1.Fraud risks related to Teslas culture, leadership, and governance structure

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

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

c)Review Teslas Code of Business Conduct and Ethics (See Supplement 1 Teslas 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 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 is more likely when three conditions are present: incentives or pressures, opportunities, and attitudes or rationalizations. These three conditions are known collectively as the \"fraud triangle\" (Cressey 1953). Auditors use the fraud triangle as a tool to help identify areas of risk during the fraud risk brainstorming process, these risks are referred to as fraud risk factors. The next section describes each of the three conditions in more detail and provides highlights from recent research about how each condition has been linked with fraud. The first leg of the fraud triangle is incentives or pressures. This condition is present whenever management and/or employees have incentives or are under pressures to commit fraud (Arens, Beasley, and Alvin 2010). Research shows that when management compensation is tied to earnings and/or stock performance (e.g., bonuses, stock options) the likelihood of fraud is higher (Healy and Wahlen 1999; Fields, Lys, and Vincent 2001). Other incentives besides greed can also contribute to fraud risk. A recent study finds that CFOs may become involved in deceptive accounting practices not for personal financial gain, but rather to appease their CEOs and protect their jobs (Feng, Ge, Luo, and Shevlin 2011). Performance pressures also cause managers and employees to engage in fraud. A recent survey also finds that 64 percent of employees engage in unethical behavior because they feel pressure to \"do whatever it takes\" to meet business targets (KPMG, 2013).Changes in the external environment, such as declines in customer demand, increased competition, or new regulations can threaten the financial stability of a firm and create pressure to \"cook the books\" and create the appearance of success while the firm attempts to adapt to the environmental changes. Paradoxically, both high performing firms (e.g., MacLean 2008; Mishina,, Dykes, Block, and Pollock 2010) and low performing firms (e.g., Harris and Bromiley 2007; Zhang, Bartol, Smith, Pfarrer, amd Khanin 2008) have a higher risk of financial statement fraud, because both situations put pressure on executives to meet or exceed last period's earnings. Managers at poorly performing firms may also feel pressure to manipulate earnings or inflate asset balances in order to meet debt covenant requirements and avoid defaulting on loans. The second leg of the fraud triangle is opportunities. This condition is present whenever circumstances allow management or employees to commit and conceal fraudulent behavior (Arens et al. 2010). Many different factors create opportunities for fraud. The use of significant accounting estimates creates opportunities for earnings management and fraud, especially in the area of reserves, allowances, and depreciation calculations (PCAOB AS 2501 2016). Difficulty in verifying estimates and valuations also create opportunities for manipulation, particularly in areas such as intangible assets and level three fair market valuations (PCAOB 2502 2016). In addition, fraud risks are higher when internal controls are weak or ineffective, when company policies are ambiguous or enforced unevenly, or when oversight of financial reporting is inadequate, as all of these circumstances make it easier to commit and conceal fraudulent activity. Finally, transactions and financial relationships with related parties can create opportunities to commit and conceal fraud (PCAOB AS 2410 2016). The last leg of the fraud triangle is attitudes or rationalizations. This condition is present whenever management or employees exhibit an attitude, character, or set of ethical values that would enable committing a dishonest act (i.e., \"bad apples\") or whenever the environment imposes sufficient pressure on management or employees to cause good people to rationalize engaging in bad behavior (i.e., \"bad barrels\") (Arens et al. 2010; Trevio and Youngblood 1990). 3 Auditors should be alert to the risk of bad apples when management has a history of being dishonest, for violating laws and regulations, or a reputation for making overly aggressive or unrealistic forecasts. In these circumstances, auditors should be skeptical of management's integrity and the veracity of their statements. Auditors also need to identify circumstances where good people may be tempted to make bad choices. Under the right pressures, managers and employees can rationalize fraudulent activity as acceptable or even necessary, and thus disengage from the feelings of guilt and regret that normally prevent people from behaving dishonestly. For example, management might rationalize financial statement fraud if it prevents the loss of jobs or the closure of the business. Employees can also rationalize stealing from a company as \"getting what they are due\" if they feel under-paid or under-appreciated. Finally, managers might rationalize committing fraud if they suspect that competitors are doing the same. It is