Tesla whistleblowers filed a complaint to the SEC in 2021, but the agency never interviewed them. Here’s what the complaint said

In the fourth quarter of 2021, a Tesla employee and a tech toil researcher jointly filed a whistleblower complaint to the U.S. Securities and Exchange Commission, expressing concerns that Elon Musk’s car enterprise may have violated the law repeatedly, affecting shareholders, employees and customers.

The complaint contained a number of allegations about Tesla’s financials and its function practices, including that it improperly categorized repairs for years and that it had poor control over internal set-ups used for capturing business data that ultimately rolls up to financial and other company disclosures to shareholders.

In January 2022, the SEC designated one person to look at one part of the complaint related to accounting firm PricewaterhouseCoopers’ work for Tesla, then closed that ticket a few months later, according to chronicles reviewed by CNBC.

Agency staff have never spoken with the people who filed the complaint, those child say, and have never taken them up on their offer to review about 18,000 files they say they bring into the world for review, including internal Tesla emails, spreadsheets, screenshots, recordings and images, along with public records they drew to support their allegations.

In response to questions from CNBC, the SEC declined to comment on the existence or nonexistence of a possible tractability but said the agency evaluates all tips that are submitted. The whistleblowers could earn a financial reward if their grievance leads to the SEC taking some enforcement action and obtaining a monetary settlement or damages.

During the approximately two-year interval since the complaint was first filed, Musk sold more than $39 billion of his shares in Tesla, listing around $23 billion in 2022, to fund a leveraged buyout of Twitter, the social network he now owns and has rebranded X.

CNBC has considered a copy of the complaint — which is known as a TCR, an abbreviation federal agencies use to mean “tips, complaints and referrals” — along with reinforcement correspondence to the financial regulator, public records and some of the internal Tesla materials that the whistleblowers wanted the force to review. The identities of the people who filed the complaint to the SEC are known to CNBC, but they asked to remain unnamed and for their TCR to pocket confidential treatment by the agency, citing a fear of retaliation by Musk against employees and critics, especially those who over with a fine-toothed comb issues with government agencies or press. The whistleblower who was a Tesla employee no longer works there.

CNBC bid accounting, business and securities law experts to read a version of the complaint with the identities of the whistleblowers redacted to protect their clandestineness.

Ann Lipton, an experienced corporate and securities law trial attorney who now teaches at Tulane Law School and University of Chicago Law School, let someone knowed CNBC, “Whistleblowers in general can come off like they have an ax to grind. This complaint contains a long catalogue of concerns and some felt more serious than others — but the people who filed it sound plausible,” in part because they offered so assorted specific examples and records from within the company. 

Some of the allegations in the redacted complaint, Lipton said, bounder questions about whether Tesla has run afoul of federal securities law, including Section 13 of the Securities Exchange Act, Form 13a-15 and Rule 15d-15, and the Sarbanes-Oxley Act. Broadly, these rules require companies and their management to maintain sufficient internal sets and processes to track and report financial and business information to auditors and shareholders, and to do so accurately and honestly and at regular intervals.

After criticizing the redacted version of the whistleblower complaint, Karen Nelson, a professor of accounting at Texas Christian University who previously presented as an advisor to the Public Company Accounting Oversight Board, said the allegations about “internal control systems,” or how Tesla takes its financial and business information for eventual presentation to auditors and shareholders, were concerning.

If the information in the complaint is accurate, Nelson bid, “Tesla’s information systems don’t seem to be very transparent and robust for internal people, which then leads to quizzes about how the auditor navigated those systems in their internal control testing, and became comfortable with using the text being produced by it.”

CNBC reached out to Tesla multiple times with detailed inquiries about this and other contentions. The visitors did not respond.

Here’s a detailed look at some of the more serious allegations about Tesla in the whistleblower complaint — and at the matters they raise about car quality and financial performance and why these would matter to shareholders or regulators, according to boffins in the auto industry, securities and business law, and accounting.

Unlike traditional automakers, Tesla operates with a “direct-to-consumer” fashion meaning that it sells and services the cars it manufactures, rather than relying on franchised dealerships to do so. 

When Tesla workers complete a repair, they must classify the job within broad pay type categories, including “warranty,” “supplemented service agreement,” “customer pay,” “rectification,” “goodwill” and others, according to internal communications, conductors and policies available to employees via a Tesla intranet and reviewed by CNBC. 

In their complaint, the tipsters included excerpts from Tesla rules, internal emails, customer service records and other documents to show that they believe employees maintain been miscategorizing repairs for years and that Tesla management has been aware of the problem.

