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FRAUD BRAINSTORMING AT TESLA MOTORS ABSTRACT This instructional case explores the financial statement fraud risks at Tesla Motors, the revolutionary...

1.    Fraud risks related to Tesla’s culture, leadership, and governance structure


a)    How would you describe the “tone at the top” set by Tesla’s leader, Elon Musk? How does Musk’s leadership style and his “tone at the top” contribute to possible fraud risk at Tesla Motors?

b)    How would you describe the company’s culture? How might this culture create pressures and rationalizations for fraud?

c)    Review Tesla’s Code of Business Conduct and Ethics (See Supplement 1 – Tesla’s Code of Business Conduct and Ethics). How might any potential weaknesses in this code contribute to fraud risk at this company? 

I need question 1) A, B, and C answered please.

FRAUD BRAINSTORMING AT TESLA MOTORS ABSTRACT This instructional case explores the financial statement fraud risks at Tesla Motors, the revolutionary company behind the popular and highly rated Model S all-electric vehicle. Drawing on publicly available information about Tesla, this case provides students with an opportunity to understand and identify the incentives/pressures, opportunities, and rationalizations that might foster financial statement fraud at this company. Through this activity, students also participate in a simulated version of the kinds of fraud risk brainstorming activities required by AS 2401 (formerly SAS 99) for financial statement audits. The student learning objectives include: (1) understanding the factors that contribute to financial statement fraud risk, (2) applying critical thinking skills and the fraud triangle to identify fraud risk factors, (3) understanding the purpose of fraud brainstorming sessions, (4) creating a fraud risk matrix prioritizing key risk areas and adapting audit procedures to these assessed risks, and (5) experiencing the process of working in a group to conduct and document a fraud brainstorming session. This case is designed for both undergraduate and graduate students in an auditing or forensic/fraud accounting course. KEY WORDS : fraud risk factors, fraud triangle, brainstorming session, fraud risk matrix, AS 2401, SAS 99 1
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INTRODUCTION One of the most important skills needed by accountants today is the ability to analyze and detect fraud risks (Carpenter 2007; CAQ 2010; PwC 2015). The Association of Certified Fraud Examiners (2016) estimates that the typical organization loses five percent of its revenues every year to fraud. Beyond these losses, financial statement frauds also have far reaching negative consequences on investors, employees, suppliers, and other stakeholders of the corporation. Because of the importance of fraud detection to the integrity of our markets, auditing standards require that accountants fulfill their responsibility to obtain reasonable assurance about whether or not the financial statements they audit are free of material misstatement due to error or fraud (AS 2401, AU-C Section 240, International Auditing Standards 240). In particular, Auditing Standard 2401 (formerly Statement on Auditing Standards No. 99), Consideration of Fraud in a Financial Statement Audit , requires that fraud brainstorming sessions be incorporated into every audit engagement. These sessions are designed to increase the probability that auditors will detect intentional misstatements and to help set the right tone for professional skepticism and heightened sensitivity to fraud risk throughout the engagement (Ramos 2003). YOUR TASK This case requires you to imagine that you have been asked to participate in a fraud brainstorming session as part of a financial statement audit of Tesla Motors. This case has two parts. In Part I, you will learn how the concept of the “fraud triangle” is used to identify fraud risk factors, read background information on Tesla Motors, and work to complete the Part I case requirement questions designed to help you identify some of the financial statement fraud risks associated with this company. Part I is an individual assignment to be turned in as Deliverable 1. In Part II, you will learn about the process of conducting a fraud brainstorming session and how to adapt your planned procedures to respond to identified fraud risks. After reading Part II, you will work as part of an audit team to conduct a fraud brainstorming session. During this session, your team will be responsible for completing a fraud risk matrix and writing up a memo for the audit file that documents the results of your fraud risk assessment and identifies how your team believes the nature, timing, and extent of the audit procedures should be altered to respond to these identified risks. Part II is a group assignment to be turned in as Deliverable 2. It is important to note that as of the time of the writing of this case, Tesla Motors has not been accused of financial statement fraud. Nevertheless, you and your team should resist the natural inclination to presume that management is honest, and exercise professional skepticism in evaluating fraud risks at this company. Auditing standards remind us that we should conduct the engagement with a mindset that recognizes the possibility that a material misstatement due to fraud could be present, regardless of any past experience with the entity and regardless of the auditor's belief about management's honesty and integrity (PCAOB AS 2401, paragraph 13). PART I Using the Fraud Triangle to Identify Fraud Risk Factors Auditing standards define fraud as an intentional act that results in a material misstatement in the financial reports (PCAOB AS 2401, paragraph 5). Research shows that fraud 2
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1. Fraud risks related to Tesla’s culture, leadership, and governance structure a) How would you describe the “tone at the top” set by Tesla’s leader, Elon Musk? How does Musk’s leadership style and his “tone at the top” contribute to possible fraud risk at Tesla Motors? Based on the reading Tesla’s culture is described as “high risk, high reward”, and the tone at the top sounds very similar. The risk of fraud at Tesla motors seems high. Tesla leans on all the of the fraud triangle legs. Musk has incentives for performance since he was “vested” 5,274,901 stock options for production and performance goals. The second leg of the triangle is opportunities; or when circumstances allow for management or employees to commit and conceal fraudulent behavior. This includes financial relationships with related parties. Musk is treading a fine line within his related parties section. Being a chairman of the board or CEO for Tesla, SpaceX, and SolarCity as well as having his immediate family members on the board at Tesla. Finally, the last leg of the triangle is the attitudes and rationalizations. This being said Musk has made some pretty aggressive and unrealistic claims of Tesla stating they could rival Apple’s $700 billion market capitalization. b) How would you describe the company’s culture? How might this culture create pressures and rationalizations for fraud? c) Review Tesla’s Code of Business Conduct and Ethics (See Supplement 1 – Tesla’s Code of Business Conduct and Ethics). How might any potential weaknesses in this code contribute to fraud risk at this company? d) Describe some possible concerns with Tesla’s board of directors. How might these concerns create opportunities and rationalizations for fraud?
