch over to other brands. Thus, the customers of VW have been badly affected by the software related manipulation in the VW cars. In the view of Kraft (2014), no company can think of delivering excellent services to the customers without considering the employees as workforce is one of the greatest resource to any organization. Good salary increment, bonuses and job promotion are some of the common expectations of employees. The employees of VW have also been badly affected by the scandal and decision taken by the company as the same might have a negative impact on their performance appraisal.
Applicability of Management Theories to the Scandal
There are various theories that might be applicable to VW considering the given scenario. The major theories are stakeholder theory, RBV theory and process theory. Stakeholder theory deals with the problems that an organization faces in respect of managing its stakeholders. Stakeholder theory suggest that it is one of the principle responsibilities of an organization to meet the expectations of the stakeholders (Palea and Maino, 2013). However, an organization may also face certain challenges in this regard, agency conflict being the most common one. Resource Based View (RBV) theory deals with the resources or assets held by an organization. RBV theory states that an organization needs to identify its most valuable assets and work on using the same to increase its competitive advantage over the rivals in the market. As per the RBV theory, organizations need to conduct Valuable Rare Inimitable and Non-substitutable (VRIN) analysis to identify assets which are increasing its competitive advantage over the rivals (Rensburg and Botha, 2014). An organization should hold only those assets and dispose-off the ones which does not meet any criteria. On the other hand, process theory could be yet another interesting theory in context of the scandal of VW. Process theory of management lays stress on the decision making process rather than the decision itself. As mentioned by Peters (2009), process theory holds that if the decision making process is appropriate then the concerned decision would also be appropriate. This theory could help in understanding and evaluating the decision making process of VW in regards to the scandal.
However, after discussing the above theories, the stakeholder theory seems to be most appropriate to the current situation as the same could help VW in managing the different needs, perceptions and interests of various stakeholders. This can also be justified by the fact that VW is facing good will risk, loss of reputation, fall in brand equity and similar other issues as a result of the scandal. Therefore, stakeholder theory could help the company in resolving the issues currently faced by it. In addition, application of stakeholder theory could also help the organization in addressing the concerns of its stakeholders and regain the confidence of the stakeholders on the company.
As per the accounting theories, VW can show the additional costs incurred in connection with dealing the scandal over a long period of time. This could help in protecting the company from serious losses in the current years which could be tough to recover in future. Spreading the costs over couple of years would reduce the burden on profit margin of the company. On the other hand, there is a strong chance that the EPA might impose some high penalties on the company. This needs due consideration as per the doctrine of conservatism which suggests that a company should not recognize anticipated profits but should account for anticipated losses. Hence, it is advisable for VW to create a provision against potential penalties that might be charged by the EPA. Creating such fund could help the company in saving the cash flow position in the year in which such penalties are made.
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