The Importance of Proper Federal Compliance: The Volkswagen Cheating Scandal

by Gonzalo Law | Nov 25, 2015 | International Business, Regulatory Compliance

Cheaters never win. This is especially true when trying to cheat governmental authorities. That is what happened for one of the most popular car manufacturers in the world, Volkswagen (VW). The VW debacle illustrates the importance of sincere corporate compliance. In a widely publicized report, a research team in West Virginia discovered that VW was caught having built cars designed to cheat on emissions tests. The team, led by engineering professor Daniel Carder, produced the first evidence of misrepresentations by VW in tests of its on-road diesel emission levels. Through its research, the team found that VW diesel vehicles produced emission levels significantly higher than the standards allowed by the U.S. Environmental Protection Agency (EPA).

Volkswagen admitted its misrepresentations to U.S. regulators and acknowledged the use of software known as the “defeat device.” The software sensed when the vehicle was being tested and changed its performance to reduce emission levels during testing conditions. The software is found in the diesel cars of VW across the globe. Regulators in the U.S. and Germany continue to investigate the extent of the misrepresentations made by VW. Other countries, such as the UK, Italy, France, and South Korea have opened their own investigations. The scope of the initial inquiry was small engine cars from VW; however, that has changed to include sports utility vehicles (SUVs), larger luxury cars, and vehicles from Audi and other VW brands.

Millions of vehicles around the world will be recalled after VW lays out the technical details to remedy the problem. The vehicles will require hardware and software changes to bring them into compliance, which will cost the company billions. Additionally, VW faces significant losses in the market, the halt of sales, lawsuits from car owners and shareholders, related investigations, and penalties and fines up to $18 billion in the U.S. alone.

The chief executive of VW, Martin Winterkorn, resigned soon after the scandal became public. Without a doubt, other individuals within the organization will leave their positions as the investigations unfold. Questions regarding who knew what and when are still unknown. The investigations will be long and tedious and the ultimate findings may have repercussions across the entire automobile industry. Communications among the board of directors, the chief executive, managers, and others in the chain of command will be at the center of the analysis to understand the way in which the problem unfolded within the company. Volkswagen is an international company with a significant presence worldwide with different managers for each department within the company approving or disapproving every decision. It is difficult to believe a scenario where one or few individuals could have made decisions on their own that affected the entire company. Internal controls that should have alerted someone about the use of an unauthorized device to cheat industry regulators were apparently missing or dismissed.

Competition in the car manufacturing business is stiff, and for VW it just became tougher. The new chief executive, Matthias Müller, has the challenging mission to reinstate the brand in the market. Regaining the trust of consumers, authorities, and its peers in the industry will be a difficult task. The repairing process has begun with the launch of an internal investigation, yet the end of the scandal is far from finished.

For any domestic or international company, large or small, it is important to set clear company objectives and the extent of authority for each individual in its company. Clear and open communications must be at the core of every business working relationship. Finally, independent investigations and controls should be established to monitor performance and compliance with federal regulations and local laws. To that end, precise legal and technical professional advice in all the areas related to the company or business is strongly recommended and necessary to compete in the market and avoid future pitfalls.

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