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CASE 1
The Volkswagen Scandal: An Admission to
Emissions Fraud
CASE NOTES FOR INSTRUCTORS
This case highlights the Volkswagen (VW) emissions scandal, a case so notorious because the
German company purposefully deceived government officials. In 2017 VW pled guilty to three
criminal felony charges that included defrauding the U.S. government, violating environmental
regulations, obstructing justice, engaging in wire fraud, and violating import regulations. It
agreed to pay $2.8 billion in criminal charges, only a small portion of the total costs it will have
to pay to resolve this scheme.
Until recently, VW was known for its strong reputation for sustainability. It became the first car
manufacturer to adopt ISO 14001 principles, international environmental principles that act as
standards for global firms. It adopted a number of sustainability goals in 2002 at a time before
sustainability became a hot topic. VW began investing in vehicles that would reduce carbon
emissions early, including electric and diesel vehicles. In 2014 VW introduced the VW XL1,
which it claimed to be the most fuel-efficient car in the world at the time. The later scandal
showed just how misleading these claims really were.
The scandal involved VW’s diesel vehicles, which it claimed were more
environmentally-friendly. During lab testing, the vehicles released fewer emissions, satisfying
regulators. What they did not know was that VW had installed defeat devices that could detect
whenever the vehicle was undergoing emissions testing. During the test, the vehicle would run
below performance, thereby giving off more emissions. On the road, however, these vehicles ran
at maximum performance and gave off 40 times the allowable limit of emissions in the United
States.
European testers noticed that these vehicles did not perform as well on emissions tests on the
road as they did in the lab. They asked U.S. testers to perform similar tests as the U.S. has some
of the highest emission laws in the world. Using a portable emission system measurement device
on the road to detect the emissions, the testers obtained scientific proof that the emissions given
off on the road were not nearly as low as those given off during lab testing.
VW admitted to installing defeat devices in its diesel vehicles to fool testers and regulators. A
whistleblower at VW came forward and stated that VW immediately began destroying
documents that could implicate the firm. VW’s CEO resigned. The company agreed to pay up to
$17.5 billion to compensate consumers affected by its defeat devices, which included retrofitting
and buying back impacted vehicles. Those who knew about or were responsible for the defeat
device’s installation could face jail time. Six executives and employees have been indicted for
knowing about the conspiracy. Charges were also filed against German parts supplier Robert
Bosch GmbH as it designed the defeat devices and seemed to know that VW was using them to
violate laws.
© 2019 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
In total, criminal and civil fines and settlements are estimated to cost VW $22 billion in the
United States. However, truly restoring its reputation will require VW to incorporate ethics and
appropriate practices into the organization from the inside-out, something that was severely
lacking in the firm’s corporate culture prior to the scandal. What is most surprising about this
scandal is the blatant use of deception to deceive consumers, governments, and testers. Students
can learn from this case how deeply a firm can fall into an ethical scandal once it begins
compromising its principles and substituting short-term results over long-term longevity.
QUESTIONS AND 0DISCUSSION
1. Explain how the culture of Volkswagen created this ethical scandal.
VW clearly had a toxic corporate culture that placed short-term gains over long-term
profitability. Since several executives knew of the defeat devices, it is clear that this culture
of short-term results was spread throughout the firm. In this particular case, VW blatantly
Additionally, the firm took a very short-term attitude. It did not seem to consider the serious
repercussions it would face should it be caught. For many VW employees, it all depended on
2. While Volkswagen claimed to support ethics and sustainability, how can they recover from
this ethical disaster?
Probably the best way for VW to recover from this disaster is to prove that its culture has
changed. It must take steps to demonstrate that it is fully embracing an ethical orientation and
that misconduct of any sort will not be tolerated, no matter if the misconduct is committed by
an executive or a lower-level employee. The first step is accepting responsibility for the
disaster and trying to make amends with consumers and governments. It will not be enough
3. Do you believe this scandal will lead to tougher scrutiny of companies’ environmental
claims in the future? Why or why not?
© 2019 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Students’ answers will vary. Most likely it will lead to some distrust of environmental claims
of automobile companies, at least in the short term. To ensure that they are not fooled again,
regulators and testers are likely to spend much more time verifying vehicles’ environmental
claims. This may require greater investment on the part of automakers. A scandal like this
ADDITIONAL RESOURCES
The scandal explained: http://www.bbc.com/news/business-34324772
VW executive pleads guilty:
https://www.usatoday.com/story/money/cars/2017/07/25/jailed-volkswagen-exec-plead-g
uilty-u-s-diesel-scandal/508525001/
How a West Virginia lab detected the VW scandal:
http://www.npr.org/2015/09/24/443053672/how-a-little-lab-in-west-virginia-caught-volks
wagens-big-cheat
The scandal’s impact on VW’s long-term future:
https://www.wired.com/story/vw-diesel-scandal-future-automakers/
© 2019 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
