Currently, fraud is a common phenomenon in the global business. The worlds prevalence of fraud in companies is large, and about 80% of organizations have experienced it in one way or another (Maurer, 2013). Most of the fraud threats emanate from within. According to Kroll (n.d.), out of the companies that experience fraud and in which the perpetrator was known, slightly over 80% suffered from the acts of an insider. Furthermore, the senior management has been attributed to most of the devastating fraud scandals in organizations (Maurer, 2013). The Krolls 2015/2016 Global Fraud Report claims that globalization is rising due to businesses exposure to fraud when they seek the ways to expand into riskier global markets (n.d.). The effects of the fraud cases to companies are detrimental since they lose money and market reputation. This paper focuses on the overview of Volkswagen (VW) Company and the fuel emission fraud scandal that emerged recently. In addition, revealing of the role of the internal auditor and the management as well as the external auditor in the case will be prevailed.
Overview of Companys Nature
VW, a Germany-based company, is among the worlds leading automobile manufacturers. Its core objective is to offer not only attractive but also environment-friendly vehicles that can favorably compete in the robust automotive industry. The organization is the largest European carmaker (Volkswagen, 2014). According to Volkswagen (2014), the company recorded an increase in sales in 2014 by reaching 10.137 million customers from 9.731 million in 2013. Moreover, its market share in the entire world stands at 12.9%. Out of four new cars in Western Europe, one is from VW that registered an increase of 202 billion in 2014 from 197 billion in 2013 (Volkswagen, 2014). After tax, the profit grew from 9.1 billion in 2013 to 11.1 billion. The company operates majorly in Europe, America, Asia, and Africa. In any single day, over 592,000 of its employees produce 41,000 vehicles globally as the organization has sales in 153 countries (Volkswagen, 2014). Its huge market and increment in sales is an indication of the companys influence on the worlds motor industry.
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Furthermore, the enterprise has brands that enable it to infiltrate the market. They include MAN, Scania, Volkswagen Commercial Vehicles, SKODA, Bentley, Volkswagen Passenger Cars, Audi, Ducati, Lamborghini, Bugatti, SEAT, and Porsche (Volkswagen, 2014). Each of the brands has a unique character that enables its operation as an independent entity in business. The broad spectrum ranges all the way from luxury vehicles to low-consumption cars and motorcycles. According to Volkswagen (2014), some of its products in the commercial vehicle sector are pickups, heavy trucks, and buses among many others. All the vehicle types and brands are important in making the company gain a huge market base.
In addition, VW is active in other fields of business. The company explains that it indulges in many areas of business manufacturing turbochargers, compressors, turbo machinery, chemical reactors, and large-bore diesel engines for stationary and marine applications (Volkswagen, 2014). Moreover, VW has taken an active role in the production of special gear units for wind turbines, vehicle transmissions, slide bearings, and couplings in addition to systems for testing many aspects of the mobility sector. Notwithstanding, it has gone beyond its initial business by gaining entry into the financial field. For example, it provides a broad range of financial services that include customer and dealer financing, banking, insurance activities, fleet management, and leasing. All of its endeavors are essential to the company’s growth and development across the globe.
The Fuel Emission Fraud Scandal
Volkswagen came to agree that it had involved itself in a scandal, commonly known as the Fuel Emission Fraud Scandal. It developed after the management of the company had admitted that its 11 million of vehicles had software that could cheat on emission tests (Mouawad, & Jensen, 2015). This fraud was aimed at deceiving the U.S. authorities and surviving the harsh laws and regulations in the country. Upon the testing of the VW car, the software sensed the testing and, in turn, activated equipment installed to reduce fuel emissions (Mouawad, & Jensen, 2015). However, this software could turn down the equipment when one regularly drives that resulted in an increment in the emission rates far beyond the legal limits. The emission increase aimed at either improving the car’s acceleration and torque or saving fuel. This issue could earn fame and popularity for the company, which would finally enjoy benefits of the criminal act. Furthermore, The New York Times (2015) informs that VW may have been worried that some of the emission system’s parts would break down easily when continuously used. To prevent that, VW modified the software to adjust components such as the valves for recycling some of the exhaust gasses or catalytic converters. These components help in reducing nitrogen oxide pollutant, which causes respiratory diseases such as bronchitis and emphysema among many others. The reason of the scandal was very dangerous to human health.
Although VW had kept this in secret, its action came to light for people to see. The revelation of the scandal came when the researchers from West Virginia University noticed the emission rates of some of the companys cars. According to Mouawad and Jensen (2015), the researchers tested fuel emission from two of VWs cars that had two-liter turbocharged four-cylinder diesel engines. They detected that when tested on the road, some of the cars emitted about 40 times more than the allowed levels of nitrogen oxide. The research prompted the U.S. Environmental Protection Agency (EPA) to carry out an investigation in order to justify the surveys claims. EPA further reiterated the claims by revealing that VW had cheated by distorting emission test results that the agency had set (The New York Times, 2015). Such was through the manipulation of the vehicle parts related to fuel emission. The companys cheating was revealed in September 2015.
That issue resulted in the fact that the company started experiencing turbulent times in the business world as well as in its management structure and functions. According to The New York Times (2015), the public relations response appeared immediately after the revelation of the scandal. The crisis hit the news across the world. Until now, the media is still airing the crisis progress and its impact on the companys market, especially in the US, the UK, and Germany among other countries. The company was compelled to accept that it had violated the law by indulging itself in fraud and was completely screwed up for what had occurred (The Wall Street Journal, 2015). It ended up apologizing for the inconvenience it had caused the consumers of its cars. It was a revelation that the company had knowingly committed acts of fraud, and it was confessing the truth before the public and legal authorities.
