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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.

David Bach is senior associate dean at Yale School of Management

Volkswagen’s falsification of pollution tests opens the door to a very different car industry

EMISSIONS of nitrogen oxides (NOx) and other nasties from cars’ and lorries’ exhausts cause large numbers of early deaths—perhaps 58,000 a year in America alone, one study suggests. So the scandal that has engulfed Volkswagen (VW) this week is no minor misdemeanour or victimless crime (see article). The German carmaker has admitted that it installed software on 11m of its diesel cars worldwide, which allowed them to pass America’s stringent NOx-emissions tests. But once the cars were out of the laboratory the software deactivated their emission controls, and they began to spew out fumes at up to 40 times the permitted level. The damage to VW itself is immense. But the events of this week will affect other carmakers, other countries and the future of diesel itself.

VW first. Its chief executive, Martin Winterkorn, has resigned, and the company is setting aside €6.5 billion ($7.3 billion) to cover the coming financial hit. But investors fear worse: in the first four trading days since the scandal broke on September 18th, VW’s shares fell by one-third, cutting its value by €26 billion. Once all the fines, compensation claims, lawsuits and recall costs have been added up, this debacle could be to the German carmaking giant what Deepwater Horizon was to BP. At least BP’s oil-drilling disaster was an accident; this was deliberate. America’s Department of Justice is quite right to open a criminal investigation into the company. Other countries should follow South Korea and probe what VW has been up to on their patch. Though few Chinese motorists buy diesel cars, the scandal may prompt its government to tackle the firm for overstating fuel-economy figures for petrol engines.

Whether or not Mr Winterkorn bore any personal responsibility for the scandal, it was appropriate that he should lose his job over it. He is an engineer who is famous for his attention to detail; if he didn’t know about the deceptive software, he should have. Selling large numbers of “Clean Diesels” was central to VW’s scheme for cracking the American market, a weak spot, which in turn was a vital part of the plan to overtake Toyota of Japan as the world’s largest carmaker. The grand strategy that Mr Winterkorn had overseen now lies in ruins.

A change at the top, and a hefty fine, must not be the end of the matter. America’s prosecutors ought to honour their promise to go after the individuals responsible for corporate crimes, instead of just punishing companies’ shareholders by levying big fines. Most of the recent banking scandals have ended not in the courtroom, but in opaque settlements and large fines. Earlier this month the Department of Justice announced a $900m settlement with GM, America’s largest carmaker, for failing to recall cars with an ignition-switch defect blamed for crashes which killed at least 124 people and injured 275. Prosecutors said (unnamed) managers at GM had knowingly ignored the potentially deadly effects of the fault, and put profit before safety. Yet they announced no charges.

VW's emissions crisis

That has to change—and the authorities know it. In a speech this month, America’s deputy attorney-general, Sally Yates, said that from now on, fining businesses would take second place to pursuing criminal and civil charges against individuals. An accused firm will no longer get credit for co-operating with investigations (as VW says it will) unless it gives the feds the names of every manager or employee involved in wrongdoing, and seeks to gather and submit evidence of their personal responsibility. VW is a test of this new approach. But to avoid suspicions of being tougher on foreign firms—as were raised in the BP Deepwater case and in recent banking settlements—the American authorities should also prosecute culpable GM managers.

Yet the biggest effects of the scandal will be felt across the Atlantic. VW’s skulduggery raises the question of whether other carmakers have been up to similar tricks, either to meet Europe’s laxer standards on NOx emissions or its comparable ones on fuel economy—and hence on emissions of carbon dioxide. BMW and Mercedes, VW’s two main German peers, rushed to insist that they had not. However, in Europe, emissions-testing is a farce. The carmakers commission their own tests, and regulators let them indulge in all sorts of shenanigans, such as removing wing mirrors during testing, and taping up the cracks around doors and windows, to reduce drag and thus make the cars burn less fuel. Regulators also tolerate software a bit like VW’s, that spots when a car is being tested and switches the engine into “economy” mode. This is why the fuel efficiency European motorists achieve on the road is around 40% short of carmakers’ promises.

At least America’s regulators, unlike Europe’s, sometimes stage their own tests to verify the manufacturers’ findings. But it is time this whole system was swept away and replaced, everywhere, with fully independent testing of cars in realistic driving conditions. Now, with outrage at VW’s behaviour at its height, is the moment to act. That would mean overcoming the objections of carmakers. But it also requires European regulators to change their attitudes to diesel, which accounts for half of cars sold on the continent. Diesel vehicles can be very economical on fuel (and thus emit relatively little carbon dioxide) but often at the cost of increased NOx emissions. That trade-off has been decided in diesel’s favour by Europe’s lousy testing regime and more lenient NOx-emissions standards.

See no diesel

Even if other makers of diesel vehicles have not resorted to the same level of deception as VW, the scandal could mean that these cars struggle to meet standards applied rigorously to both types of emission. Some fear that this may be the “death of diesel”. So be it. There is still scope to improve the venerable petrol engine; and to switch to cleaner cars that run on methane, hydrogen and electricity, or are hybrids. A multi-billion-dollar race is already under way between these various technologies, with makers often betting on several of them as the way to meet emissions targets. If VW’s behaviour hastens diesel’s death, it may lead at last, after so many false starts, to the beginning of the electric-car age.