difficult to detect rationalization risks, but auditors should be alert for potential indicators such as the use of euphemistic language, social norms in the company and/or industry that treat dishonesty as a part of doing business, and the tone at the top set by the company's CEO. A CEO that explicitly values ethics and honesty and emphasizes not only results but the just means used to reach those results can foster ethical choices, whereas a CEO that is perceived as being unethical or even ethically-neutral can foster an environment where fraud is more easily rationalized (Trevino, Hartman, and Brown 2000). By examining fraud risk factors through the three legs of the fraud triangle, auditors may develop more accurate fraud risk assessments and become better prepared to alter the nature, timing, and extent of their audit procedures to respond to these identified risks. Tesla Motors Case Background Founding and History of Tesla Motors Tesla Motors (NASDAQ: TSLA) was founded in 2003 by a group of engineers in Silicon Valley with the vision of accelerating the world's transition to sustainable transport. To that end, Tesla Motors has created \"cars without compromise\" - that is, all electric vehicles that offer all of the torque, power, and style of high-end automobiles with none of the emissions. The company's mission is \"to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible\" (Tesla Motors 2015). Tesla's first release was the Roadster in 2008, which offered 0 to 60 mph acceleration in 3.7 seconds and a range of 245 miles per charge of its lithium ion battery. In 2012, Tesla launched the Model S, a four-door sedan that was named Motor Trend's 2013 Car of the Year. At the beginning of 2016, with more than 107,000 vehicles on the road worldwide, Tesla's product line has expanded to include the Model X, a crossover vehicle that entered volume production at the end of 2015, and the Model 3, a lower-priced vehicle expected to be released in 2017. However, Tesla does not limit its vision to only automobiles. It describes itself as \"a technology and design company with a focus on energy innovation\" (perTesla Motors 2016). Tesla has revolutionized the automobile industry in many ways. In addition to proving that all-electric vehicles can perform as well, if not better than, gas-powered vehicles, Tesla has challenged the conventional approach of how vehicles are sold. Rather than selling through 4 dealership franchises, Tesla sells and services its vehicles through its own sales and service network, including acceptance of online orders. To help establish the value of the Tesla brand and encourage early adopters to buy their vehicles, Tesla offers \"resale value guarantees\" to customers. Under this program, customers have the option of selling their vehicle back to Tesla Motors during the period of 36 to 39 months after delivery for a pre-determined resale value (Tesla Motors 2016). Due to widespread publicity and generally positive reviews of the vehicles, Tesla has enjoyed greater demand for its vehicles than it can fulfill. As such, it has been collecting deposits from customers at the time they place an order for a vehicle and, in some locations, at certain additional milestones up to the point of delivery. In addition, a closer look at Tesla's income statement reveals that Tesla sells much more than just cars. Tesla also earns revenue from related services, including access to its Supercharging network and software updates on its vehicles. Tesla also earns revenue from the sale of regulatory credits from energy tax credits and from the sale of components to other manufacturers. Lastly, Tesla earns revenue from \"Tesla Energy,\" a division of the company offering battery-powered energy solutions for home, businesses, and utilities (Tesla Motors 2016). Tesla's Income Statement and Balance Sheet for the past three years are presented in Exhibit 1 and 2, respectively. Tesla launched its initial public offering in June of 2010, raising $226 million in equity. At the time, the company employed less than a thousand employees and had less than $150 million in revenue. The company has since experienced rapid growth. Over the past five years, revenues have grown more than 1,000 percent from $204 million in 2011 to $4.1 billion in 2015. After several years of trading between $22 and $33 per share, Tesla's surprise announcement of quarterly profits in 2013 drove the stock into the triple-digits (Taylor III 2013). In March of 2016, the company enjoyed a market capitalization of almost $30 billion and traded at about $200 per share. Tesla Motors stock performance for the past two years is provided in Exhibit 3. Tesla's Leadership Tesla Motors is led by CEO and co-founder Elon Musk. Musk made his fortune as a cofounder of PayPal, which was acquired by eBay in 2002 for $1.4 billion. Musk is also the CEO of Space Exploration Technologies, better known as SpaceX, a company that aims to develop the world's first private spacecraft for commercial space travel, and he is Chairman of the Board of SolarCity, a company that aims to expand the availability of clean, affordable energy. A selfmade man and serial entrepreneur, Musk's innovations and charisma have earned him the areputation as a \"real life Iron Man\" in reference to the Marvel Comics super hero (Smith 2014). Musk is known for his bold vision and his even bolder proclamations. In a live interview in 2009, Musk called a New York Times journalist that wrote a critical review of Tesla a \"douchebag\" and an \"idiot\" (https://www.youtube.com/watch?v=ajP3B0gYJlo). In an early 2015 earnings call with analysts, Musk also declared that he thought Tesla's market capitalization could rival Apple's $700 billion in the next ten years, which would be more than the market capitalizations of Ford, GM, Honda, Toyota, BMW, and Mercedes Benz combined. Musk made this declaration in the face of production delays, weakening market conditions, and falling gas prices, which has traditionally made the sale of electric cars more difficult. 