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Code of Business Conduct and Ethics (Adopted by the Board of Directors on May 20, 2010) Introduction This Code of Business Conduct and Ethics covers a wide range of business practices and procedures. It does not cover every issue that may arise, but it sets out basic principles to guide all employees, directors and officers of Tesla Motors, Inc, (the "Company"). All of our employees, directors and officers must conduct themselves accordingly and seek to avoid even the appearance of improper behavior. The Code should also be provided to and followed by the Company's agents and representatives, including consultants. If a law conflicts with a policy in this Code, you must comply with the law. If you have any questions about these conflicts, you should ask your supervisor how to handle the situation. Those who violate the standards in this Code will be subject to disciplinary action, up to and including termination of employment. If you are in a situation which you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 14 of this Code. 1. Compliance with Laws, Rules and Regulations Obeying the law, both in letter and in spirit, is the foundation on which this Company's ethical standards are built. All employees must respect and obey the laws of the cities, states and countries in which we operate. Although not all employees are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel. If requested, the Company will hold information and training sessions to promote compliance with laws, rules and regulations, including insider-trading laws. 2. Conflicts of Interest A "conflict of interest" exists when a person's private interest interferes, or appears to interfere, in any way with the interests of the Company. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively. Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Company. Loans to, or guarantees of obligations of, employees and their family members may create conflicts of interest. It is almost always a conflict of interest for a Company employee to work simultaneously for a competitor, customer or supplier. You are not allowed to work for a competitor as a consultant or board member. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf. Conflicts of interest are prohibited as a matter of Company policy, except under guidelines approved by the Board of Directors. Conflicts of interest may not always be clear-cut, so if you have a question, you should consult with higher levels of management or the Company's Legal Department. Any employee, officer or director who becomes aware of a conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described in Section 14 of this Code. 3. Insider Trading Employees who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business. All non-public information about the Company should be considered confidential information. To use non-public information for personal financial benefit or to "tip" others who might make an investment decision on the basis of this information is not only unethical but also illegal. In order to assist with compliance with laws against insider trading, the Company has adopted a specific policy governing employees' trading in securities of the Company. This policy has been distributed to every employee. If you have any questions, please consult the Company's Legal Department. 4. Corporate Opportunities
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Employees, officers and directors are prohibited from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No employee may use corporate property, information, or position for improper personal gain, and no employee may compete with the Company directly or indirectly. Employees, officers and directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises. 5. Competition and Fair Dealing We seek to outperform our competition fairly and honestly. Stealing proprietary information, possessing trade secret information that was obtained without the owner's consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each employee, officer and director should endeavor to respect the rights of and deal fairly with the Company's customers, suppliers, competitors and employees. No employee, officer or director should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice. The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any Company employee, family member of an employee or agent unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff and (5) does not violate any laws or regulations. Please discuss with your supervisor any gifts or proposed gifts which you are not certain are appropriate. 6. Discrimination and Harassment The diversity of the Company's employees is a tremendous asset. We are firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind. Examples include derogatory comments based on racial or ethnic characteristics and unwelcome sexual advances. 7. Health and Safety The Company strives to provide each employee with a safe and healthy work environment. Each employee has responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions. Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of illegal drugs in the workplace will not be tolerated. 8. Record-Keeping The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions. For example, only the true and actual number of hours worked should be reported. Many employees regularly use business expense accounts, which must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or your controller. All of the Company's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation. Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e- mail, internal memos, and formal reports. Records should always be retained or destroyed according to the Company's record retention policies. In accordance with those policies, in the event of litigation or governmental investigation please consult the Company's Legal Department. 9. Confidentiality Employees, officers and directors must maintain the confidentiality of confidential information entrusted to them by the Company or its customers, except when disclosure is authorized by the Legal Department or required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. It also includes information that suppliers and customers have entrusted to us. The obligation to preserve confidential information continues even after employment ends. In connection with this obligation, every employee
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TESLA MOTORS INC FORM 10-K (Annual Report) Filed 02/24/16 for the Period Ending 12/31/15 Address 3500 DEER CREEK RD PALO ALTO, CA 94070 Telephone 650-681-5000 CIK 0001318605 Symbol TSLA SIC Code 3711 - Motor Vehicles and Passenger Car Bodies Industry Auto & Truck Manufacturers Sector Consumer Cyclical Fiscal Year 12/31 © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-34756 Tesla Motors, Inc. (Exact name of registrant as specified in its charter) Delaware 91-2197729 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3500 Deer Creek Road Palo Alto, California 94304 (Address of principal executive offices) (Zip Code) (650) 681-5000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.001 par value The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The aggregate market value of voting stock held by non-affiliates of the registrant, as of June 30, 2015, the last day of registrant’s most recently completed second fiscal quarter, was $26,340,519,416 (based on the closing price for shares of the registrant’s Common Stock as reported by the NASDAQ Global Select Market on June 30, 2015). Shares of Common Stock held by each executive officer, director, and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 31, 2016, there were 132,056,338 shares of the registrant’s Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2015.
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1 Tesla Fraud Case Analysis
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