Fraud and betrayal, lavish parties and visits to the red light district at the company’s cost... They sound like the plot elements of a thriller, but the allegations that have been flying around Volkswagen headquarters in Wolfsburg in recent months are very real.

Volkswagen hired auditing firm KPMG to scrutinize company procedures on the first of July, three days after it asked German prosecutors to investigate two former human resources executives for fraud.

It was alleged Helmuth Schuster and Klaus-Joachim Gebauer had set up shell companies in a number of countries, including India and the Czech Republic, to win business from the carmaker.

Sleaze and bribery

Members of the company’s works council were allegedly ‘bought’, while personnel managers, on the other hand, made deals that weren’t in the interest of the company, incurring losses worth millions of euros.

But, the most sensational element of the Volkswagen scandal story is the allegation that the company’s board sent members of the works council on expensive sex holidays. In return, works council members rubber-stamped board resolutions. The procedure saw unconfirmed expense claims of up to 30,000 euros approved.

The Volkswagen scandal became public after a network of letter-box companies was uncovered. It’s alleged Helmuth Schuster, the former personnel chief of VW-subsidiary Skoda, used the companies as a front to channel funds into his own pockets.

An Indian state government also accuses Schuster of demanding two million euros in kickbacks in exchange for his promise that Volkswagen would build a plant in their region.

Wrongdoing right up to top rungs

It wasn’t long before investigations into the network of front companies turned up another name: Klaus-Joachim Gebauer, Volkswagen’s former personnel manager. It’s alleged he organized several sex parties that later came to haunt several members of the works council.

"Some of the things that have been said are true," Gebauer said. "The one thing I regret is that ,through other people, I got into a situation I don’t want to be in."

But the scandal doesn’t end there. Even the long-serving and influential head of the works council, Klaus Volkert, has caught the eye of prosecutors.

But Volkert maintains fraud allegations are unfounded.

"The short version is: I’m not aware of any wrongdoing. I have no idea why I have the ‘honor’ of being subject to this media witch-hunt," Volkert said.

Hartz resignation

Trade union officials say the scandal is partly a conspiracy to weaken employee representation at Volkswagen. They argue that a strong works council and union have long been a thorn in the side of Volkswagen’s top management.

Fraud allegations also led to recent resignation of human resources executive Peter Hartz. For years Hartz stood as one of the supporting pillars of the so-called “VW-System” of close cooperation between top management and employee representatives.

He “invented” of the four-day-week -- cutting working hours without compensatory wage increases -- and even had national labor market reforms named after him, before he had to admit he’d made mistakes at Volkswagen by not keeping tight enough control of his employees.

VW moves to stem damage

All in all, the KPMG report estimates the scandal has cost Volkswagen a total of five million euros, although further investigations could see that figure rise.

As the initial fallout of the scandal settles, chief executive Bernd Pischetsrieder says he’s taking steps to make Volkswagen a ‘more transparent company internally and externally’.

Under a new ombudsman system, Volkswagen will assign two lawyers to deal with allegations throughout the corporation. Company employees will then be able to give them anonymous tips on corrupt activities.

Top management at Wolfsburg say they want investigators to get to the bottom of the scandal.

It’s a call echoed by the premier of the of Lower Saxony Christian Wulff. His federal state is Volkswagen’s largest shareholder.

"Those guilty of wrongdoing will have to clear their desks and accept

responsibility for what they did,” Wulff said. “Then we’ll put systems in place to ensure this can never be repeated.

Volkswagen announced on Friday that Horst Neumann has been named to replace Hartz.

Neumann, who currently oversees human resources as a board member at Volkswagen’s subsidiary Audi, will start his new job on December 1.