Gaps in Measurements of the Costs of Quality: Revisiting the Volkswagen Emission Scandal After Seven Years

Abstract

This study examines the costs associated with Volkswagen’s diesel emission cheating scandal. This study views the incident as a failure in quality, thus, the costs borne by VW are the costs of quality (COQ). So far, different estimates of the COQ have been suggested at different times because of the contingent nature of the litigations. As most of the pending litigations faced by VW have been resolved over the past seven years, this study revisits the scandal to evaluate the gap between two contrasting approaches, accountingbased and market-based. The cumulative COQ derived from VW financial reports varies between $31.5 billion and $44.8 billion by the end of 2021. However, these figures are below what was reflected in the market, $60.0 billion, when VW settled most litigations in the U.S. This study confirms a large gap, ranging from $15.2 billion to $28.5 billion, between the two measures. This study concludes the gap is likely to be associated with the opportunity costs arising from the scandal, which are ignored in financial reporting.