BERLIN/ROME (Reuters) - Volkswagen's own staff and one of its suppliers warned years ago about software designed to thwart emissions tests, two German newspapers reported on Sunday, as the automaker tries to uncover how long its executives knew about the cheating.

The world's biggest automaker is adding up the cost to its business and reputation of the biggest scandal in its 78-year history, having acknowledged installing software in diesel engines designed to hide their emissions of toxic gasses.

Countries around the world have launched their own investigations after the company was caught cheating on tests in the United States. Volkswagen says the software affected engines in 11 million cars, most of which were sold in Europe.

The company's internal investigation is likely to focus on how far up the chain of command were executives who were responsible for the cheating, and how long were they aware of it.

The Frankfurter Allgemeine Sonntagszeitung, citing a source on VW's supervisory board, said the board had received an internal report at its meeting on Friday showing VW technicians had warned about illegal emissions practices in 2011. No explanation was given as to why the matter was not addressed then.

Separately, Bild am Sonntag newspaper said VW's internal probe had turned up a letter from parts supplier Bosch written in 2007 that also warned against the possible illegal use of Bosch-supplied software technology. The paper did not cite a source for its report.

Volkswagen declined to comment on the details of either newspaper report.

"There are serious investigations underway and the focus is now also on technical solutions" for customers and dealers, a Volkswagen spokesman said. "As soon as we have reliable facts we will be able to give answers."

A spokesman for Bosch ROBG.UL said the company's dealings with VW were confidential.

Bild said Martin Winterkorn, who quit as Volkswagen CEO last week, was demanding his salary for the rest of his contract through the end of next year but the board did not want to pay it. It cited no source. Winterkorn was paid 16 million euros last year, the most of any CEO in Germany's blue chip DAX index.

SALES HALT IN ITALY

Volkswagen is still coming up with plans to deal with the 11 million cars that it built with the affected engines.

BERLIN/ROME (Reuters) - Volkswagen's own staff and one of its suppliers warned years ago about software designed to thwart emissions tests, two German newspapers reported on Sunday, as the automaker tries to uncover how long its executives knew about the cheating.

The world's biggest automaker is adding up the cost to its business and reputation of the biggest scandal in its 78-year history, having acknowledged installing software in diesel engines designed to hide their emissions of toxic gasses.

Countries around the world have launched their own investigations after the company was caught cheating on tests in the United States. Volkswagen says the software affected engines in 11 million cars, most of which were sold in Europe.

The company's internal investigation is likely to focus on how far up the chain of command were executives who were responsible for the cheating, and how long were they aware of it.

The Frankfurter Allgemeine Sonntagszeitung, citing a source on VW's supervisory board, said the board had received an internal report at its meeting on Friday showing VW technicians had warned about illegal emissions practices in 2011. No explanation was given as to why the matter was not addressed then.

Separately, Bild am Sonntag newspaper said VW's internal probe had turned up a letter from parts supplier Bosch written in 2007 that also warned against the possible illegal use of Bosch-supplied software technology. The paper did not cite a source for its report.

Volkswagen declined to comment on the details of either newspaper report.

"There are serious investigations underway and the focus is now also on technical solutions" for customers and dealers, a Volkswagen spokesman said. "As soon as we have reliable facts we will be able to give answers."

A spokesman for Bosch ROBG.UL said the company's dealings with VW were confidential.

Bild said Martin Winterkorn, who quit as Volkswagen CEO last week, was demanding his salary for the rest of his contract through the end of next year but the board did not want to pay it. It cited no source. Winterkorn was paid 16 million euros last year, the most of any CEO in Germany's blue chip DAX index.

SALES HALT IN ITALY

Volkswagen is still coming up with plans to deal with the 11 million cars that it built with the affected engines.

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Its Italian unit has told its dealers to stop selling them, Italy's Corriera della Sera newspaper reported on Sunday. It said that would leave 40,000 cars stuck on Italian lots.

"As a precautionary measure, we ask that you suspend immediately the sale, registration and delivery only of vehicles carrying the Euro 5, EA 189 motor," the newspaper quoted Massimo Nordio, chief executive office of Volkswagen's Italian unit, as writing in a letter to dealers.

A Volkswagen spokesman said there had been no instructions from company headquarters in Germany to dealers to stop selling the affected cars, but sales units in individual countries had the right to take such decisions on their own.

Italy's Volkswagen headquarters in Verona did not immediately respond to calls.

In Volkswagen's home market Germany, where 2.8 million of the 11 million affected diesel cars are on the road, the government watchdog KBA has set an Oct. 7 deadline for the company to present a plan to bring diesel emissions into line with the law, Bild reported.

The transport ministry said the KBA had written to VW demanding it "commit to concrete steps and a timetable" to ensure its cars in Germany meet requirements.

A Volkswagen spokesman said: "It is in our strongest interest to provide clarification here as soon as possible. We will inform the KBA about what we are doing and the talks are occurring on the highest level."

