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Vorsprung durch Technik Bent September 22, 2015

Posted by Audit Monkey in The Joy & Pain of Internal Audit.
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In an effort to be slightly more contemporaneous, I thought I would try and post more promptly on corporate governance issues or scandals. The latest corporate scandal is Volkswagen’s (VW) falsification of emission test results for diesel engines in the US. (Analysis of the incident can be found here.) I say falsification, it has become apparent that VW managed to program its vehicles to switch from a ‘on the road’ mode to ‘test’ mode to beat emission limits. Presumably this was done while the vehicle’s were being imported into the US as it would appear there is no US equivalent of the UK MOT. (For my International readers, any automobile over 3 years old has to have an annual MOT to ensure it is roadworthy.) Vehicles are, however, are emission tested by the EPA (Environmental Protection Agency).

There has been a lot of speculation as to how VW managed to pull this off. Note I used the word program above? The vehicles in question were probably ‘chipped’ cars. This will not mean much to some people but modern cars, those with fuel injection, have an engine control unit (ECU) which controls the mix of air and fuel in the engine. In the early 1990’s, engine chipping in the UK was all the rage. Essentially very naughty boy racers would reprogram the ECU using a micro chip inserted onto the circuit board to make the car travel faster. Physical chipping with a microchip died out in 2000’s as the computers became more sophisticated and any reprogramming was done by a laptop. This is how most motor mechanics diagnosed engine problems, not by lifting the bonnet (hood) but they plugging in the laptop. This Auto Express article explains chipping while Wikipedia explains chip tuning.

So what’s this got to do with Internal Auditing? While, VW’s American Boss Michael Horn has admitted,”We screwed up”, on the face of it, not a lot. However, from a corporate governance and control perspective, it does. My contention is that the VW IT programmers must have knowingly coded the ECU’s to perform in a certain manner in test conditions. The question is whether it was authorised by the Board, senior management team, IT Director for VW, etc. Alternatively, it was an unauthorised bit of code, as due to downward pressure from the Board, manufacturing team, whoever, to reduce emissions, the IT programme team probably went native in order to satisfy the VW gods. If the latter, I’ve got to admire the IT coders for a bit of ingenuity to get themselves out of a fix.

Of course, we can ask ‘where were Audit?’ As I’ve said before, industries outside of FS are usually self-regulating. In light this episode, apparently not! The British media (Channel 4) have come up with a figure of 23,000 deaths per annum due to diesel emissions but of course, this isn’t attributable to VW alone. However, the EPA in the US have either been very observant in noticing the disparity between engine omission results inside and outside of the test facility, or they were tipped off. My money is on ‘tipped off’. I suspect there’s been some input from the competition in the US to nudge the EPA in the right direction. Conversely, the State Department has asked the EPA to investigate historical claims against VW more ‘thoroughly’. Protectionism never crossed my mind! Deepwater Horizon and BP bashing? Standard Chartered and HSBC, money laundering and sanctions against non-US Banks? Methinks there’s a pattern…

Footnote

I was going to end the blog post there but to really answer the question, ‘where was audit?’, here’s my supposition. Being rudimentary, did Audit review the program code for the ECU’s, albeit on a sample basis? I doubt it. Did Audit review the data for emissions? Probably to ensure there were no ‘exceptions’. Did Audit check that the emission data was inline with EPA benchmarks? Yes and they probably stopped there as all was well, but as we now know, it wasn’t!

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