7101AFE Financial Accounting Theory and Practice

7101AFE Financial Accounting Theory and Practice

7101AFE Financial Accounting Theory and Practice

Question 1:  In your opinion, has Volkswagen (VW) breached its social contract?

By the effective analyses and evaluation of case study of Volkswagen we can say that the company has breached its social contract. This conclusion is providing due to various reasons which are explaining the negative impact which is made by the organisational activities and harming the overall society by the Volkswagen. Taking the position of the CEO of the company we can see that there are different legal and regulatory requirements and due diligence which are neglected by the company with the purpose of conducting fraud and cheat which cannot be done without the permission of the CEO of Volkswagen.

7101AFE Financial Accounting Theory and PracticeClean air act- Volkswagen has violated the clean air act by the unlawful installation of the software into diesel cars manufactured in 2009 to 2015 which leads to cheat in the emission test. They were emitting toxic gases up to 40 times about permitted levels. This is making impact on the aspects of social responsibility which are making impact on the overall effectiveness on the organisation and its impact on the overall effectiveness of organisation.

Defeat device installation- Volkswagen has installed a defeat device which is software to manipulate the emission and was harmful for the users and for the environment. The company has not taken the liability for this also. This was lead to violation of social contract.

This scandal has been proved as the breach of social contract as in there emerges various consequences of these irregularities and fraud of the company on the environment which is ultimately making impact on the society. Following are the consequences which are bearing by the society due to this scandal (Deegan, 2014).

Consequences on health

Death of people- According to a study of environment it is identified that premature death ratio in US is caused due to excess pollution which is produced between 2008 and 2015.Increase in the pollution is due to vehicles is estimated 87% and remain is due to ozone which is 13%. And it is estimated that this emission due to vehicles is leading to 130 early deaths in the country.

Increase in the disease- There are increased in the NO2 in the environment which is leading to the Non- fatal impacts on health which is developing disease like asthma, bronchitis and emphysemaetc.

Impact on Environment- NO2 and CO2 are treated as environment pollutant which are liable for the acid rain and lead to formation of brown clouds which are making impact on the ozone layer (Saxena, 2015).

These consequences are emerged with the impact of breach of contract which has been in the knowledge of the CEO and management of Volkswagen. In this case study of Volkswagen the social contract was to provide effective and positive services with the no harm or a very less harm to the environment and making impact on the overall society by increasing chances of disease and accidents. The product of the company is not safe and also including mal-intentions target to cheat its customers and society. These elements are liable for the breach of social contract by the organisation.

Question 2: Consider the daily ordinary share price (in Euros) of VW over the period from 10 Sept 2015 to 6 Oct 2015. Why do you think the VW stock price reacted in the way it reacted during this period?

The share price reactions in the period above said is fluctuating. The 10th September 2015 to 18 September 2015 period was quite satisfactory according to the financial analysts where the stock prices are reflected with a steady proportions.

But on 18 September 2015 to 21 September 2015 and 21 September 2015 to 22 September 2015 the share price drastically decreased. The prime reasons for these changes were as follows: On this date the US EPA has given a notice of violation to the Volkswagen group which is involving the 480000 vehicles which are equipped 2 litre TDI engines are having this problem which is making impact on environment and this is a violation of liability. On this date there has been an announcement by the EPA which is an order to recall cars of 2009 to 2015. These are the reasons which are making impact by reducing the stock price. It was declared by engineer of the company that the default software was purposely installed in the vehicles with the consideration of the team. EPA threatens the company to not certify any further vehicles. EPA charged penalties on the company for use of this cheating software. Company has expanded its expenses on the development of technology of euro 100 million. Various products of the company are still developing in the R&D department. Law firm files action lawsuit on behalf of owners on the defeat devices. Volkswagen accepted the deception as in they have this fraud software system. There are issued public apology by the company. The first day after this apology news was 21 sep on which is was recorded that the stock was fallen by 20% due to this news in the market.