POLITICAL PRESSURE

German politicians have been adding to the pressure on Volkswagen, worried about the reputation of German industry.

"We need a guarantee that cars of German manufacturers are in line with the norms, without manipulation," Chancellor Angela Merkel's chief of staff Peter Altmaier told Der Tagesspiegel in an interview published on Sunday.

Environment Minister Barbara Hendricks said the scandal must not be allowed to tarnish "the made in Germany brand".

"If a global player from Germany violates environment protection rules that blatantly, this casts a shadow on the environment pledges of German companies,” she told Handelsblatt newspaper in an interview to be published on Monday.

She said the European Union was working on stricter emissions tests to focus more on normal road conditions, rather than rely on lab results.

Diesel engines use less fuel and emit less carbon - blamed for global warming - than standard gasoline engines. But they emit higher levels of toxic gasses known as nitrogen oxides, blamed for deaths from lung and heart disease.

In most of the world, including the United States, diesel engines in passenger cars are a niche product. But their fuel economy and low carbon emissions have made them popular in Europe, where they now account for half of vehicles sold.

Volkswagen and other European manufacturers have promoted "clean diesel" technology, benefiting from diesel's fuel economy but meeting stringent tests for emissions of toxins. But the suggestion that this was achieved by cheating on tests could affect the viability of the entire diesel sector and the fate of companies that have bet on it.

Big technological bets can make or break companies. Not every cunning innovation can be a winner. For each James Dyson with his triumphant bagless vacuum cleaner, there is always a Betamax video cassette just waiting to flop.

Sometimes these rolls of the dice can come back to haunt entire industries. The storm surrounding Volkswagen’s flouting of emission standards may presently centre on the German company’s shamefaced confession that it manipulated data. As a transfixed driving public has noted, this has put both its reputation and financial health at risk.

But behind the immediate clamour lies a deeper worry; and one that affects not just VW but other European automakers. It concerns the technological bet placed by these producers. Alone among their peers in the developed world, they have prioritised the development of diesel passenger cars.

These are, of course, the offending vehicles in the VW scandal. The company has owned up to tweaking its software to spoof tests designed to ensure that its diesel engines lived within the prescribed rules concerning air pollution. When fairly assessed (and in spite of being badged “clean diesel”) they exceeded US legal limits by as much as 40 times.

To miss by such a margin would be calamitous, even had VW not compounded the fault by concealing it. The result raises questions about the very viability of its technology. What makes it worse is that VW and its fellow European carmakers have so much riding on the legality and acceptability of diesel itself.

Since the 1990s, these manufacturers have configured their businesses to utilise this technology. In 2011, for instance, diesel powered vehicles accounted for more than 50 per cent of EU car sales — almost all of them domestically made. Elsewhere in the developed world — the US and Japan, for instance — they represent a measly 1 per cent of the outstanding fleet.

European manufacturers went down this path not because of the underlying superiority of the technology. Noisy, dirty and rattly, it was historically confined to commercial vehicles. Its one big advantage is fuel consumption.

Because the diesel mechanism burns hydrocarbons more efficiently, it consumes about 25 per cent less fuel than the petrol equivalent (resulting in a smaller but meaningful reduction in greenhouse gas emissions).

Carmakers were not alone in spotting diesel’s fuel efficiency. It also intrigued EU governments, which saw the technology as a way to meet targets on CO2. They nudged the industry further along the path to dieselisation, reinforcing the fuel-saving benefit and offering consumers financial incentives to switch. These proved more than sufficient to offset the premium (about €3,000) that makers charge for building sophisticated diesel engines suitable for passenger cars.

The continent’s idiosyncratic predilection for diesel has not been without advantages for manufacturers. It has made their home market harder for rivals to penetrate, preserving both sales and employment.

True, this imposes a reciprocal handicap abroad — due to the reluctance of customers there to buy the technology. One reason VW was so keen to push “clean diesel” in the US was to stem steep falls in its market share, which had halved since 2000.

But carmakers now have bigger reasons to rue their “dash for diesel”. The main worry with the technology has always been pollution. While diesel engines are sparing on CO2, they chuck out lots of unpleasant particulate matter and harmful nitrogen oxides.

The hope was that manufacturers would find clever technical solutions to meet tightening pollution standards without putting diesels beyond the pocket of the average driver. This has been thrown in the air by VW’s shock admissions.

While there are fixes that would make the cars’ emissions compliant, these are expensive — potentially adding thousands to the list price of even a modest car.

Nor is the crisis necessarily confined to VW. The German company is not the only European diesel manufacturer to have posted puzzlingly better emissions results in tests than its cars seemed to achieve on the road.

Industries court peril when they throw their capital and energies into also-ran technologies. The US camera maker, Kodak, foundered after failing to keep up as its rivals digitised.

Europe’s carmakers could be similarly outmanoeuvred by the Japanese-led move into petrol-hybrid vehicles. At no greater cost, these do not have the pollution downside of diesel. The fuel economy they offer is superior.

Europe’s obsession with diesel may have driven its car industry up a technological dead end. Extracting it from this predicament will be no mean feat.