In late 2021, a Tesla employee and a tech industry researcher joined forces to Whistleblowers on concerns they had about Elon Musk’s car company. They took their worries to the U.S. Securities and Exchange Commission (SEC), believing Tesla might have broken the law multiple times, impacting shareholders, employees, and customers.
The complaint had various claims about Tesla’s finances and how they conducted business. It pointed out that repairs were not being categorized properly for many years. Additionally, it raised concerns about Tesla’s internal systems, suggesting they didn’t effectively handle crucial business data, which is essential for the company’s financial and other disclosures to shareholders.
In January 2022, the SEC took notice and assigned someone to investigate a specific aspect of the complaint related to the accounting firm PricewaterhouseCoopers’ work for Tesla. However, a few months later, they closed that part of the investigation, as revealed by CNBC’s review of records.
A group of individuals who filed a complaint against Tesla claim that they’ve never had any direct communication with the authorities regarding their complaint. They offered to share about 18,000 files, including Tesla’s internal emails, spreadsheets, screenshots, recordings, images, and public records to substantiate their allegations, but say they were never contacted.
Allegations of Potential Securities Law Violations by Tesla
When CNBC reached out to the SEC for comments, they neither confirmed nor denied the existence of the complaint but stated that they carefully evaluated all tips submitted. The whistleblowers could potentially receive a financial reward if the SEC takes enforcement action based on their complaints.
Over a span of two years since the complaint was first filed, Elon Musk, Tesla’s CEO, sold over $39 billion worth of his Tesla shares, with approximately $23 billion sold in 2022. These sales were purported to finance his acquisition of Twitter, which he has since rebranded as “X.”
CNBC has had access to a copy of the complaint, referred to as a TCR (tips, complaints, and referrals), as well as follow-up communications with the financial regulator and some of the internal Tesla materials that the whistleblowers had urged the agency to review. The identities of the complainants are known to CNBC. Still, they have requested anonymity due to fears of retaliation by Musk against employees and critics, especially those who raise concerns with government agencies or the press. The whistleblower, who was once a Tesla employee, no longer works for the company.
CNBC sought insights from professionals in accounting, business, and securities law. These experts reviewed a complaint in which the identities of the whistleblowers were carefully concealed to safeguard their privacy.
Certain allegations in the redacted complaint suggest potential violations of federal securities law by Tesla, as noted by Lipton. These include violations of Section 13 of the Securities Exchange Act, Rule 13a-15, Rule 15d-15, and the Sarbanes-Oxley Act. These regulations emphasize the need for companies and management to uphold robust internal systems to accurately report financial and business information to auditors and shareholders at regular intervals.
Concerns over Financial Reporting Accuracy and Transparency
Karen Nelson, an accounting professor at Texas Christian University and former advisor to the Public Company Accounting Oversight Board, expressed concern about Tesla’s internal control systems based on the redacted whistleblower complaint. The adequacy and transparency of how Tesla captures financial and business information for reporting to auditors and shareholders were questioned.
If the complaint’s information holds true, Nelson highlighted issues with Tesla’s internal information systems, leading to concerns about the auditor’s ability to navigate these systems during internal control testing and ensure the accuracy of the data being used.
CNBC attempted to reach out to Tesla multiple times regarding these contentions but received no response. The allegations in the whistleblower complaint regarding Tesla’s car quality and financial performance raise significant concerns for shareholders and regulators, as indicated by experts in the auto industry, securities and business law, and accounting.
Tesla employs a direct-to-consumer model, selling and servicing its cars directly. Internal sources reveal concerns that Tesla employees may misclassify repairs, particularly distinguishing between warranty, extended service, customer pay, rectification, and goodwill repairs. The complaint suggests that this miscategorization could mask actual warranty costs, impacting financial statements. Specifically, “goodwill” and “customer pay” repairs might be misreported, affecting revenue and expenses. Whistleblowers urge the SEC to investigate, potentially necessitating restated earnings dating back to at least 2017.