From 23 September 2015 to 06 October 2015 the share price were fluctuating, initially it regains the values and score good points but with the later drama it again decreases and provided the figure of 106.90. Hence the total loss for the share price in the period was 60.00 basis points as initial value was 166.90 and reflected value or latter value was 106.90. The prime reasons for the decrease were as follows: Volkswagen has recall 11 million vehicles which are affected by this scandal. The brand developer has been suspended of Volkswagen. The market positioning of the company is reduced with the impact of its retesting effects.

Question 3: Explain how the future earnings performance and financial position of VW would be affected as a result of the scandal.

As a result of the scandal there are effective impact put over the future earnings performance and financial position of VW. The scandal adversely impact the goodwill of VW in their respective market as they lose their position in market. It is measured that intangible assets (such as goodwill and others) having 16% share within their total assets. Due to the falsified emission they call back their 11 million cars that results that put adverse impact over their sales as it get fallen down. There is fall noted down within the sales of new featured cars that directly impact over the sales revenue and net profit shares in adequate manner. They invest around $7 million over rectifying their software. These activities adversely impact their financial position as there is effective reduction is their total assets and with this there is significant increase in liabilities. They paid around $375 million as a fine as per the US federal Clean Air Act. The finance department get impacted and threatened as they need to pay repairs, fines and lawsuits against the emissions scandal.

The scandal adversely impact their share prices as there is fall in their share prices by 30% because they got a notice of violation. They also cut off their dividend over the both kind of shares (ordinary and preference) that also adversely impacted their retained profits as well as their share capital.

The overall cost that get estimated is $34.5 billion and it make inclusion of net present value of cost scandal, fines charged by government and settlements made by them (including private settlement, expenses incurred in the form of recalling vehicles, repair expenses and future loss in their sales.

With the effect of the emission scandal there is adverse impact put over their future earnings, their performance and cash flows.

Question 4: Are there any earnings management incentives for VW in the future as a result of the emissions scandal? Explain.

Company has enough money set aside which can easily cover up this expected scandal and loss in its profit and this leads to come in profit position so early (Andrus, et. al 2016). This scandal ensured improvement in organisational activities which can be related to the manufacturing of products. Inquiries and investigation at the end has improved the core business of the company and lead the company to ensure as providing appropriate services and environmental standards achievement which can improve its lost market value and ensure its recovery to its investors. BMW was also involved in the scandal which is leading to fall in its share price also and increased chances to achieve the market position again. There is increased chances Porsche boss Matthias Mueller will take over as chief executive after the resignation of existing CEO of the company which will be incentive for the company. After this scandal company has re-called all the defaulted vehicles and satisfy the customers and government regulations by developing their system software. All the above are various aspects of the earning management of the company which are planned with the impact of this scandal in company (Andrus, et. al 2016). The emission scandal was huge and badly impacted on the overall performance and market positioning of the company. Company has to recall it’s all sold cars and modify them by removing the defeated device and reduced future profits. Volkswagen can take it as opportunity to repositioning of the brand image and lead to earning management incentives.


Deegan, C.M. 2014, Financial accounting theory, 4E. edn, McGraw-Hill Education (Australia) Pty Ltd, North Ryde, N.S.W.

Saxena, A.K. 2015, "Capital budgeting principles: bridging theory and practice", Academy of Accounting and Financial Studies Journal, vol. 19, no. 3, pp. 283.

"Good in parts; carmakers after the VW scandal: Volkswagen's emissions scandal strengthens the arguments for motor-industry consolidation. But deals will be hard to achieve", 2015, The Economist, vol. 417, no. 8958, pp. 66.

Andrus, L., De Bartolomeo, A.J., Levitt, A.J. & Maher, S.R. 2016, The Volkswagen emissions scandal: Volkswagen faces lawsuits, criminal charges, and billions of dollars in fines for misleading consumers about the emissions performance of many of its diesel vehicles, American Association for Justice.

Tuttle, H. 2015, Volkswagen rocked by emissions fraud scandal, Risk Management Society Publishing, Inc, New York.