Alexander Adomat

Dr. Vinson

ACCT 4150 Section 002

February 3, 2020

Fraud Case Part 1

4-1: There are a few external business risks that may create the potential for fraud at Tesla. One

major risk is the possibility of failure to meet financial expectations due to a reliance on single

source suppliers. For example, because Tesla relies on single suppliers for some parts, a strike in

that company or an unwillingness to work with Tesla would create a hiccup in production. This

may lead to Tesla being unable to meet production demands, and therefore financial

expectations. Because of this, somebody at Tesla may have the ability to create numbers that

make their production look higher than it actually is, affecting the ending revenue numbers that

effect stock prices. Faking production numbers would intentionally mislead investors who rely

on these numbers to make a sound investment decision.

Another example is the risk of Tesla’s financing program failing. If Tesla makes poor

credit decisions when deciding who to finance, the customer may not have the ability to pay

what they are owed. To make up for this, Tesla may downplay the number of uncollectable

accounts that they have at the time. They may wait to put an uncollectible account in another

year in order to make the current year not seem as bad, in effect misleading investors.
4-2: Tesla’s investors expect their returns to grow each year, something that is often hard for a

start up to promise. Tesla continues to expand in order to offer new models and services, leading

investors to infer that the company is doing well and that their investment will be returned. Tesla

states, however, that they have limited experience with this level of rapid expansion, which may

lead to them making some poor decisions. These poor decisions could affect financial

performance and therefore lead to Tesla not meeting investor expectations. This would cause

motivation to commit fraud in order to create the numbers that investors are searching for in their

returns.

Similar results may occur if Tesla is unable to produce the number of cars that they say

they will be able to. This could lead to the company overstating how many cars they produced in

order to please investors.

4-3: Tesla relies heavily on its suppliers and is also affected by the pricing of raw materials.

Because many of its suppliers are single source, the suppliers have an advantage over Tesla and

may ask for special treatment. This opens the door for fraud if the suppliers ask to move

expenses to another period or move deliveries to move around revenue numbers. This would

have an effect on Tesla by putting them in a tough position where they need to do what the

supplier wants or else they would lose production time while searching for a new supplier.

Raw material pricing also allows Tesla to commit fraud by putting a lower market cost on

their financial statements in order to lower costs and raise their margins. This would be

misleading to investors who often look at profit margin. The market pricing model opens the

door for fraud because Tesla can decrease or increase costs in order to better suit what their

financial statements need as long as they stay within a reasonable range.

5-A: Because Tesla is operating at a loss, there are numerous opportunities for fraud on its

financial statements. Obviously, operating with a net loss each year is not good for the company,

especially when the loss is growing each year. To remedy this, Tesla has the opportunity to raise

its sales numbers, downplay its losses, or possibly raise its expenses to avoid taxes each year.

Research and development is one figure that is particularly hard to measure, so the company may

be able to raise or lower this number to something that would help it, especially with the rate of

growth they are experiencing. The growth that they are going through makes it much harder to

track asset value and expenses, especially with the building of their new factory.

5-B: One factor that stands out when comparing Tesla to its competitors are the numbers they

claim for receivables turnover. When comparing to ZAP and BMW, Tesla’s receivables turnover

is roughly 3x higher than ZAP in 2014 and 2015, and 6x higher than BMW in the same years.

This raises questions about how they obtained such high turnover numbers, while payables

turnover is lower than BMW. Net income growth is also much lower than BMW, reaching nearly

-300%. However, because Tesla can still be considered a start-up company with volatile returns

each year, the numbers seem reasonable when compared to an established company such as

BMW.