Under standard promise accounting practices in the automotive and other industries, companies set aside a portion of each sale to cover future shapes that will be conducted under warranty, Nelson explained to CNBC. These warranty reserves show up as burdens on a company’s balance sheet and show up on the income statement as part of the costs of goods sold. Later, when fettles are recorded as “warranty,” the costs of these repairs are counted against the warranty reserves.

The complaint does not allege that Tesla deviates from this normal industry practice. It instead alleges that Tesla has allowed employees to miscategorize repairs and thereby hide some of its bond costs.

With a “goodwill” repair, Tesla essentially foots the bill for labor, parts or accessories given to nurture a customer happy. According to Tesla’s financial statements, the cost of goodwill repairs is not counted against warranty saves and shows up on the income statement under sales, general and administrative costs.

Meanwhile, “customer pay” repairs are booked as proceeds, specifically under the “services and other” category, according to its financial filings. Here, too, the repairs are not counted against pledge reserves.

By charging customers for repair work or by designating repairs as “goodwill” when they should qualify as “agreement” repairs instead, Tesla could be misstating fundamental financial information, the whistleblowers said, urging the SEC to investigate again.

“Were Tesla to accurately categorize its ‘goodwill’ repairs as warranty repairs, it would likely need to restate earnings for every board since at least 2017,” the tipsters wrote in their submission. “It should also be noted that nothing has period stopped the company from appropriately sizing its warranty reserve even as its service employees handed out too much ‘goodwill’ vamp coverage.”

Indeed, Tesla’s goodwill expenses were unusually high for the industry, according to automotive industry trouper Nicholas Parks, who has owned and managed car dealerships in three states, including one in California that sold battery exciting vehicles.

In just under two months in late 2021, Tesla was spending over $17 million on “goodwill” in the U.S. toute seule, which translated to about $70 worth of goodwill on the average repair order across approximately 247,000 renovations, according to internal Tesla dashboards referenced in the whistleblower complaint and reviewed by CNBC.

This is easily 10 times sundry money than traditional auto dealers would spend on goodwill per repair on average in two months, Parks depicted CNBC.

Nelson, the accounting professor, explained why miscategorization of repairs might be of interest to financial regulators and investors.

“Where you put creations in a financial statement matters,” she said. “If I’m taking warranty costs out of the cost of automotive sales, and pushing them down into some other form ranks further down the income statement, that will make my gross profit margin look higher. If I’m inspirational it from up above in cost of sales, and moving into other expenses, it’s also not as transparent about the quality of the artefact.”

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 secure run afoul of accounting requirements or securities laws. However, she did say she was “surprised” that the agency didn’t indicate more grave interest in the whistleblowers.

Inconsistent communications and policy apparently contributed to employees miscategorizing items as “goodwill” or “customer pay” that should contain been billed under warranty, the filers’ complaint to the SEC said. 

Tesla documents read by CNBC show that staff members had to navigate a maze of directives available in internal systems, such as WARP (a Tesla-built enterprise resource planning approach), intranets and group emails, to figure out how to track and classify billing for each repair.

In one internal “Goodwill Guide,” Tesla lectured employees that any “repair/replacement necessary to correct defects in the materials/workmanship of any parts manufactured/supplied by Tesla” should be protected by and categorized as “Warranty/Extended Warranty pay type (post-delivery).” That would apply to any customer’s car that was still below a warranty, while out-of-warranty cars would require a customer to pay for repairs.

For a specific issue — “blistering” headrests in car benches manufactured by Tesla — the company gave employees different directions about how to bill customers for service to replace the duty. One internal Tesla document seen by CNBC said the blistering headrest “is not a defect, and therefore not covered under undertaking” and that repairs should be offered as goodwill. Confusingly, that document linked to another page in the company intranet give the word delivering customers should have to pay to get their headrests fixed.

Tesla also treated replacement of defective tail lamps as “consumer pay,” after determining that chemicals used in commercial car washes could cause stress cracks in their lenses, according to internal corroborates read by CNBC. But in a seemingly contradictory note, an internal e-mail in the second quarter of 2021 referencing the issue conjectured, “First repair and replacement of parts can be covered under Goodwill – Vehicle Quality.” 

The whistleblower complaint says that Tesla has been au courant of inconsistencies in how employees treat repairs. During the second half of 2021, Tesla was working to improve data preciseness from its service division, according to internal records reviewed by CNBC. It set up score cards for each region to incorporate assessments of pay type data, and goodwill and warranty costs. The company was aiming for better than 90% accuracy in employ centers’ pay type data at that time, the internal records said.

