It has only been a week since the stunning revelation that the Volkswagen group equipped millions of diesel-powered cars with software designed to fool anybody testing their emissions, and just days since the company’s chief executive, Martin Winterkorn, resigned.

And yet there are reasons to believe that the fallout from this scandal will be as big as Enron, or even bigger. Most corporate scandals stem from negligence or the failure to come clean about corporate wrongdoing. Far fewer involve deliberate fraud and criminal intent.

Enron’s accounting manipulation is often held up as a prime example of the latter and cases featuring the US energy company’s massive financial fraud are therefore taught in business schools around the world.

Here are seven reasons why the Volkswagen scandal is worse and could have far greater consequences.

First, whereas Enron’s fraud wiped out the life savings of thousands, Volkswagen’s has endangered the health of millions. The high levels of nitrogen oxides and fine particulates that the cars’ on-board software hid from regulators are hazardous and detrimental to health, particularly of children and those suffering from respiratory disease.

Second, led by Volkswagen, Europe’s car manufacturers lobbied hard for governments to promote the adoption of diesel engines as a way to reduce carbon emissions. Whereas diesel engines power fewer than 5 per cent of passenger cars in the US, where regulators uncovered the fraud, they constitute more than 50 per cent of the market in Europe thanks in large part to generous government incentives.

It was bad enough that Enron’s chief executive urged employees to buy the company’s stock. This, however, is the equivalent of the US government offering tax breaks at Enron’s behest to get half of US households to buy stock propped up by fraudulent accounting.

Third, the fines and lawsuits facing Volkswagen are likely to surpass Enron in both scale and scope. Volkswagen’s potential liability to Environmental Protection Agency fines is $18bn. Add to this fines in most or all of the 50 US states and class action lawsuits by buyers and car dealers who have seen the value of their cars and franchises diminish overnight and you have a massive legal bill.

No jury in the US will be lenient with a foreign car company that touted its “clean diesel” technology when the technology on board instead served to hide the fact that particulate emissions were up to 40 times greater. And that is before expert testimony about the effects on children with asthma. Yet crucially, fewer than 5 per cent of the cars in question were sold in the US and regulators in Europe, South Korea and elsewhere have already launched investigations. This is a truly global fraud and global scandal.

Fourth, Enron was wiped out when the revelation of its accounting fraud showed the company had been suffering massive losses. Volkswagen could get wiped out even though the company is financially healthy. The stock collapse is only the beginning. Potentially irreparable reputational damage, a crisis of confidence and massive legal liabilities could do the company in.

And whereas Enron was a young, though admittedly admired company, Volkswagen is the 78-year-old centrepiece of Germany’s most important industry.

Fifth, because of Volkswagen’s central role in Germany’s automobile industry, the scandal is a devastating blow to the country’s global image. For years, Mercedes, BMW, Audi and Volkswagen have used German slogans and tag lines in their English-speaking advertising to link their products to the country’s engineering prowess. Expect to see “Das Auto” and “Vorsprung durch Technik” to be wiped off billboards as fast as value has been wiped off German car manufacturers’ market caps.

It was fairly easy for most US companies to distance themselves from Enron’s fraud. It will be much harder for the rest of German industry.

Sixth, even if it turns out that other European and Asian car manufacturers who have invested heavily in diesel technology did not commit such brazen fraud, the scandal will probably reestablish the perception of diesel engines as dirty after two decades of concerted effort to change that view.

This will not only put hundreds of thousands of jobs at risk, but also deprive policymakers of a tool they counted on to reduce carbon emissions. In the long run, the impetus to develop even cleaner alternatives may be good but in the short run it is a massive problem for Europe in particular.

Seventh, and perhaps most importantly, whereas Enron tainted the accounting profession’s mantra of trustworthy financial reporting, Volkswagen’s fraud will for a long time confront anybody advocating technology and engineering as a means to achieving greater environmental sustainability.

“Clean diesel”, it turns out, is as much a lie as “clean coal”. Volkswagen’s abhorrent behaviour therefore threatens to delegitimise the countless and essential efforts by companies around the world to develop scalable environmental solutions.

Herein lies perhaps the biggest tragedy in this whole affair: Volkswagen has emboldened the cynics at a time when we need business efforts to save the planet more than ever.

Audi says 2.1m of its cars were fitted with emission cheating software, as Volkswagen is said to have suspended the research and development heads of three divisions.

