The Emissions Scandal in 2015/16 and its Impact on the World’s Biggest Automobile Manufacturer, Volkswagen Ag

This Business report analyses the impact of the current emissions scandal of Volkswagen AG in the economic, social and reputational sphere. Volkswagen has long been regarded as the most successful German company and one of the biggest automotive suppliers in the world. The emissions scandal has undermined trust and confidence of both clients and managers in the company’s predominant role. This report is meant to analyses qualitatively and quantitatively the effects of the scandal on the corporate result and identity as well as drawing conclusions to a possible outlook for Volkswagens future and the whole automotive sector. Citation: Fiedler FFH-J (2018) The Emissions Scandal in 2015/16 and its Impact on the World’s Biggest Automobile Manufacturer, Volkswagen AG. J Account Mark 7: 293. doi: 10.4172/2168-9601.1000293


State taxes:
There is a strong influence of Volkswagen AG's corporate results and the municipal tax income of the production locations like Wolfsburg, Zwickau and Leipzig. For the cities like Wolfsburg and Zwickau the Volkswagen emissions scandal caused a great decline in commercial tax ('Gerwerbesteuer') [10]. Exact amounts are not published yet, but the municipality of Wolfsburg has already set a spending freeze for their finances [11].
Vehicle tax evasion because of the emissions scandal: According to Sueddeutsche Zeitung [12] eight hundred thousand diesel Vehicles worldwide and two hundred thousand diesel Vehicles in Germany are in danger of additional tax payments. Volkswagen has recently announced to take over these additional costs and has inquired the German Vehicle Tax Authorities to directly bill Volkswagen for the additional costs (ibid). These additional costs are not yet considered in the financial statements of the recent years and carry further cost-risks, which are not yet certain to be quantified.

Reporting of Intangible Assets and Financial Instruments Measurement principles
Intangible Assets: In Volkswagen AG's annual report [9] it is stated that research costs are recognized when incurring in accordance with IAS 38. Depreciation of intangible assets follows a straight line depreciation method (ibid). Brand names from business combinations, having an indefinite life, are not amortized (ibid). Goodwill, intangible assets with indefinite useful life or those which are not yet used are tested for impairment once a year (ibid).

Financial instruments:
i.
Financial instruments measured at fair value: Net gains and losses from financial assets and liabilities are composed of fair value measurement of gains and losses on derivate, comprising interest gains and losses along with currency transactions [5].
ii. Financial instruments measured at amortized costs: Net gains and losses from loans and receivables are measured with amortized costs, as well as financial liabilities (ibid). Effective interest method of IAS 39 is used (ibid).
iii. Financial instruments not related to IFRS 7: The financial instruments not falling in the frame of IFRS 7 are particular investments in association with joint ventures, which are accounted using the equity method [5].

Liquidity ratio analysis
Liquidity ratios are supposed to indicate if a company is capable of paying back its short term debts and other short-term obligations [13]. The higher this ratio the better is the company's situation in terms of paying back its short term debts and obligations.
Financial Leverage Multiplier (FLM): FLM in this case is 3, 7 times the shareholder's equity (2013) and constantly rising up to 4, 34 of the shareholder's capital (2015). The higher the FLM ratio gets, the harder it will be for a company to receive further loans and the higher the risk for a company's illiquidity. In Volkswagens case FLM rose by 17.3% from 2013-2015 (Table 1).

Current Ratio (CR):
The Current Ratio is an indicator for a company's liquidity [14]. It is calculated taken the Current Assets divided by Current Liabilities. The higher the value gets, the better the prospect for a company to fulfill their short-term obligations (ibid) ( Table 2) [15].
In Volkswagen's case the CR is constantly decreasing from 1.03 (2013) to 0.98 (2015). This means a decrease of 4.85%. As the CR sank under 1 in 2015, the Current Assets were then lower than Current Liabilities. This is generally a bad sign, if Current Liabilities are exceeding the Current Assets, which means that a company may not be able to pay off its debts in the short term.

Solvency ratio analysis
Solvency ratios are indicating if companies are able to pay of their long-term debts and obligations [16]. The viewer is told, whether the cash-flow of a company is sufficient to meet this purpose (ibid).

Asset:
The Asset Turnover is showing the times of Asset multiplication to reach Revenue. In Volkswagen's case we can observe a constant decrease in AT. From 2013-2015 the decrease of the AT is 6.45%. Hence, the solvency of VW gets worse (Table 3).

Profitability ratios
Profitability ratios show, whether a company has adequate operating profits on the company's asset side. For shareholders this is one of the main questions, because it matters to them to have strong profits of the equity invested. For managers it is important to evaluate the profit for the assets invested.

Return on Equity (ROE):
ROE shows for investors, whether their capital employed gives a good return. It is an adequate tool to analyses the overall performance of a company (Table 4) [3]. From 2013-2014 the ROE was nearly constant with approximately 11%. In 2015 there was a massive slump of ROE, going to minus 1.67%, which means there is a negative return on Equity.   In 2013 and 2014 the ROCE was nearly constant with around 6 %. In 2015 there was a massive slump by from 5.84% to -2.48%.

