Discuss about the Accounting Theory for Environmental Protection Agency.
The Volkswagen scandal mainly happened or exposed due to a test done by the Environmental Protection Agency or EPA of the specific cars which were sold in U.S. had been found a defeat device in the aforesaid diesel engines. The EPA admitted the car maker as defaulter in the emission test in U.S. It made a huge downfall to the company in their sell margins as well as in international share market too (Hotten, 2015).
The body of this said topic is being divided into various issues in the financial part of the company as well as the ownership of the company and the trust of the customers too. The issues which will be discussed as:
After the scandal happened, the company fully lost their business rhythm in the car making industries due to the loss of their goodwill. The selling margin is affected badly beyond expectations. Turnover faced the heat with adverse effect as they had broken the trust of the customer according to their brand value. Profit margin fell down due to the lesser margin in sale. Customer refused to buy which hit their market share in the international market as well as in the share value. Due to this incident ownership had also entered in a big crisis (Theglobeandmail, 2015).
After the scandal was exposed, the stake holders of the company have been affected disastrously. As the market share fell in the international market it gave the stake holders a very worrying condition. As the scandal is exposed; the company lost about 19.91 billion Euros, which leads to loss of reputation. As this the company CEO stepped down from its post as well the company suspended their several high rank executives due to this unethical matter. The annual sale margin of the carmaker company disastrously fell. The company had faced various legal offences which made worry to the stake holders of the concern. As the EPA test, the diesel vehicles had faced penalty due to the emission test challenge on the particular models of the diesel cars as totally manipulated in the defeat device, the company had admitted the fraudulent offence in the test which affected the petrol vehicles of the company in Europe too. Due to this the company got its quarterly loss of 2.6 billion euros (Gecrisk, 2015).
After the scandal of the fraudulent incident of this giant car making company, it is still very unclear to say that the concerned incident of misappropriation of the set bench mark had been done by motivation or not. The Volkswagen Company had a great management command to made approval for fitting the devices in to their engine. But according to the company’s view there were no such intentional activities to make such engines which are correlated with the engines run by diesel. Although it might have happened due to the technical issue or some other real factors, but difference of opinion said that the damage made with the purpose to degrade the share price of the company by money value and it was sabotage (Ruddick, 2015).
Positive theory: the positive accounting theory or PAT is the accounting research which provides the predictions of real events of choice of accounting policies across the industry. There was lack of possible accounting issues, and it has come in front when the scandal unveils. Proper prediction or academic accounting research could explain or predict the reality across the industry and Volkswagen could overcome the situation to some extent (Fontinelle, 2015).
Normative Theory: this theory based on the observations, it tells the accountants what should be done based on theory and it is more of deductive process than PAT (Isolum, 2016).
Agency theory: the agency theory resolves the agency problems which may violet the agency relationships. Proper execution of this theory in VW could mitigate the confusion. Agencies like dealers are hired by the company to perform some duties. Companies have certain obligations to the agents they have, like transparency, proper accounting etc (Kaplan, 2012).
Legitimacy theory: the legitimacy theory explains the social responsibility of the business. Business has to perform the socially desirable functions. As VW deliberately had violated the pollution emission norms it’s understood the theory was not followed (Burlea, 2013).
Stake holders’ theory: it explains the moral and values of the business operating. It states that purpose is to create maximum value to the stakeholders. VW fails to implement that and the stakeholders lose the faith. The management should keep the interest of employees, customers, vendors. Etc.
As the scandal exposed, the company had deviated from its professionalism of its brand value. They not only fell in the European region, it had also ruined the US market of Volkswagen, and Asian car market too. The Volkswagen Company followed some wrong accounting policies which were resulted to great loss in their proportionate sales margin, profit margin, turnover etc. They followed the strategy which was monopolistic in nature and fell down in an emission test which was taken care by EPA in testing the absolute value of nitro oxide in the diesel engines made by the company (Adams, 2015).
A defeat device which was installed in the diesel cars of the Volkswagen Company failed to prove the emission test. Due to this disaster the company should follow some proper accounting theory or policies to build up their reputation of earlier period. They have to follow the proper sales margin not only in European sectors also in the whole world with fully tested devices before launching in the market. The turn over policy have to follow systematically by which the proper justified profit margin is found. Customers satisfaction is to be met on which the profit depends. The management of the company has to maintain the safe accounting policies as well as managerial concern which will provide them a great value in their future development.
Every company has to follow some safe accounting theory to maintain the trust, goodwill, customer satisfaction as well as the product quality. Company like Volkswagen has to follow some safe accounting policies as they were upset after the scandal exposed relating to be proven as an emission challenge test. The required policies they have to maintain are as follows:
The giant car maker company should have to maintain a production cost which carries the quality of the appropriate product
Labor cost is also one the important factors in which the cost of the product depends.
