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Discuss about the Accounting Theory for Flagship Company.

The flagship company and the proud of German work culture in the segment of automotive industry, Volkswagen had faced the worst hit during its long 78 years tenure of manufacturing of vehicles in the form of cars. The company had faced it in 2014 which posed the worst threats to the existence of the company by culture while they were detected of with the violation of emission of green gas from their vehicles at US. This incident has direct impact on the company’s self esteemed ego of outstanding confidence and leader of the market. The abnormal signs of the products of the company had been first found by a non-profit organization named International Council on Clean Transportation but the same dilemma was existed since long, even since decades. This had not been exposed by the official of the company for the purpose of defusing the test of emission. The test, when made, had been failed disastrously to comply the US clean air standards as per the parameter fixed by the authority. After detection of the same, the same had been taken to the notice of the company management but none had accepted the awareness of the facts. Ultimately the issue had been notified through a memo to Mr. Winterkorn, the CEO of Volkswagen of that time which was with the content of the abnormalities of the emission of the cars in 2014, but the company had not lent their ears to this fact and reluctantly insisted on the old practice of manufacturing of cars with the defeat devices till the last of the year of 2014. In the month of June, 2014, the German prosecutors had declared that Mr. Wintrekorn had been put under vigilance for the purpose of investigation of the wrong practices adopted by the company to manufacture and place their vehicles in the market and had not initiated any steps to announce that the company was in the process of facing the inquiry relating to this scandal. At the same time, a civil complaint had also been lodged at New York by the attorney general against Mr. Matthias Muller; the current CEO of the company regarding this scandal and with this, the level of investigation had touched the highest level of Volkswagen management  (GUILBERT GATES, 2016).  

Possible accounting issues to be faced by Volkswagen

As per the literature of Parker, Guthrie & Linacre, 2011, emphasized in the subject of impact of accounting system on corporate activities with the measurement of its positivity or negativity observed the changes of transformation has the ability to make certain effects from micro changes in the attitudinal approach and the respective practices connected to the specific changes in the area of fixation of policy. These changes may happen in the domain of Corporate Social Responsibility of that company or found in the aspects of behavior or attitude in the outlook driven by professionalism to safeguard the interest of stakeholders in respect of equality or diversity (Parker, 2011). 

Role of Stakeholders

This specific incident had been named as defeat device of Volkswagen and it may create impact in the issues related to accounting of the company while considering the replenishment of the damages is concerned along with the valuation of intangible asset in the form of goodwill of the company. There are other direct impacts in the form of expenses to be incurred by the company for the purpose of repairing and maintaining of the cars with defeat device causing the emission scandal with other reciprocal steps like buy back option and cash payment for the purpose of replenishing the damages which had been amounted to the tune of US $ 14.07 billion to different stakeholders like Environmental Protection Agency, to name one of them (EWING, 2013).

The stakeholders play a major role for running the business. The stakeholders are of tow types, internal and external. Internal stakeholders are the employees of the company while the external stakeholders comprises of the supply chain associates, customers, the government and all other identities which are allied to this company. Volkswagen has a big range of stakeholders the management of whom is with diversified stakeholder’s organization which endorses its product and services to meet the expectation of them to add value with the bigger area of relationship between the company and the stake holders. There are external stakeholders in the forms of analysts, investors talents, customers, neighbors, competitors, suppliers, business associates, public authorities and non governmental organizations  (Volkswagen, 2013). 

To discuss the way the stakeholders got affected, we have to realize the different stakeholders and their role in the company and then only we will be able to understand how they are going to be affected. The internal stakeholders like employees would face the impact of being demoralized with the incident which actually raised question on the integrity of the company with its policy.

The external stakeholders like the analysts will find the impact on the financial aspect of the company and analyze them with pre and post facto the incident. They will derive the result how the company got affected with the fiasco in the share market and with their financial reports. The global customer base will loose their confidence and trust on the company and its products and gradually leave the brand. The supply chain associates are more concerned with the bunch of ancillary industries attached to this company. In nut shell the company and its stakeholders will loose the bondage which was there since 78 years of inception. 

Motive of Volkswagen

The management knew this scandal since long but they had not reacted by taking the remedial measures just because they were under tremendous pressure to perform their sales as the company had made marketing drive in the US for the cars made by Volkswagen to generate optimum level of turnover with subsequent revenue and profit. (Hotten, 2015) 

The fiasco of defeat device by Volkswagen had no direct impact with the accounting principle because this is the decision of the production management. But the accounting professional of the company can’t deny their role in this aspect as they are supposed to highlight the issue to the stakeholders regarding the process management of the fiasco along with the implication of financial aspects to make them enable about the future action in this regard.  

The accounting theories known as IFRS, Rookies were able to develop the International Accounting Standard IAS 37. This is active in the domain of provision making, creation of contingent liabilities, and assets.  This accounting theory is proved to be instrumental to help Volkswagen to define its scandal by determining its losses which needs subsequent provisions from the reserves they have to make to combat the problem in the perspective of financial accounting of Volkswagen.  (IFRS, 2016). 

As per IFRS Rookies IAS 37, the following steps are to be taken by the management:

1. Identifying the economic event
2. Notifying the same to the stakeholders
3. Anticipating the impact of the event
4. Identifying the financial concepts to combat this event.
5. Discuss the improvement of the issue
6. Determination of the non-alignment of the concept with principles
7. Derive the minimum disclosure (IFRS, 2016).

There are two types of methods on which the accounting theories are made- deductive and inductive methods. The deductive methods starts from application of accounting principles and reach the outcome which seems to be logical while inductive theory starts from findings and measurement to have the conclusion of generalized outcome.  

In this case, the application of inductive method should be applied which wills tart from the derived loss and then take proper steps to make the stakeholders comfortable. (scribd, 2015) 

Theory and Practice

The theory is being tested through three different process for its applicability- dogmatic, self evidence and scientific. Out of these three, the scientific approach will be th best option to justify the accounting theory by applying IAS 37 of IFRS Rookies as it provides the framework of scientific background, so that it can be considered as the most applicable theory.  (scribd, 2015). 

Conclusion 

The happening of the Volkswagen scandal had put the company in a high level of humiliation of its corporate status is concerned. The company ahs to reinstate the old status to bring the stakeholders’ trust and confidence through the application of proper accounting theory which is suitable to match the need of the company with successful implication of the same.

References

EWING, H. T. (2013). Volkswagen to Pay $14.7 Billion to Settle Diesel Claims in U.S. The New York Times .

Guilbert Gates, J. E. (2016). Explaining Volkswagen’s Emissions Scandal. The New York Times .

Hotten, R. (2015). Volkswagen: The scandal explained. Retrieved September 15, 2016

IFRS. (2016). Our Teaching Philosphy. Retrieved September 15, 2016, from https://www.ifrsrookies.com/teaching-philosophy.html

Parker, G. &. (2011). Accounting for Impact?: Accounting research engaging with business, practice and the profession. CPAC , 7.

scribd. (2015). Introduction to Accounting Theory. Retrieved September 15, 2016, from https://www.scribd.com/doc/19010247/Accounting-theories-and-practices

Volkswagen. (2013). sustainabilityreport2013. Retrieved September 15, 2016, from https://sustainabilityreport2013.volkswagenag.com/strategy/stakeholder-management