INSIDE

Protecting Data in the Cloud ... 8

Understanding Social Risk..... 10
Privileged Access Hacking
12
Sentiment Analysis................. 14

Q&A: Workplace Violence .. 16

Volkswagens costly emission fraud scandal has shaken consumer trust and prompted greater regulatory scrutiny of the auto industry.

n Sept. 18, the U.S. Environmental Protection Agency revealed that

Volkswagen illegally programmed its diesel engines to bypass emis

sions standards. Volkswagen admitted to installing the software,

known as a defeat device, which could detect if a car was in testing mode
and activate full emissions controls to appear compliant with regulations.

Under normal driving conditions, how

ever, the vehicles would release up to 40
times more pollution. The nitrogen oxide
emitted, which contributes to the cre
ation of ozone and smog, has been linked
to a range of health problems, including
asthma, respiratory diseases and prema
ture death, leading Cynthia Giles, assis

4 December 2015

tant administrator for the EPAs Office of

Enforcement and Compliance, to charac
terize the companys actions as not only
illegal, but a threat to public health.

The affected EA189 diesel engines are

in more than n million Volkswagen and
Audi vehicles manufactured between
2009 and 2014, of which almost

by Hilary Tuttle
500,000 are in the United States. On
Oct. 22, the company announced it was
also looking into whether the software
might be in earlier versions of its latest
EA 288 diesel engine, potentially adding
millions more to the total.
The EPA issued a second notice of
violation on Nov. 2, saying that the com
pany had also used cheating software
on 3.0-liter diesel engines in VW, Audi
and Porsche cars from model years 2014
through 2016. Approximately 10,000 of
these cars have been sold in the United
States and an untold number are still on

GETTY IMAGES/UWE ZUCCHI/AFP

Volkswagen Rocked by
Emissions Fraud Scandal

F o re f ron|.

the market. Unlike with the first notice,

V W denied that any emissions cheating
software had been installed in these vehi
cles, but said it would stop selling them
in the U nited States. The scandal wid
ened to gasoline-fueled engines emitting
excessive amounts of carbon dioxide on
Nov. 4, impacting another 800,000 cars.
In the two days after the first EPA
announcement, V W stock plummeted
35%, losing up to $33 billion in market
value. At the end of the third quarter, V W
reported its first quarterly loss in 15 years,
with a net loss of $1.84 billion. Executives
attributed this solely to the emissions
cheating scandal, noting underlying sales
and profitability remain strong. The com
pany said it expects 2015 net income to be
down significantly from last year.
V W has suspended a num ber o f
employees, including several top engi
neers, pending an investigation into how
and why the cheating occurred. After an
eight-year tenure that saw a doubling in
sales and almost tripling of profits, CEO
M artin W interkorn resigned, saying he
was shocked by the events and stunned
that m isconduct on such a scale was
possible in the Volkswagen Group. He
accepted responsibility for the scandal,
but denied any knowledge o f wrongdo
ing, and called for a fresh start for the
company, including its personnel. He has
been replaced by Porsche CEO Matthias
Muller.
A recall o f all 11 m illion initial vehi
cles would be one o f the largest in his
tory by a single auto company, exceeding
Toyotas 2009 recall o f 10 million cars
over unintended acceleration problems.
V W set aside $7.3 billion to address the
crisis, but admits this is just to cover the
costs o f necessary service measures and
other efforts to win back the trust of our

D e cem b er 2015

customers, according to a statement.

T he sum does not include any estimate
of the costs from anticipated regulatory
fines or litigation, C FO Frank W itter
said. Fines from the EPA alone could
reach $18 billion$37,500 per car in the
United States in which the defeat device
was installed. It also does not include the
$2.2 billion the company says it would
need to fix the problems in its gasoline
engines. Outside estimates o f the scan
dals total cost are also much higher than
V W s projections, w ith C redit Suisse
projecting the sum to be between $26
billion and $87 billion.
Recalls are expected to begin for some
models as soon as January 2016. Some
o f the fixes are not as simple as updat
ing the software, so adequate hardware
engineering will require testing and
development, said Michael Horn, V W s
U.S. president and chief executive.
T he fixes will be unique to the differ
ent affected generations o f engines and
some may also vary based on countryspecific customizations. Any solutions
will then need to be tested and approved
by regulators.
In the m eantime, V W is m ired in
legal and reputational trouble th a t
may wind up impacting the entire auto
industry.

THE LEGAL FALLOUT

In addition to shareholder lawsuits over
lost stock value, customers have also
begun filing class actions. Most of these
come from consumers who paid a pre
mium to purchase vehicles with V W s
clean diesel engines, which promised
lower emissions and up to 30% better fuel
economy than gasoline-powered engines.
Now, they claim they face rapidly declin
ing resale values because their cars do not

perform as the company claimed. Fortune

reported that V W owners may lose up to
$5,000 at resale because of the fraud.
These lawsuits could prove costly.
After Toyota underwent its massive recall
for unintended acceleration, the com
pany agreed to compensate certain own
ers who had resold their cars while prices
were down. W hile the average payout per
owner was just $472.59, the company paid
a total of $1.1 billion in the settlement.
Attorneys have also filed suits seek
ing compensation for damage to pub
lic health caused by such high nitrogen
oxide emissions. Based on projected
emissions and impact prediction models,
M IT and Harvard University researchers
found that the pollution thus far from the
impacted vehicles could directly contrib
ute to 60 premature deaths in the United
States alone and another 130 if the prob
lem is not fixed by the end of 2016.
There is no mention of criminal liabil
ity in the section o f the Clean Air Act
pertaining to automakers, but federal
prosecutors may be able to bring charges
under another provision o f the act or
other laws, particularly for defrauding
regulators. The U.S. Justice Department
has opened an investigation, which could
result in criminal or civil charges. In addi
tion to individual state efforts, attorneys
general Irom at least 30 states and the
District of Columbia have organized a
bipartisan coalition to investigate pos
sible consumer fraud and environmental
violations.

Several countries have also opened

formal inquiries into the scandal, includ
ing France, Italy, Germany and South
Korea. These probes include not only
environmental standards violations, but
also criminal charges for various forms of
fraud and deception.

ADDITIONAL SCRUTINY
In the United States, less than 3% of new
cars sold have diesel engines, but they
power about half of cars in Europe, where
governm ents have encouraged their
use to meet fuel efficiency and green
house gas targets. Michel Sapin, Frances
finance minister, called for a continent
wide probe for automaker malfeasance,
explaining it seemed necessary to check
cars made by other European compa
nies to reassure the public. W hat we are
dealing with is making sure people avoid
being poisoned by pollution, he said.
Regulatory oversight of the auto indus
try may increase in the United States as
well. T he EPA has also begun testing
every current make and model o f lightduty passenger diesel vehicle for similar
problems. Coupled with the EPAs notices
of violation against VW, these steps are
part of a broader, more aggressive enforce
ment effort by regulators. Industry ana
lysts say it is meant to send a message to
automakers that there will be harsh pen
alties for breaking federal rules, especially
those pertaining to public health and the
environment. Just last November, the
adm inistration announced the largest
penalty ever for a violation of the Clean
Air Act, with Hyundai and Kia agreeing
to pay a combined $300 million as part of
a settlement for overstating fuel economy
on i.z million cars.
According to Mark Rosekind, admin
istrator o f the U.S. N ational Highway
Traffic Safety Administration, the scan
dal hurts the entire industrys reputation
and will bring greater scrutiny on all
automakers. I f they did it, anyone else
can do it, he told reporters. Youre not
just going to worry about one person,
unfortunately that now is extended to the
entire industry.

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