by Ethem Dikenli, Leuphana University of Lüneburg, Germany.
Just imagine you are a CEO of a multinational company, and the stock drops 33% of its value in just two trading days. That happened to Volkswagen in 2015. The crash wasn’t caused by any financial crisis like in 2008: it was due to a systematic manipulation of test values regarding emissions from 2009 to 2015.
But how was the manipulation possible?
Volkswagen felt the pressure of producing highly developed diesel cars, since there was a diesel boom in Germany. There was a high demand for diesel cars, as they were considered more sustainable. To fulfill the requirements of the market, they installed software into the cars that manipulated the emission values, by detecting whether it was tested or a regular road use.
How did they finally detect the manipulation?
Many car manufacturers were suspicious of Volkswagen, so they did special tests in West Virginia to test the emission values. After multiple tests, Volkswagen had to publish that they systematically manipulated the emission values from 2009 to 2015. After that the stock value crashed by more than 33% of its total value. Consequently, the VW Chief Executive Officer, Martin Winterkorn, resigned three days later.
How does Volkswagen relate to financial Accounting and what is financial accounting exactly?
Financial accounting is a core component of business administration. It is divided in three core instruments, balance sheets that reflect the assets of a company; the income statement, which measures profitability over a certain period of time; and the cash flow statement, which tracks the transactions of funds. They provide you with a great financial overview and analysis of companies financial situation. Only the fact that public companies must publish their financial reports, and that many banks and stakeholders take the reports as a base for future decisions by shorting or buying a stock. That exactly shows how important financial accounting really is. Even banks evaluate creditworthiness based on financial reports. For this reason, it is crucial to get to know the basics of financial accounting in a bachelor’s program.
However, financial accounting has structural critical points as well. The Dieselgate scandal clearly illustrates these limitations. Financial accounting neither prevented fraud nor captured the environmental damage that Volkswagen caused. Moreover, the world we live in changes very fast due to globalization and the rising global wealth, so therefore education has to change as well, we have to increase the value of sustainability and justice by implementing for instance sustainable criteria in financial accounting too. Many qualitative data points are missing, like for example the employee satisfaction, the work circumstances and how sustainable the company is.
But how does financial accounting relate to Volkswagen?
Volkswagen had the Dieselgate in 2015, but the dimension of the scandal was never clear. After the publication of the financial statements, many external stakeholders and banks could transparently realize how precarious the financial situation of Volkswagen was. For this reason, the stock lost over 33% in two trading days and the scandal resulted in total costs of 16.2 billion euros. Moreover, Warren Buffett once advised: always understand and critically analyze balance sheets. For any potential Investor or business student, financial accounting is a must. So maybe start understanding financial accounting even today.