Net Profit Margin (NPM):
NPM is the part of the revenue, that remains when all operating expenses, interest taxes and preferred stock dividends are deducted from a company's total revenue (Table 6) [17].
At first, the NPM stays constant with approx 4.5% from 2013-2014. In 2015 it is massively slumping to -9.80%.
to the Australian Board of Company Directors [23] has revealed a 'climate of fear' in VW's corporate Governance, also criticizing the construction of German corporate Governance in general.
Big eruption to German corporate governance system due to failure at Volkswagen as biggest German company Bainbridge (2016) is convinced that inherent problems in the construction of German corporate Governance significantly contributed to the emissions scandal. The "co-determination" in the consistence of the board itself, which is common in German companies leads to three massive problems (ibid): 1.) Interest conflict of the dual-class stock held by Families Porsche and Piech 2.) Presence of a Government (Lower-Saxony) as a major stockholder 3.) The characteristically German "two-tier" board around the principle of co-determination It may be just to say, that Volkswagens emissions scandal only revealed major flaws of the German corporate governance system, which have been inherent to the German system already. Surely the emissions scandal will lead to various changes with the aim to improve German corporate governance. 2.) ECB's announcement to buy an independent asset purchase programme worth 1.1 trillion Euros. The Euros exchange rate to the USD immediately dropped to the lowest value since September 2003 (ibid).

Countries with the highest foreign exchange risks
As Switzerland is not a major market for VW and a weak Euro is generally positive for Volkswagen these example can just exemplify the explosive force of currency exchange risks. But especially the currently very weak Chinese Yuan can turn out to be a big problem for the German car manufacturer Volkswagen, as it faces a 5 years' low compared to the USD [25]. In 2015 VW group sold 3.55 million cars in China [26]. China is the most important market for Volkswagen group, still having growth potential, in case the Chinese economy is continuing to roar. Chinese economy and currency is currently are in danger of a recession.

Major risks and measures against these risks apart from financial hedging
Currency exchange risks are strongly tied to the economic standing of one country. Companies like Volkswagen, strongly reliant on certain markets like China, have to anticipate market events in particular economies. Through diversifying manufacturing facilities in the whole world, paying wages and materials with the local currency as well as selling cars with the local currency implements a money circle softening currency exchange risks to a large extent [27].

Date
Return on capital employed (ROCE)

Legal basis for corporate governance in Germany
Corporate governance is the regulatory frame for leading and controlling enterprises [19]. This regulatory frame is vastly influenced by lawmakers and company owners. In Germany the foundations of corporate governance are set in the German Corporate Governance Codex. A governmental commission was installed by the German Federal Ministry of Justice in September 2001 to pass that Codex on the 26 th February 2002. The Codex repeats several substantial laws for corporate governance and publicity, as well as numerous recommendations for leading and controlling stock listed companies. Legal foundation for corporate Governance in Germany is the German 'Aktiengesetz' (stock-law; short: AktG).

Impact of the Volkswagen emissions scandal for the notion of the German corporate governance approach compared to the Anglo-Saxon model
In the 1990s experts where discussing replacing the Anglo-Saxon corporate governance system by the German and Japanese corporate governance system [20,21]. On the other side authors like Kaplan [22] emphasize the advantage of the American corporate governance system over the German and Japanese one in discouraging successful companies in over-investing. The German emissions scandal, according

Implications of the Emissions Scandal 2015/16 on Corporate, Finance and Governance
Short term or long term public trust problem of Volkswagen?
According to Weber [28] the case of Volkswagen AG is not to be compared with the 'Deepwater Horizon' case, which led to draconian penalty payments of BP. In this case many Volkswagen drivers feel personally betrayed, buying a defaulted car (ibid). Moreover, many clients are potentially confronted with additional unexpected vehicle tax payments. In the short term the impact for the reputational damage will be less grave, if Volkswagen accomplishes to calm down clients on the one hand with financial compensation and to reconcile investors and authorities as well as the federal states in Germany (as large corporate tax receivers) concerning the collapsing profits on the other. The current challenge can well be called a ridge walk.

Changes in corporate culture?
Cabras, an IR expert, is convinced, that the emissions scandal has to lead to a change in VW's corporate culture [28]. The formerly prevailing 'atmosphere of fear' leading to pressurized profit generation [29] will change, because management has to realize the external costs of corporate decisions, eventually falling back to the corporate result.

Financial effects of the emissions scandal
Short term impact: There is much evidence of a grave impact on Volkswagens finances in the short run. 11 million cars are affected by the scandal worldwide and Volkswagen had to set aside 6.7 bn. € to covers cost in 2016 and in the last quarter of 15 Volkswagen had to state its first loss for 15 years (2.5 bn. €) [23].

Long term impact:
Definitely the VW's emissions scandal has undermined trust in the whole automotive industry [30]. Du et al. appeal, that a decisive action now may prevent Volkswagen from major future damage. Economically, the VW scandal can be handled well as for now, but if the reputational damage continues to pull down car sales, it can lead to major problems for the company. Everything relies on the willingness for changes in the corporate identity of Volkswagen to regain trust in both company and cars to be technologically advantageous and clean [31][32][33].

Scandal management
According to Rikken [31] the new VW CEO Michael Müller (former Porsche CEO) has acted too defensively and uncertain. To prevent major long term damages, it is evident, that Volkswagen needs to take more decisive measures to ensure a major regain of trust.

Conclusion
Volkswagen has experienced massive eruptions in the three spheres: 1.) Public sphere: Public trust in the company has been demolished and Volkswagens corporate identity has shown to be insufficient.

2.) Economic sphere:
Economic analysis has shown, that all ratios have worsened in terms of liquidity, solvency and especially profitability (huge decrease).

3.) Corporate sphere:
On the corporate sphere Volkswagen's corporate identity has shown to be insufficient, the principle of fear among the employees does not lead to success and creates external costs which eventually fall back to the company's results. These costs will hopefully be accounted for in the future.