5 Tesla's future prospects appear to depend on Musk's ability to achieve feats that other car makers would never dream of. As an incentive for Musk to make his bold vision a reality, Tesla's Board of Directors granted 5,274,901 stock options to Musk that will \"vest\" or become available to him to exercise based on his ability to lead the company towards meeting specific production and performance goals, including the successful completion of the Model X and Model 3 prototypes and reaching 100,000 units in total vehicle production (Tesla Motors 2016). In addition to overseeing Musk's plans and providing the company with guidance, Tesla's Board of Directors is also tasked with protecting the interests of Tesla's stockholders, to include having responsibility for risk oversight. Following best practices for corporate governance, Tesla's guidelines suggest that the majority of Tesla's directors be \"outsiders,\" meaning noncompany employees, and it has a standing Audit Committee to whom both internal and external auditors report directly (Tesla Corporate Governance Guidelines 2016). Some have raised concerns, however, about whether Tesla's board is as independent as it appears. CtW Investment Group, which works with union-based pension funds and holds 200,000 shares of Tesla, recently called on the company to separate the Chairman of the Board and CEO roles, both of which Musk now holds, and to prohibit immediate family members from serving on the board (Sage 2016). Elon Musk's brother, Kimbal Musk, currently serves on the boards of both Tesla and SpaceX. Board member Brad Buss is also a former employee of SolarCity, Elon Musk's related company. Tesla's Employee Culture Tesla's culture has been described as \"high risk, high reward,\" and the company prides itself on operating like an internet startup, despite having been public for five years (Fehrenbacher 2015). Employees regularly work long hours and the atmosphere has been described as \"grueling.\" Nevertheless, many employees have enjoyed big payouts as a result of their association with Tesla. In mid-2015, Jerome Guillen, then Tesla's Vice President of Sales and Services, exercised options and sold shares netting him $4 million. Guillen has subsequently taken a leave of absence from Tesla. In addition, Tesla's longtime CFO, Deepak Ahuja, has recently retired from Tesla after making millions exercising his stock options in 2015. While the environment may be one of high pressure for employees, many may enjoy working in the innovative and mission-driven environment Tesla promotes. As an example of Tesla's commitment to transparency and the advancement of energy alternatives, Tesla made the radical announcement that it would not initiate patent lawsuits against anyone who, in good faith, wanted to use its technology (Tesla 2015). Challenges for Tesla and Its Future Despite its rapid growth and popularity, Tesla has also experienced a number of setbacks. It has struggled to reach its desired production levels, resulting in lengthy delays for customers. Competitors, such as BMW, Nissan, and General Motors, have been developing all electric alternatives and boast much higher production and distribution capabilities than Tesla. Exhibit 4 presents a peer comparison of Tesla's financials with its current competitors. In addition, analysts have raised questions about Tesla's reliance on emissions credits to shore up 6 losses and its exposure to lawsuits and lobbying by dealership unions to block states from allowing direct automotive sales to consumers (Taylor III 2013). Moreover, while Tesla's Model S achieved an overall five star safety rating by the National Highway Traffic Safety Administration, questions about the safety of Tesla's new technology have continued to plague the company. In November 2013, a class action lawsuit was filed against Tesla and its CEO alleging that Mr. Musk had made false and/or misleading representations with respect to the safety of the Model S. The case was dismissed in September 2014 by the trial court, but the plaintiff's appeal is still pending as of early 2016 (Tesla Motors 2016). Tesla has big plans for the future of its business. With the popularity of its vehicles continuing to climb, Tesla has begun to expand its operations. Among these expansions, the company has invested in an assembly facility in the Netherlands and a specialized production plant in Lathrop, California. Tesla has also entered into strategic partnerships with companies like Panasonic to focus on reducing the costs of lithium