Tesla is the toast of Wall Street. Tesla has been hitting it’s numbers every quarter, has a product that gets rave reviews by consumer magazines, and its CEO is heralded as the genius of green .
However, an investor should be extremely cautious when considering investing in Tesla. There is a high risk that Tesla’s financial statements may not be providing an accurate picture of Tesla’s financial situation. From an accounting perspective, there is a high risk that Tesla and Elon Musk are overstating the financial strength of Tesla.
In accounting there are three main points that create the accounting fraud triangle: pressure, opportunity, and rationalization. Tesla, and Mr. Musk exhibit all three points. Pressure: Mr. Musk faces extreme pressure from his investors/banks to hit his numbers in order to keep his funding; Opportunity: Tesla accounting does not use Generally Accepted Accounting Principles (GAAP) which may allow Tesla to “skew” their financials; Rationalization: Mr. Musk has an image (and perhaps a self-image) as a genius entrepreneur with godlike business qualities- it is easy for one with such an oversized ego to gloss over short term discrepancies.
The first point that fuels accounting fraud is pressure. Mr. Musk and Tesla face massive pressure from their investors/ banks. In order for Tesla to stay solvent they are reliant on cash provided by banks, and stockholders. These owners demand that Tesla hit its projections without any mistakes. The problem is that Tesla has set unreal projections. According to Tesla’s website they will sell 50% more cars annually. From 48,000 cars in 2015 to 72,000 in 2016.
The other pressure to commit fraud is Elon Musk setup of his compensation package. Elon Musk only received 33,280 dollars in salary in 2014. The rest of his compensation comes from his options to buy company stock. Currently Mr. Musk controls 35,528,859 shares of Tesla. At the current price of TESLA ($250) that is roughly 8.85 billion dollars. This creates huge incentive to report numbers which would drive his stock compensation higher.
The second point of accounting fraud is the opportunity to commit fraud. TESLA reports in NON-GAAP which means that TESLA reports in non-Generally Accepted Accounting Principles. Reporting in NON-GAAP provides the opportunity for TESLA to “fudge” their numbers. One example of the flaws of TESLA’s NON-GAAP reporting is their Lease buyback program. In GAAP Tesla would only report the income from the projected revenue for the sold car. In GAAP Tesla would have to report income earned over years the owner had the car. The Journal entry would look like Cash 100,000 Unearned Revenue 50,000 Liabilities 50,000. In GAAP revenue of 50,000 would have to be earned over the years the owner owned the car. In TESLA’s NON-GAAP reporting they are reporting all the lease as income so the journal entry would look like: Cash 100,000 Revenue: 100,000. This is just one of the glaring flaws in TESLA’s reporting that an investor can see. It begs the question what other “creative” accounting is TESLA doing in the background.
The last point of accounting fraud triangle is the rationalization. Elon Musk is seen as the torchbearer of green technology. This adds to his persona, that he cannot fail. That his company is for the “greater” good of society. That numbers mean nothing to what he is trying to achieve. Musk also has a persona that he is massively intelligent. His image is tied to TESLA. Would he change numbers, and cross ethical lines to keep his image.
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