The luxury car brand, which is a subsidiary of Volkswagen, has admitted that millions of its vehicles with so-called EU5 engines have an emissions "defeat device" installed.

Newer cars with EU6 engines aren't said to be affected.

The news comes as reports suggest the R&D chief of Audi, along with those of Volkswagen's core passenger car division and sports car maker Porsche, is reported to have been put on leave.

All three companies have declined to comment.

Volkswagen was forced to apologise last week after it was discovered that it had developed the device in order to trick emission tests in the US for some of its diesel models.

The devices are able to detect when cars are undergoing tests, and can switch the vehicle to a low emission mode in order to achieve more favourable results.

This means that many people have bought cars which are much less environmentally friendly than they had been led to believe.

According to the Audi spokesman, around 1.42 million Audi vehicles in Western Europe are fitted with the device, with 577,000 in Germany.

Another 13,000 Audi cars in the US are affected.

Vehicle lines involved include the Audi A1, A3, A4, A5, A6 and the TT, Q3 and Q5 models.

Volkswagen said last week that around 11 million of its cars worldwide have been fitted with the cheat device, 5 million of which were produced directly by its core VW brand.

Then CEO of the Volkswagen Group, Martin Winterkorn, has been forced to resign over the revelations after almost nine years in the job and was replaced by Matthias Müller, who has been the chief of another Volkswagen subsidiary, Porsche, since 2010.

German investigators subsequently announced they have started an investigation into Winterkorn, which will focus on "allegations of fraud in the sale of cars with manipulated emissions data".

Also on Monday, a European environmental organisation said it had found evidence that some new models Mercedes, BMWs and Volkswagen cars are consuming up to 50% more gasoline than lab tests have suggested.

The Transport & Environment organisation said that, while they had no evidence of cheat devices similar to those in Volkswagen diesel cars, the gap between fuel economy levels judged in lab tests and those seen in real road driving for gasoline (petrol) cars had risen to 40 percent in the past year.

They specifically singled out Mercedes for criticism, suggesting its A, C and E class models showed differences of over 50% between lab tests and real-world performance.

The organisation has called on EU governments which have announced investigations as a result of the Volkswagen controversy to broaden their probes to include petrol cars as well.

Germany is coming down hard on its biggest carmaker over the diesel-emissions crisis, giving Volkswagen just over a week to come up with a fix to a problem eight years in the making.


Yesterday, VW received a letter from Germany’s Federal Motor Transport Authority, signed by transport minister Alexander Dobrindt, demanding that it deliver a binding plan and schedule to fix the 11 million “cheat code” diesel cars by October 7.


If Volkswagen can’t present a viable solution by then, according to Dobrindt, the German government would have no choice but to ban the 2.8 million affected cars from driving on that country’s roads. Switzerland has already banned affected cars from being sold, new or used, and other countries continue to investigate their options; the U.S. arm of VW issued a stop-sale order on new diesel VWs last week.


Volkswagen plans to present its solution within days to repair the affected cars, a spokesman said, and will notify customers and regulatory authorities around the world in writing. That’s not the only issue for VW, though, with German prosecutors opening up a criminal investigation of former Volkswagen Group CEO Martin Winterkorn over his role in what it is calling a “fraud scandal” that has shattered public confidence in the world’s biggest carmaker. The U.S. Department of Justice also has opened a criminal investigation.


The German prosecutor will attempt to get to the bottom of where ultimate responsibility lies for the scandal, which saw Volkswagen sneak around NOx emissions regulations by switching on its full exhaust-cleaning system only when it was tested in a laboratory.


Volkswagen itself filed a criminal complaint with the same prosecutor’s office last week and insists it will fully cooperate with and assist the public investigation. Winterkorn was replaced last week by Volkswagen Group lifer and ex-Porsche head Matthias Müller.

A Volkswagen board member has told the BBC that he believes some of the automaker's staff behaved criminally over installation of devices to cheat on emission testing.

It was a startling admission from Olaf Lies, who is also economy minister of the German province of Lower Saxony as Volkswagen faces a barrage of legal costs in the widening scandal.

"Those people who allowed this to happen, or who made the decision to install this software —- they acted criminally. They must take personal responsibility," Lies told the BBC.

The world's largest automaker said Tuesday it would recall 11 million diesel vehicles worldwide to remove software that engages emissions controls for nitrous oxide when the cars are being tested, but disengages them when the vehicles are in operation.

