VW cheated and harmed us all. Some of us are more harmed than others. If you own stock, you have seen your net worth decline. If you own one of the affected cars, your troubles are just beginning. If you work for VW, your job may be jeopardy. If you live on the planet, your air is more polluted.
VW’s story is one of fraud, but why is it so troubling? All frauds are troubling, but VW’s lies seem particularly egregious. VW cast itself as a sustainable company. In their 2014 sustainability report, the company declared the following:
“For the Volkswagen Group, sustainability means that we conduct our business activities on a responsible and long-term basis and do not seek short-term success at the expense of others.”
In the report, they also listed the environmental performance of their specific car models. Many people believed them. In 2014, CDP put VW in its Climate Performance Leadership Index and in 2015, the Dow Jones Sustainability Index (DJSI) listed VW as the most sustainable automaker. (It has since been delisted by the DJSI.)
Could the fraud have been prevented or detected earlier? Perhaps. I contend that assurance of sustainability reports could make a difference. In audits of financial statements, the auditor’s opinion states whether reasonable assurance has been obtained that the financial statements as a whole are free from material misstatement, whether due to fraud or error. Following professional auditing standards, auditors obtain this reasonable assurance from substantial testing of data systems and underlying information.
Audits do not provide absolute assurance; nothing can. Frauds will occur and have always occurred. Detecting fraud is difficult when multiple people collude to hide it. We can make it harder for them to do.
Was VW’s sustainability report assured? Yes, but it was a “review” or “limited” assurance. What does limited assurance mean? The procedures were limited to inquiring of key personnel, understanding the company structure, documenting systems, visiting sites, performing data comparisons, and examining internal and external documents. Limited assurance is just that, limited.
If we are going to depend on the information in sustainability reports, we need more than limited assurance. We need “reasonable assurance.” This can be done using procedures similar to that of an audit of financial statements. Will this cost money? Sure, but the fallout from fraud is much more costly for all of us: company, employees, customers, suppliers, and the environment.