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However, VW was willing to arrive at a solution to its perpetuated results of fraud. The Wall Street Journal (2015) asserts that the company announced that it was directing much of its energy into the finding of a solution to its fraud woes. It halted sale of some of the cars that consumed diesel and pursued an external investigation in order to reveal the cause of the fraud scandal. In the meanwhile, it had no option other than restructure its leadership. Its incumbent Chief Executive Officer (CEO) issued an apology for the crisis before resigning (The Wall Street Journal, 2015).The incoming CEO vowed to resolve the drama revolving around the scandal and to hold accountable those who masterminded it. Additionally, VW suspended nine of its entrusted managers with an aim to investigate into the matter of the scandal and the involved employees (Boston, Varnholt, & Sloat, n.d.). However, it is unclear on whether all of them participated in the wrongdoing or not. Boston, Varnholt, and Sloat (n.d.) explain that Ulrich Hackenberg, the company’s thirty-year veteran and senior engineer, was the one to be resigned the last. Such occurrences after the crisis prove that the fraud case interfered with its management structure and leadership to a great deal. However, the response was enough to demonstrate that VW had committed itself to finding a solution to what had happened.
The impact of the companys cheating of the EPA in the US has affected it immensely, especially with the reduction of its sales after losing its customers trust. First, the scandal had various public relations implications. In the initial stages of the scandals revelation, Saarinen (2016) asserted that the company may have a poor reputation in the public. That could be a reality because consumers of the company’s products would have lost trust thus resulting in the reduction of VW’s sales. Such an issue was true since, in the UK alone, VW dropped by 14% in its sales, which was associated with the fraud scandal (Saarinen, 2016). Consequently, the company would likely have a reduction in its competitive power in the market.
Moreover, the company faced some losses in subsequent months after the occurrence and revelation of the fraud scandal. For instance, the sales in South America dropped by a whole 27.6% while Russia showed a decline by 16.3% (Saarinen, 2016). This decrease is an indication of the extent the fraud incident affected the company. Furthermore, VWs sales in North America dropped by 2.1% while in the US where the scandal hit the most registered decrease in the sales by 5.7% (Saarinen, 2016). Such challenges are detrimental to the companys aims of reaching and expanding its global market since customers are likely to have begun considering the companys competitors. VW has a hard job ahead in solving the issue and most importantly in trying to convince its clients to regain the lost trust. However, the company has been affected, and if nothing is done on time, it is likely to continue making losses.
The Role of the Management and the Internal Auditor
The management and internal auditors played a key role in the either the coming up with the scandal or in helping respond to it appropriately. Rising and Sopke (2015) report that the management took an enormous importance in the manufacture of the defective cars and cheated the US EPA. Such a statement may be true since it is hard for a manufacturing company to outsource and install equipment that could deceive the local authorities on diesel emission without the knowledge of the enterprise’s management. The internal auditors pinpointed that VWs engineers started to install the emission cheating software around 2008 (Rising, & Sopke, 2015; Staff, 2015). The administration accepted the scandal as a total mess that required immediate resolution. Furthermore, it resolved to handle the problem with the full force it demanded. Firstly, its role was to restructure itself by allowing some key individuals to be resigned, including the CEO in addition to suspending some (Staff, 2015). Secondly, it had to conduct investigations to find the key people who masterminded the cheating. The internal auditors were essential for the investigation process. Moreover, the company management agreed to take the full responsibility for the business woes and compensate its customers. Therefore, it is obvious that the companys management played an active role in the VWs fraud scandal.
The Role of the External Auditor
External auditors have played a key role in the revelation of the truth after the cheating allegations from the US EPA in addition to searching for those responsible for causing the scandal. The auditors detected that the company cheated the US-based authorities on emissions. That has resulted in an informed decision from the company’s leadership to agree that it messed up by cheating not only the authorities but also its customers. Furthermore, the revelation of those who masterminded the scandal is under the external auditors responsibility. According to Rising and Sopke (2015), VW is searching for the individuals behind the installation of the software through the performance of both internal and external audits. External auditors have already revealed that management in the engineering department was involved, and the information was not shared though was within a small circle among the engineers themselves. External auditors are currently analyzing data from the companys devices of employees, and more than 2,000 have received information not to delete any data relevant to the case (Rising, & Sopke, 2015). They have already verified over 102 terabytes of data, which equates to more than 50 million books. This proves an extensive involvement of the external auditors in the fraud scandal. Therefore, they play a crucial role in the company’s cheating case.
VW, a company based in Germany, is one of the leading carmakers in the world with a huge customer base. It has a broad range of vehicle models for both personal and commercial purposes. Its core objective is to offer attractive and environment-friendly vehicles in order to compete adequately in the automotive industry. However, the company went against its goal by cheating the US EPA and most importantly, its esteemed customers. Instead, it promoted environmental pollution through developing and installing software that could cheat emission tests despite its vehicles excessive emissions. The revelation of the fraud scandal has made the company face turbulent times. It has experienced managerial restructuring and decrease of sales as the company has lost trust from most of its customers. The management was involved in the case in many ways such as planning and implementing the cheating as well as seeking for a resolution to the devastating scandal. Both internal and external auditors have played a critical role in the process towards the revelation of those behind the scandal.