Two whistleblowers’ complaint to the SEC about Tesla alleged that Elon Musk’s automaker may have run afoul of securities laws and flouted accounting…
In 2021, a Tesla employee and a tech industry researcher filed a whistleblower complaint to the SEC with concerns that Elon Musk's car company may have violated securities law and flouted accounting standards.
The complaint contained a number of allegations about Tesla's financials and its business practices, including that it improperly categorized repairs for years and that it had poor control over internal systems used for capturing business data that ultimately rolls up to financial and other company disclosures to shareholders.
CNBC asked accounting, business and securities law experts to read a version of the complaint with the identities of the whistleblowers redacted to protect their privacy. CNBC reached out to Tesla multiple times with detailed inquiries about this and other contentions. The company did not respond. Under standard warranty accounting practices in the automotive and other industries, companies set aside a portion of each sale to cover future repairs that will be conducted under warranty, Nelson explained to CNBC. These warranty reserves show up as liabilities on a company's balance sheet and show up on the income statement as part of the costs of goods sold. Later, when repairs are recorded as"warranty," the costs of these repairs are counted against the warranty reserves.
Meanwhile,"customer pay" repairs are booked as revenue, specifically under the"services and other" category, according to its financial filings. Here, too, the repairs are not counted against warranty reserves. In just under two months in late 2021, Tesla was spending over $17 million on"goodwill" in the U.S. alone, which translated to about $70 worth of goodwill on the average repair order across approximately 247,000 repairs, according to internal Tesla dashboards referenced in the whistleblower complaint and reviewed by CNBC.
Because Nelson did not review all the documentation the whistleblowers had to offer the SEC nor interview them, she would not give an opinion on whether Tesla may have run afoul of accounting requirements or securities laws. However, she did say she was"surprised" that the agency didn't indicate more serious interest in the whistleblowers.
For a specific issue —"blistering" headrests in car seats manufactured by Tesla — the company gave employees different directions about how to bill customers for service to replace the part. One internal Tesla document seen by CNBC said the blistering headrest"is not a defect, and therefore not covered under warranty" and that repairs should be offered as goodwill.
The complaint said the whistleblower who had been a Tesla employee was authorized to access a wide array of records — including policies, internal emails, and sales- and service-related data — at Tesla through software and systems used daily by thousands of employees for normal work, including both custom-built and off-the-shelf programs.
In another example, the complaint said screenshots showed Tesla employees had manually changed the status of"used" cars to"new" in a program that tracked vehicle deliveries data. This could affect Tesla's delivery numbers, they said, though they didn't try to estimate the overall impact and instead encouraged the SEC to investigate further.
Business and securities law expert Lipton told CNBC if there are weaknesses in either"disclosure controls" or the"internal controls over financial reporting" at Tesla, there could have been a"potential violation of the substantive requirement that such controls be maintained" under Section 13 of the Exchange Act, and there might have been"false statements by the company, Musk, the CFO, or PwC regarding the effectiveness of internal controls.
Although there are only four major auditing firms, there are dozens of reputable firms Musk's privately held enterprises could have turned to for tax consulting.
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