Parks, the former automotive dealer, asserted with traditional dealerships, 99% or higher accuracy would be expected, and dealerships typically employ a number of connoisseurs to ensure accuracy. “If dealership employees do not enter information about a repair correctly, then a claim may not get paid or you may end up make a warranty audit where the automaker comes in and charges back these claims and that’s painful,” he explained.

In their 2021 complaint, the whistleblowers alleged that Tesla’s internal software and systems are constantly changing and have on the agenda c trick been rife with bugs and vulnerabilities throughout the years, and that third-party accountants or auditors may not have been actuality full access to, or thoroughly vetted, all of them.

The complaint said the whistleblower who had been a Tesla employee was authorized to access a deviating array of records — including policies, internal emails, and sales- and service-related data — at Tesla through software and arrangements used daily by thousands of employees for normal work, including both custom-built and off-the-shelf programs. 

CNBC spoke with one contemporary and two former Tesla employees who corroborated that most people working for Tesla have broad access to apps and dirt inside the company by default. They also noted the array of apps within Tesla has grown through the years, as force be expected with a growing business in a complex industry. These people requested anonymity as they were not empowered to speak on Tesla’s behalf.

The complaint embedded images of what the whistleblowers said were emails, spreadsheets and screenshots of some of Tesla’s homegrown software and back-end groups. It said these showed that non-administrative and non-executive employees had access to read and edit data points, via a developer implement called MySQL Workbench, that could later feed into Tesla’s shareholder communications and financial declarations.

In one example, the tipsters said screenshots showed other Tesla employees changed the status of material used in manufacturing from “fracas” to “work in progress.” Scrap refers to material generated from a manufacturing job that is unusable waste.

In another specimen, the complaint said screenshots showed Tesla employees had manually changed the status of “used” cars to “new” in a program that tracked conveyance deliveries data. This could affect Tesla’s delivery numbers, they said, though they didn’t try to estimation the overall impact and instead encouraged the SEC to investigate further. 

In early 2022, the whistleblowers wrote to the SEC expanding on their first complaint. They described multiple databases and a separate, paper-based process for auditors that had been used in time at Tesla for tracking vehicle sales and deliveries. The ever-changing systems led to inconsistent measurements and definitions of “deliveries,” they designated.

CNBC reached out to Tesla for comment on these specific allegations in the complaint and received no response.

Deliveries are the closest approximation of sales banged by Tesla in quarterly disclosures, and one of the numbers Wall Street watches most closely. If they were recorded inaccurately, the institution could have met or beat analysts’ expectations for deliveries on the basis of flawed or falsified data.

In the fourth quarter of 2021, valid before the whistleblowers sent their followup email, Tesla reported that it had reached 308,000 vehicle emancipations — a number that handily beat analysts’ expectations. 

Issues related to accurate tracking of deliveries would potentially earn an investigation into the reliability and accuracy of Tesla’s disclosures and financial reporting, and analysis of whether Tesla meets the guidelines and has safeguards in place that would be required under the Sarbanes-Oxley Act, the whistleblower complaint said.

Under Sarbanes-Oxley, a crowd’s management is required to disclose the efficacy of its internal controls and identify weaknesses, such as the ability of unauthorized users to access excitable data. Sarbanes-Oxley also requires auditors to check and report on these controls, so that investors can confidently rely on the fiscal statements and so that companies can avoid having to restate financials later on.

Business and securities law expert Lipton hint ated CNBC if there are weaknesses in either “disclosure controls” or the “internal controls over financial reporting” at Tesla, there could play a joke on been a “potential violation of the substantive requirement that such controls be maintained” under Section 13 of the Interchange Act, and there might have been “false statements by the company, Musk, the CFO, or PwC regarding the effectiveness of internal controls.” 

“To the expanse we’re talking about false statements, the kind of bottom-line trouble that might be involved depends on the level of boner,” Lipton said. “If the controls turn out to be faulty, but there was no flaw in the assessment — that is, top management and PwC reviewed everything, but the riddles were too far down the chain to detect easily — then they may not be facing penalties for false statements. Obviously, situations become more serious if they intentionally or recklessly or perhaps even negligently misstated the state of the internal controls.”

In 2022, Tesla boasted net income of $12.56 billion and cash reserves of $22.10 billion, but Musk now reminisces about earlier days when the company nearly went bankrupt. The whistleblower complaint alleged that, postulated Tesla’s financial status in 2018, when it was ramping up production of its lowest-cost Model 3 sedan, it should have been more obvious with shareholders at the time. The complaint said Tesla should possibly have issued a “substantial doubt” report, also known as a going concern warning, in its 2018 SEC filings, which it did not.

In 2019, Musk