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P1.T1.20.16 Learning from financial disasters (third of three)

Nicole Seaman

Director of FRM Operations
Staff member
Learning objectives: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors: Reputational risk, including the Volkswagen case; Corporate governance, including the Enron case; Cyber risk, including the SWIFT case.


20.16.1. The Volkswagen emissions scandal concerned over ten million cars during the years 2009 to 2015. The scandal unfolded with significant financial repercussions and massive reputational damage to the company. GARP writes that "the damage to Volkswagen, the world’s biggest carmaker, was significant ... Its reputation, particularly in the important US market, took a severe hit. The reputational effect extended beyond the company itself as German government officials expressed concerns that the value of the imprimatur 'Made in Germany' would be diminished because of Volkswagen’s actions." Which of the following most accurately summarizes the Volkswagen emissions case study?

a. Volkswagen deliberately programmed emission controls to activate only during regulatory testing but not during real-world driving
b. Volkswagen did not conduct adequate quality assurance (QA) on its emission controls and consequently, a meaningful percentage of them failed during real-world driving
c. The Volkswagen case study illustrates how reputation risk can materialize despite the good intentions of managers who disclose problems immediately and cooperate with regulators
d. Volkswagen had effective emission control devices (i.e., hardware), however, the software contained an undetected bug that caused the controls to inadvertently fail during real-world driving

20.16.2. Enron's bankruptcy in 2001 was the largest corporate bankruptcy in the US when it occurred. Each of the following is true about the Enron case study EXCEPT which is false?

a. Enron was a corporate governance failure
b. Enron used fraudulent (aka, excessively "creative") accounting practices to hide actual financial performance
c. Enron's chief problem was the basis risk realized when its hedges against electricity prices collapsed due to unexpected price volatility
d. Enron outsourced its audit function to Arthur Anderson who explicitly approved, or failed to capture, several of its fraudulent accounting practices

20.16.3. Which of the following is TRUE about the SWIFT (Society for Worldwide Interbank Financial Telecommunication) case study?

a. The 2015-16 cyber attack (aka, hack) demonstrated that the SWIFT network was unreliable and it was subsequently phased out
b. The 2015-16 cyber attack (aka, hack) successfully exploited vulnerabilities to achieve the theft of about USD 81.0 million
c. The 2015-16 cyber attack (aka, hack) was an unsuccessful attempt to steal money, and it demonstrated the SWIFT network is essentially impervious to attacks
d. The 2015-16 cyber attack (aka, hack) was a fictitious news account but the negative press nonetheless shook confidence sufficiently in the network that transactions ground to a halt for several weeks

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