Volkswagen and its subsidiary Audi may currently be in Frankfurt showcasing their wares, but the attention of the boardrooms of both companies is likely to be elsewhere. The US EPA has issued Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. with a notice of violation (NOV) of the Clean Air Act by running software in their vehicles that turns full emissions controls on only when undergoing official emissions testing.

A test program conducted independently by the International Council for Clean Transportation (ICCT) and West Virginia University (WVU) in 2014 first raised concerns of elevated levels of nitrogen oxide (NOx) emissions in real world driving. They took their concerns to the US EPA and the California Air Resources Board (CARB), which prompted the agencies to begin investigations into the high NOx emissions in Volkswagen's 2.0-liter diesel vehicles.

In July, the agencies shared their findings with Volkswagen Group America, which earlier this month admitted using a "defeat device" on its vehicles to circumvent official emission testing procedures. The device, which is described in the NOV as a "sophisticated software algorithm on certain Volkswagen vehicles detects when the car is undergoing official emissions testing, and turns full emissions controls on only during the test," is allegedly found in four-cylinder VW and Audi diesel cars from model years 2009-2015. These include the Jetta, Beetle, Audi A3, Golf and Passat models.

According to the Clean Air Act, any vehicle equipped with a defeat device that reduces the effectiveness of the emission control system during normal driving conditions cannot be certified for sale in the US. That means around 482,000 diesel passenger cars sold in the US since 2008 have been on the roads uncertified and the EPA has ordered VW to recall all the affected vehicles and fix the cars' emission systems. However, the EPA has stressed that anyone driving these cars isn't breaking the law, and can legally continue to drive and resell the vehicles. It also points out that the defeat device violation doesn't affect the car's safety.

It is mindboggling that the world's second biggest automaker would employ such practices and even more mindboggling for it to think it could get away with it. It is unclear if Volkswagen is the only automaker looking to fool authorities in such ways, but the EPA says it is widening its search and will look for defeat devices in diesel vehicles from other auto manufacturers. But for now, it is only Volkswagen that has taken a hit, with the company's stock price falling almost 20 percent on the back of the news.

"I personally am deeply sorry that we have broken the trust of our customers and the public," said Volkswagen CEO, Martin WinterKorn. "We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case. Volkswagen has ordered an external investigation of this matter. We do not and will not tolerate violations of any kind of our internal rules or of the law. The trust of our customers and the public is and continues to be our most important asset. We at Volkswagen will do everything that must be done in order to re-establish the trust that so many people have placed in us, and we will do everything necessary in order to reverse the damage this has caused."

That will be a major task, with the possibility that fines of up to US$37,500 could be imposed on each defeat device-equipped car under the US Clean Air Act. That would add up to a bill of over $18 billion – and that's just in the US. The final bill could be much higher, with authorities in other countries sure to launch their own investigations. And then there's the negative hit to the brand in the eyes of consumers, which is impossible to calculate.

Source: EPA, CARB (PDF), Volkswagen

Update (28 Sept. 2015): Last week, the scandal claimed its first casualty, with Martin Winterkorn stepping down as CEO of Volkswagen AG and being replaced by Matthias Müller, the current Chairman of Porsche AG, who will continue in that role until a successor is found.

Late last week, the Volkswagen Supervisory Board issued a statement addressing the deception, saying that, "the company will leave no stone unturned in getting to the bottom of this, will call those responsible to account, and take the necessary actions." It also revealed that the lawyers had been called in and some employees have already been suspended.

"The test manipulations are a moral and political disaster for Volkswagen," said Berthold Huber, Deputy Chairman of the Supervisory Board. "The unlawful behavior of engineers and technicians involved in engine development shocked Volkswagen just as much as it shocked the public. We can only apologize and ask our customers, the public, the authorities and our investors to give us a chance to make amends."

Volkswagen has revealed the roughly five million Volkswagen Passenger Cars brand vehicles, including the sixth-gen Golf, seventh-gen Passat and first-gen Tiguan, are affected by the "defeat device" software worldwide. However, no vehicles, including the aforementioned models, that passed the EU6 emissions standard throughout Europe are affected. The company says all markets around the world will be informed how many vehicles are affected locally, while it works on remedies with certification authorities.

The company again stressed all of the affected vehicles remain technically safe and roadworthy.