Friday, September 25, 2015

Volkswagen Cheats the Emissions Test and Gets Caught Big Time

The Volkswagen scandal has been all over the news the past several days (TIME, CNN, Economist). In summary, Volkswagen committed a massive fraud by installing a chip in at least 11 million of their diesel cars that slowed down emissions only when the car was plugged in to the emissions machine. Then as soon as the test was finished and the car was unplugged, the car emitted anywhere from 10 to 40 times the amount of nitrogen oxides than what the test results showed. The amounts emitted normally by the car far exceed environmental regulations in the United States. (For more information on the story, see the video below.)

The question that many people are asking is why would Volkswagen, or at least some people at Volkswagen, commit this fraud? While the fraud did allow for their cars to more inexpensively pass the emission test while simultaneously maintaining high levels of power in the engine, the $18 billion in potential fines from the United States Government, $7.3 billion cost to fix their 11 million law-breaking cars, and 38% drop in their stock price certainly appear to be more costly than the potential benefits of the fraud.

As we have mentioned in a previous post, there are three factors that must be present in order to create an environment conducive to fraud. These three factors, commonly referred to as the fraud triangle, are pressure, opportunity, and rationalization. We are still learning what may have caused Volkswagen to commit this fraud, but there was almost certainly ample pressure to cut costs while also producing a high-performing, low-emission emitting car. We also know that the opportunity to commit this fraud was also present (based on the fact that someone at Volkswagen was able to develop the technology to cheat the emissions test). Finally, whoever decided to go forward with the illegal acts had to have rationalized their actions in some way.

There will almost certainly be repercussions for those responsible within the Volkswagen organization, and the company as a whole will most likely be held responsible for selling 11 million cars illegally. It remains to be seen whether there will be jail time, fines, or a combination of the two. Overall, if uncovered fraud is left unpunished, it will become easier for people in the future to justify engaging in similar misconduct. Finally, everyone rationalizes things differently, but it is important to ensure that we never get so caught up in the pressures and opportunities to commit fraud that we choose to rationalize and ultimately do something both unethical and illegal.

See the graphic below (provided by TIME) for some of the statistics of the fraud.

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