Sales margin depends upon the production and labor cost of the car making as if the sales price remains in such level to generate justified margin with the customer satisfaction to be maintained in a benchmark level as per the value of the car.
If the company maintains a safe and secured sales margin by meeting the customer satisfaction in an affordable price without any fault in the product by giving quality assurance to them, the turnover will also increase up to the satisfactory sales margin.
Profit depends on sale. If sell increase then profit will also increase due to the absolute turn over.
The goodwill of the company depends upon the quality of the product. If the product remains coveted quality level in respect of all kinds of test or examination, then it can be placed in the market for sale. But the Volkswagen Company failed in this aspect and remained as a company fooling the customers (forbes, 2015).
From this above discussion in my opinion the company should follow the goodwill as well as the customers demand. In case of maintaining goodwill the company like Volkswagen has to check and test all their cars including diesel and petrol cars in the emission challenge. If the company once loses its goodwill it would be very much difficult to execute the business in future. Customer Satisfaction also remains necessary as the sales turnover and profit depends upon it in direct relation. If customer got aware in any faulty factors of the company then everything might be in critical situation.
In the above discussion after the Volkswagen Company got a scandal exposed relating to the fraudulent incident proved by the EPA, the company should follow the relative accounting theory in practical application. Because of the defeat device, which was tested false by the EPA in measuring the absolute nitro oxide emission, the company had faced loss in sales and the goodwill in the market of Europe, America and Asia too. So to make the situation healthy for the company, the application of proper accounting standard is to be followed with the implication in practical areas.
Conclusion:
From the overall discussion of this incident in the history of Volkswagen, the company has to take a lesson from this incident which could help them to grow in better future by maintaining all strategies in their financial criteria as well as managerial factors to establish their born entity in their brand image.
References:
Adams, C. (2015, December 02). VW scandal: ethics versus profit. Retrieved September 22, 2016, from icaew: https://economia.icaew.com/business/december-2015/ethics-versus-profit
Burlea, A. S. (2013). Legitimacy Theory. Retrieved September 23, 2016, from springer: https://link.springer.com/referenceworkentry/10.1007%2F978-3-642-28036-8_471#page-1
Fontinelle, A. (2015, December 23). Positive economics. Retrieved December 23, 2016, from investopedia: https://www.investopedia.com/ask/answers/12/difference-between-positive-normative-economics.asp
forbes. (2015, September 28). The domino effect of volkswagens emissions scandal. Retrieved September 22, 2016, from forbes: https://www.forbes.com/forbes/welcome/?/sites/greatspeculations/2015/09/28/the-domino-effect-of-volkswagens-emissions-scandal/&toURL=https://www.forbes.com/sites/greatspeculations/2015/09/28/the-domino-effect-of-volkswagens-emissions-scandal/&refURL=https:/
Gecrisk. (2015, September 23). THE Volkswagen Emissions Scandal will be one for the books: The Long Term Effect on Stakeholder Trust. Retrieved September 22, 2016, from gecrisk: https://gecrisk.com/gec_blog/the-volkswagen-emissions-scandal-will-be-one-for-the-books-the-long-term-effect-on-stakeholder-trust/
Hotten, R. (2015, December 10). Volkswagen: The scandal explained. Retrieved September 22, 2016, from Bbc: https://www.bbc.com/news/business-34324772
Isolum. (2016). Legal Theory Lexicon 068: Welfare, Well-Being, and Happiness. Retrieved September 23, 2016, from Isolum: https://lsolum.typepad.com/legal_theory_lexicon/normative_theory/
Kaplan. (2012, August 15). Agency theory. Retrieved September 23, 2016, from kaplan: https://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Agency%20theory.aspx
Ruddick, G. (2015, December 17). VW makes management changes following emissions scandal. Retrieved September 22, 2016, from theguardian: https://www.theguardian.com/business/2015/dec/17/vv-management-changes-emissions-scandal-german-carmaker
Smith, G., & Parloff, R. (2016, March 07). How the massive diesel fraud incinerated VW’s reputation—and will hobble the company for years to come. Retrieved September 22, 2016, from fortune: https://fortune.com/inside-volkswagen-emissions-scandal/
Theglobeandmail. (2015, September 26). The Volkswagen emissions scandal: A case study in corporate misbehaviour. Retrieved September 22, 2016, from theglobeandmail: https://www.theglobeandmail.com/report-on-business/rob-commentary/the-vw-emissions-scandala-case-study-in-what-not-to-do/article26550100/
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