Discuss about the Accounting Theory for Volkswagen.
As and when business revolutions have become successful in attaining new significant events, the extent of modern opportunities of businesses have become extreme resilient to anticipate. Besides, every kind of scandal tends to deteriorate the goodwill of all businesses, thereby affecting their success and development. The recent scandal of Volkswagen is altogether relatable to such. It has highly put the goodwill of the company at stake due to the recent revelations of defeat devices. This essay is a very generous and committed venture to investigate and evaluate the significance and practical suitability of accounting theories, taking into account the scandal of Volkswagen emission. The investigation and evaluation will facilitate in better understanding of the concept, practices and theories of accounting.
Out of all the automotive scandals, the scandal of testing of Volkswagen emission by a defeat device has been regarded the biggest. The US Environmental Protection Agency describes such a device as equipment that can minimize the efficiency of emission control systems under circumstances a vehicle can reasonably encounter (Klinger, 2016). With the assistance of this emission testing, minimization of emissions of nitrogen oxide and torque becomes easier, that is different when normal situations arise. A stakeholder is describable as a definite body that cannot only induce achievement of organizational goals but may also be itself induced by these organizational goals. From the following figure, the identification of stakeholders of Volkswagen becomes easier (Volkswagen, 2015).
In the Volkswagen group, there are primarily four major stakeholders such as customers, capital market, partners, and the society as a whole. The immediate impacts of the scandal of Volkswagen are clearly attributable to the fact that the shares of the group jumped upwards approximately to one-third. Hence, it was the investors and shareholders of the group that ultimately suffered due to the scandal because they exerted huge trust, expectations, and resources on the shares of the company. As a result, the company had to lose its goodwill and trust upon the minds of these investors and stakeholders. Besides, it must be notable that the partners like suppliers, strategic partners, employees, business etc of Volkswagen give due prominence to satisfaction of customers, sustainability, unprejudiced opportunities, heath, safety etc. However, due to the scandal, huge uncertainties and insecurities associated with Volkswagen’s upcoming future have risen on the minds of the partners that they have decided to get rid of the company (Fracarolli & Lee, 2016). Furthermore, the society as a primary stakeholder of Volkswagen group comprises of municipal authorities, lawmakers, social working groups etc. The concerns of the customers and the society are observable to correspond in relation to climate, safety of vehicles, and matters of environmental protection. Nevertheless, because of the scandal, these concerns of customers and the society are highly at stake.
The defeat device introduced by the Volkswagen group on approximately 40000 Volkswagen diesels move on the United States roads. The Environmental Protection Agency (EPA) has imposed a heavy fine of around $37500 per vehicle and a maximum fine of around $18bn for contravention of statutory rules and regulations. The stock of Volkswagen declined by approximately twenty percent, the Chief Executive Officer resigned, and an investigation initiated by the department of United States (Bryant & Milne, 2015).
On September 2015, the Environmental Protection Agency (EPA) has exonerated Volkswagen of contravening tests of US emissions. In relation to this, Volkswagen has provided £4.8bn (€6.7bn) to refill the expenses necessary for revoking cars with cheat devices in huge amounts, such as 2.4 million in Germany, 8.5 million in Europe, 500000 in United States, and 1.2 million in United Kingdom. Due to such huge spending, Volkswagen had to encounter loss of around €2.5bn during the period of October 2015. On a whole, Volkswagen reportedly contravened the code of ethics that every company of United States must adhere to regarding the statutory compliances in the working environment.
The management plans of Volkswagen are describable by various theories of financial accounting. In relation to the Legitimacy theory, every organization must ensure that their activities are not detrimental to general interest. In other words, their activities must be according to the rules and norms of society where they belong. The theory of legitimacy proves that the value system of organizations aligns to that of the society and this can be set through the legitimation procedure (Janssen, 2013). In the current scenario, it is the responsibility of every organization to function as per the expectations of public and this includes both the implicit and explicit expectation. Furthermore, the issues relatable to environment, social, and human as a whole must also be address by an organization. The operations of a company must approve of social legitimacy. Such legitimacy is maintainable by organizations by introducing the system of public disclosure through scrutinizing environmental and social reporting.
Managerial, ethical, and stakeholder theories also play a part. It is the company’s duty to treat properly all their stakeholders in a fair and equal manner. As per the Ethical branch, every stakeholder pursues a right to information in case of conflicts of interest. Moreover, the installation of defeat device as an operating device was not only illegal but also immoral.
The citations of decoupling and isomorphism institutional theories are very much in need. In isomorphism, powerful stakeholders of the organization alter the institutional practices by exerting pressure on the organization. In decoupling, the practices adhered to by the management is not similar to that of the general practices related with social and environmental responsibly.
The management of Volkswagen must accept responsibilities due to the fact it is liable for the scandal. It must account and operate for those actions regarding them as a right to information. Furthermore, reporting is the utmost responsibility of a company even if it is not necessary. The stakeholder’s theory managerial branch describes how a management must satisfy the expectations of stakeholders by sustaining strategic objectives of the organization and regularly adhering to the disclosure policy of its activities. Therefore, all information regarding the social performance and financial accounting of an organization must be readily available to the stakeholders.