Tesla faced unusually high goodwill expenses compared to the automotive industry norm, as noted by industry veteran Nicholas Parks. Over roughly two months in late 2021, Tesla spent over $17 million on “goodwill” in the U.S. alone for approximately 247,000 repairs, amounting to about $70 of goodwill per average repair order. This was about 10 times more than what traditional auto dealers typically spend on goodwill per repair in the same time frame, according to Parks.
Tesla’s Internal Communication and Billing Challenges Revealed in Whistleblower Complaint
Employees at Tesla struggled with inconsistent communications and policies, resulting in misclassification of repair charges as “goodwill” or “customer pay” instead of being billed under warranty, as stated in a complaint filed with the SEC. Internal Tesla documents revealed the complex process employees had to navigate to track and classify billing for each repair, involving systems like WARP and internal communication channels.
Tesla’s internal guidelines provided conflicting instructions on categorizing repairs. For instance, a specific issue with headrests in car seats had contradictory guidance on whether repairs should be categorized as warranty-covered or charged to the customer.
The whistleblower complaint outlined Tesla’s awareness of these inconsistencies and efforts made during the latter half of 2021 to enhance data accuracy from its service division. Tesla aimed for over 90% accuracy in service centers’ pay type data, though traditional dealerships typically strive for 99% or higher accuracy and employ specialists to ensure this level of precision.
In 2021, whistleblowers alleged issues with Tesla’s constantly changing internal software, citing bugs and security vulnerabilities. They claimed third-party auditors may not have been given complete access to assess these systems. The complaint highlighted that Tesla employees, including non-administrative ones, had broad access to various company records and systems.
CNBC corroborated this, noting the extensive access employees have to Tesla’s internal apps and information. The whistleblowers included images in the complaint, showcasing examples of employees altering data points using developer tools, potentially impacting Tesla’s financial statements.
Additionally, the complaint emphasized inconsistencies in tracking vehicle sales and deliveries due to evolving databases and processes at Tesla. The accuracy of reported delivery numbers, crucial for investor expectations, was called into question.
Potential Legal Ramifications of Tracking Inaccuracies and Control Weaknesses at Tesla
The whistleblowers expanded on their concerns in early 2022, citing multiple databases and varying tracking methods. CNBC reached out to Tesla for comment but received no response.
Inaccuracies in tracking deliveries could warrant an investigation into Tesla’s financial reporting and adherence to Sarbanes-Oxley Act standards. This act mandates companies to disclose and maintain effective internal controls, preventing unauthorized data access. Securities law expert Lipton highlighted the potential legal implications of these alleged control weaknesses at Tesla.
Tesla’s Financial Challenges and Whistleblower Allegations
In 2022, Tesla made $12.56 billion in profit and had $22.10 billion in cash reserves. However, Elon Musk sometimes talks about the tough times when Tesla was close to going bankrupt. A complaint from a whistleblower suggested that in 2018 when Tesla was struggling while ramping up production of its Model 3, the company should have been more open with shareholders about its financial challenges.
In 2019, Musk discussed Tesla’s financial difficulties under oath in court. The whistleblowers referred to this in their complaint. They also mentioned internal documents about Tesla’s bank account balances, but the SEC did not follow up on this.
An accounting expert, Nelson, explained that if a company does not meet its financial obligations within a year, it should issue a warning. Tesla’s auditing firm, PricewaterhouseCoopers, was accused of a potential conflict of interest as it had done non-audit work for Musk’s other companies.
The whistleblowers also pointed to public records suggesting this conflict of interest. The SEC started looking into this in January 2022 but closed the investigation in April without talking to the whistleblowers.
The whistleblowers have been trying to get the SEC’s attention since late 2021, but the agency has been dealing with high turnover and understaffing. The SEC whistleblower program aims to encourage people to report violations of securities laws, and tip outcomes often depend on the SEC’s enforcement priorities. Whistleblowers can receive a percentage of the enforcement action fines.
The SEC mentioned that they value all whistleblower tips, regardless of whether the whistleblower has legal representation with SEC experience.
