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Volkswagen’s effort to stop scandals needs more work, report says

The report comes about three years after Volkswagen admitted to a vast emissions cheating scheme.

The Volkswagen sign is displayed at a retailer in Berlin. Markus Schreiber / AP Photo, File

WOLFSBURG, Germany — Nearly three years after Volkswagen admitted to a vast emissions cheating scheme, the company has only just begun to take steps necessary to prevent future scandals.

That was the main takeaway from a report issued Monday by a prominent U.S. lawyer appointed to monitor the company’s behavior. Among other things, Volkswagen still has work to do to create an adequate whistleblower program, the lawyer, Larry D. Thompson, wrote in the report.

In interviews before the report was issued Monday, Thompson said it was intended not as a criticism of the company but rather as recommendations for future action.


“My mandate is a forward-looking one,” he said in Wolfsburg, Volkswagen’s base.

Still, the implication was that Volkswagen has made insufficient progress toward repairing the shortcomings in company culture and internal controls that led to one of the biggest corporate scandals ever.

“It is not easy to come from shock to shame to change,” Hiltrud D. Werner, a member of Volkswagen’s board responsible for integrity, said at a news conference Monday.

But she said the company had made more progress than it might appear. “There is a lot that might not have been seen from the outside, but the effort from inside is really tremendous,” she said.


Volkswagen has admitted programming millions of diesel cars to deliver acceptable emissions only when engine software detected that they were being tested. At other times they polluted far above legal limits. After Volkswagen pleaded guilty in a U.S. court to charges that included conspiracy to violate the Clean Air Act, a federal judge appointed Thompson — who had been deputy attorney general under President George W. Bush — to monitor whether Volkswagen is keeping promises it made as part of its plea deal and when it settled civil cases.

The report released Monday, which dealt solely with the company’s compliance with the civil settlements, also underscored how much Volkswagen continues to struggle with the consequences of the scandal, which came to light in September 2015. In a report in April that dealt with the criminal charges, Thompson faulted the company for failing to hold executives accountable and moving too slowly to remake the corporate culture.


“The wrongful acts and crimes that were committed in the United States were enormous,” Thompson said. “The cultural change is going to be enormous, and it’s going to require lots of work on the part of the company.”

Despite promises to become more ethical, top management was until recently dominated by longtime insiders who often seemed to be in denial.

Even after pleading guilty, Volkswagen insisted that the wrongdoing was the work of lower-level managers and engineers and that top executives were not involved.

That assertion became more difficult to defend in May after federal prosecutors indicted Martin Winterkorn, the former chief executive of Volkswagen, on charges that included conspiracy to defraud the government. Winterkorn has denied the charges.


Then, in June, Munich prosecutors arrested Rupert Stadler, the head of the Audi division and a member of Volkswagen’s management board, on suspicion of taking part in the fraud.

Stadler is being held without bail, a sign that a judge has decided he might obstruct the investigation if he were free. Nevertheless, Volkswagen has not fired Stadler, and in theory he could get his old job back if he manages to win release.

Thompson declined to comment directly on Volkswagen’s decision to stand by an executive who is in jail. But he said, “In my experience, one of the cornerstones of any effective ethics and compliance effort is the organization’s willingness to hold itself and its executives, especially top executives, accountable for wrongdoing.”


Thompson’s power as court-appointed monitor is considerable and unusual for Germany — especially for Volkswagen, which has huge political power and was accustomed to acting with near impunity. Thompson has a team of more than 50 accountants, engineers and other experts, and broad powers to demand documents and interview Volkswagen employees.

Some in Volkswagen and the German media resent the scrutiny of one of the country’s iconic companies, he acknowledged. It would be a mistake for anyone to underestimate the team’s resolve, he said.

“Anyone who would think they could wait the monitor team out, that’s not going to happen,” he said.


If at the end of this three-year term Thompson concludes that Volkswagen has not done enough to avert future wrongdoing and create a stronger sense of ethics, the company might land back in U.S. courts. In the worst case, the Justice Department might accuse Volkswagen of violating the plea agreement and force the company to renegotiate the terms.

Volkswagen has generally cooperated with Thompson’s team, he said, and accepted the recommendations in his report. But the company has sometimes resisted turning over documents, a point he noted in his report.

Werner and Thompson, who appeared at a news conference together Monday, said they were trying to work out differences over access to documents amicably.


Thompson stressed that he had not come to any conclusions about whether Volkswagen was complying with the settlement terms.

“They have put in a number of processes to start the change effort,” he said. “We are still in the process of reviewing the adequacy of these new programs.”

Thompson’s report identified two relatively minor violations by Volkswagen of the settlement terms. In one case Volkswagen neglected to put required compliance information into a handbook for managers in the United States, and in another Volkswagen failed to notify California regulators of impending emissions tests, as required.

Volkswagen reported the violations itself. Werner said they were simply oversights.


Volkswagen pleaded guilty last year to federal charges that included obstruction of justice and conspiracy to violate the Clean Air Act. The company admitted that it had rigged nearly 600,000 Volkswagen and Audi vehicles sold in the United States to conceal excess emissions.

Worldwide, 11 million vehicles contained illegal software that could detect when cars were undergoing emissions tests. During those tests, the software turned up pollution controls to be compliant with U.S. regulations. At other times, the cars spewed nitrogen oxides — which cause smog and asthma and are regarded as a carcinogen — in amounts far above legal limits.

Under the terms of the settlements Volkswagen is supposed to be overhauling its internal controls to avert future wrongdoing, for example by making sure that all engine software is scrutinized by someone not involved in the design.


The company also agreed to establish a whistleblower system that would allow employees to report unethical behavior. Volkswagen has such a program, but it was not approved by top management of the Audi division and Volkswagen’s U.S. unit until last autumn. Thompson’s report indicated that the company has more work to do to ensure that the whistleblower program is effective.

The scandal occurred in large part because Volkswagen had a win-at-all-costs culture and ineffective oversight of managers and engineers. The few employees who raised objections were silenced or ignored.

Thompson, 72, has experience with corporate scandals. He oversaw the federal investigation of Enron, the energy trading company that went bankrupt in 2001 after exposure of extensive accounting fraud. He has also worked for large corporations, including serving as general counsel of PepsiCo.


Thompson said he invoked the Enron scandal when, in June, he addressed a meeting of several hundred top Volkswagen executives in Wolfsburg. He told them that there were executives at Enron who had expressed concern about questionable accounting practices and even wrote memos complaining about it. But none had the courage to confront top managers.

“I think that resonated with a lot of the Volkswagen managers I talked to,” Thompson said.