Lies said he learned about the problems at the latest VW board meeting, although there had been questions about VW's diesel vehicle emissions in the U.S. for more than a year.

"Huge damage has been done because millions of people have lost their faith in VW. We are surely going to have a lot of people suing for damages. We have to recall lots of cars and it has to happen really fast," he said.

Internal probe to report today

The VW board meets on Wednesday to review the findings of an internal probe into the scandal.

New CEO Matthias Mueller will brief the board and is under pressure to release details about how VW will handle an enormously costly and potentially complicated recall.

It also will be facing external investigations into its record.

Already Germany has announced a criminal investigation of the company that could lead to charges against executives, including former CEO Martin Winterkorn.

And U.S. lawmakers have sent letters to VW demanding all documents and communications related to compliance with the Clean Air Act and federal and California emissions standards.

Saying there are "many unanswered questions," a Congressional committee also sent a notice to the Environmental Assessment Agency asking for details of its dealings with VW.

No charges under U.S. emissions law

"We will continue to investigate this deceptive activity on the part of Volkswagen to ensure that these blatant violations do not happen again and consumers can trust the products that they buy," Congress members Frank Pallone Jr. of New Jersey and Diana DeGette of Colorado said in a statement.

But the Justice Department has pointed out that the Clean Air Act does not provide for criminal prosecution of automakers or their executives.

Car companies, with the aid of industry-friendly lawmakers, won a carve-out from criminal penalties in the 1970 Clean Air Act — with the reasoning that it would be too costly and difficult to provide for criminal prosecution under the act.

That loophole has been forgotten over the years, but is likely to get more attention in the wake of the VW scandal.

Instead, VW could face millions, if not billions, of dollars in civil penalties under the Clean Air Act, as well as class action lawsuits by car owners.

Prosecutors are considering alternative legal approaches, such as charging Volkswagen with lying to regulators.

About 482,000 Volkswagen diesel cars were sold in the U.S. and more than 100,000 in Canada.

Environment Canada has opened its own investigation into Volkswagen and is working with the EPA to retest VW cars.

WOLFSBURG, Germany—Two top Volkswagen engineers who found they couldn’t deliver as promised a clean diesel engine for the U.S. market are at the center of a company probe into the installation of engine software designed to fool regulators, according to people familiar with the matter.

The two men, Ulrich Hackenberg, Audi ’s chief engineer, and Wolfgang Hatz, developer of Porsche’s Formula One and Le Mans racing engines, were among the engineers suspended in the investigation of the emissions cheating scandal that sank the company’s market value by 43% since Sept. 18 and triggered a world-wide recall to refit the engines to meet clear-air standards, these people said.

Messrs. Hackenberg and Hatz, who didn’t respond to requests for comment, are viewed as two of the best and brightest engineers in German industry. They were put in charge of research and development at the Volkswagen group shortly after Martin Winterkorn became chief executive in January 2007. Mr. Winterkorn, who resigned over the scandal, couldn’t be reached for comment.

The company has acknowledged that managers, struggling to meet U.S. sales targets, masked the emissions of new-car engines to sell so-called clean diesel technology to skeptical American consumers. The car maker said as many as 11 million vehicles carried a “defeat device,” software that reduces tailpipe emissions only when the car is being tested, not on the road.

Several countries have since blocked sales of certain VW vehicles, and regulators are considering steps to tighten emissions standards for diesel engines.

The details haven’t been made public, but Volkswagen’s investigation is focused on Messrs. Hackenberg and Hatz, Mr. Winterkorn’s top aides during his tenure at Audi, as well as Heinz-Jakob Neusser, head of development at the VW brand, people familiar with the matter said.

Mr. Neusser, also suspended, joined VW from Porsche in 2011, long after the diesel engines began production. He declined to comment.

Disclosure of the scam by the U.S. Environmental Protection Agency last month unleashed criminal investigations of Volkswagen and its management in the U.S. and Europe, and threatened to bury the company in shareholder and customer lawsuits for years.

“Our company was dishonest with the EPA, and the California Air Resources Board, and with all of you,” Michael Horn, head of Volkswagen of America, told dealers last month in New York City. “We’ve totally screwed up.”

For years, Volkswagen sought a triumph in the U.S. As part of an expansion of the company to sell at least 10 million cars a year by 2018, Mr. Winterkorn’s strategy was to be a leader in the world’s three biggest markets.