The financial accounting theories such as Stakeholder Theory, Legitimacy Theory, and Institutional Theory like decoupling and isomorphism are attributable in the Volkswagen emission scandal. The legitimacy theory plays a key role in creating connections between community expectations and company disclosures. The management is under an obligation to adhere to moral issues as well as its performance (Balbir, 2016). It relies on the righteousness of a company that allows it to attain legitimacy and abilities to thrive. The stakeholder theory operates where management functions in order to satisfy the expectations of stakeholders by regular following of the policy of disclosures. The institutional theories of decoupling and isomorphism are significant as it is associated to both forceful exertion of pressure of powerful stakeholders and the goodwill of an organization with various disclosure policies on the social and environmental issues (Balbir, 2016).
Hence, all the above-mentioned theories of financial accounting are very relevant in order to understand the scandal case of Volkswagen emission testing in the viewpoint of moral lessons. It is very necessary that either the existing theories are able to execute various practices to reach the objectives or new theories are necessary to develop. Accounting theories are that principles in a guideline form that provide an effective understanding on how to efficiently carry out the accounting practices, how to develop the same, and how to evaluate it. It is a fact that a good business mainly depends upon trust and reputation (Duffer, 2015). In other words, individuals who are driving their cars, if are not satisfactory to the safety of their vehicles, then that company is by all means guilty because of its practices and non-compliance must be charged taking into account both the stakeholder accounting theory (ethical branch) and legitimacy theory. Volkswagen aims to revolve around practices that are necessary for all employees of the company to follow (Elson et. al, 2015). However, the company contravened the code of ethics, thereby losing its reputation and trust in the minds of the stakeholders. Furthermore, contravention of this ethical code of conduct will attract liable consequences as per the law and it will lead towards hampering of relationships between an employer and employee (Plungis & Hull, 2015).
The present study has been very effective for a better explanation of the theories, concepts, and practices of accounting. The assessment of their significance in the viewpoint of the scandal of Volkswagen emission testing has also been very informative. Furthermore, this study has also been useful in serving as a disclosure as viewed scrutinizing a never before scandal of such a huge magnitude that is impacted by one of the most resilient automobile companies. Besides, it has also served a role in portraying the prime environmental matters and their concerns associated to emissions of carbon and nitrogen oxide (Loehr, 2015). Lastly, this study also plays a very significant role in providing the readers an effective understanding on the several stakeholders in the business of Volkswagen, its practices and management, accounting practices and the company itself.
References
Balbir, S 2016, Do You Own a Volkswagen? Values as Non-Functional Requirements. In Human-Centered and Error-Resilient Systems Development, Springer.
Bryant, C & Milne, R 2015, Volkswagen’s ‘uniquely awful’ governance at fault in emissions scandal, viewed 23 September, 2016 https://www.cnbc.com/2015/10/04/volkswagens-uniquely-awful-governance-at-fault-in-emissions-scandal.html
Duffer, R 2015, Volkswagen diesel scandal: What you need to know, viewed 23 September 2016, https://blog.caranddriver.com/everything-you-need-to-know-about-the-vw-diesel-emissions-scandal/
Elson, C.M., Ferrere, C.K. & Goossen, N.J 2015, ‘The bug at Volkswagen: Lessons in co determination, ownership, and board structure’, Journal of Applied Corporate Finance, vo. 27, no. 4, pp.36-43.
Fracarolli N,M. & Lee P, C 2016, ‘Caught red-handed: The cost of the Volkswagen Dieselgate’, Journal of Global Responsibility, vo. 12, no. 2, pp. 22-38
Janssen, C.I., 2013, ‘Corporate historical responsibility (CHR): Addressing a corporate past of forced labor at Volkswagen’, Journal of Applied Communication Research, vol. 41, no. 1, pp.64-83.
Klinger, A 2016, On the Dynamics of Identity–The Interplay between Volkswagen’s Organizational and Consumer Identities in Light of the 2015 Emissions Scandal. Springer International Publishing.
Loehr, J 2015, Two-thirds of Germans still trust Volkswagen after emissions scandal, viewed 23 September, 2016 https://www.theguardian.com/business/2015/oct/20/two-thirds-of-germans-still-trust-volkswagen-after-emissions-scandal
Plungis, J & Hull, D 2015, VW’s Emissions Cheating Found by Curious Clean-Air Group, viewed 23 September 2016, https://www.bloomberg.com/news/articles/2015-09-19/volkswagen-emissions-cheating-found-by-curious-clean-air-group
Volkswagen 2015, Volkswagen: Annual report and accounts 2014, viewed 23 September 2016, <https://www.volkswagenag.com/content/vwcorp/content/en/misc/pdf dummies.bin.html/downloadfilelist/downloadfile/downloadfile_30/file/Y_2014_e.pdf>.
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