ion battery packs. In addition, Tesla recently announced the beginning of construction on its multi-billion dollar investment in a \"Gigafactory\" in Nevada that will facilitate production of more affordable electric vehicles and battery powered energy alternatives (Tesla Motors 2015). According to its 2015 annual report, Tesla plans to continue expanding stores and its service infrastructure worldwide. It will invest $1.5 billion in capital expenditures in equipment to support cell production at the Gigafactory, to begin installation of Model 3 vehicle production machinery, to open about 80 retail locations and service centers, and to energize about 300 new Supercharger locations (Tesla Motors 2016). These bold expansion plans could put Tesla at the center of an energy revolution, or they could cause the company to implode under the weight of significant debt levels and even greater expectations. Part I Case Requirements: Identifying Fraud Risk Factors Students should work individually to complete responses to each of the assigned case requirement questions using the information on Tesla Motors provided in the case background and, where noted, the case supplements.1 Student responses should be turned in to the instructor as Deliverable 1 before proceeding to Part II. 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? 1 Case supplements are available as an instructor download. These supplements include Tesla's Code of Business Conduct and Ethics (Supplement 1) and Tesla's 2015 Annual Report (Supplement 2). 7 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? 2. Fraud risks related to Tesla's incentive structures and stock performance a) To what extent are executives and employees incentivized with shares and stock options (See Supplement 2 - Tesla's 2015 Annual Report, Item 8 Financial Statements and Supplementary Data section, Note 10 - Equity Incentive Plans)? How do these pay structures create pressures/incentives for fraud? b) Review Tesla's stock performance over the last two years (refer to Exhibit 3). What fraud pressures does this stock performance create? 3. Fraud risks related to revenue recognition at Tesla a) What does this company sell and how does it account for revenue, accounts receivable, and COGS (See Supplement 2 - Tesla's 2015 Annual Report, refer to Item 1 Business, Item 7 Management's Discussion and Analysis (MD&A), and Item 8 Financial Statements and Supplementary Data Note 2 - Summary of Significant Accounting Policies)? b) How might these revenue recognition practices create opportunities, incentives, and/or rationalizations for fraud? 4. Fraud risks related to Tesla's business and operating conditions a) Review the business risks disclosed by the company (See Supplement 2 - Tesla's 2015 Annual Report, refer to Item 1A Risk Factors and Item 7 MD&A). How might some of these business risks from the external environment also create fraud risks within Tesla? b) What fraud risks are posed by this company's expansion plans and its ability to operate as a going concern? c) What related party transactions support Tesla's financial performance (See Supplement 2 - Tesla's 2015 Annual Report, refer to Item 1 Manufacturing)? How might these transactions create opportunities for fraud? 5. Fraud risks indicated by the results of preliminary analytical procedures a) What fraud risks are indicated by preliminary analytical procedures of Tesla's financial statements (See Exhibits 1, 2, and 4)? How does the company perform relative to its peers? Do these ratios and trends seem reasonable? 8 9 REFERENCES American Institute of CPAs (AICPA). 2006. Consideration of fraud in a financial statement audit. AU Section 316. Arens, I. R. J., M. S. Beasley III, and A. Alvin. 2010. Auditing and Assurance Services: An Integrated Approach-13/E. 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Moral person and moral manager: How executives develop a reputation for ethical leadership. California Management Review 42 (4): 128-142. Trevino, L. K., and S. A. Youngblood. 1990. Bad apples in bad barrels: A causal analysis of ethical decision-making behavior. Journal of Applied Psychology 75 (4): 378-385. Wells, J. T. 2001. Irrational ratios. Journal of Accountancy 192 (2): 80. Zhang, X., K. M. Bartol, K. G. Smith, M. D. Pfarrer, and D. M. Khanin. 2008. CEOs on the edge: Earnings manipulation and stock-based incentive misalignment. Academy of Management Journal 51 (2): 241-258. 12 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\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 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 email, 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 should have executed a confidentiality agreement when he or she began his or her employment with the Company. 10. Protection and Proper Use of Company Assets All employees, officers and directors should endeavor to protect the Company's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Company equipment should not be used for non-Company business, though incidental personal use may be permitted. The obligation of employees to protect the Company's assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Company policy. It could also be illegal and result in civil or even criminal penalties. 11. Payments to Government Personnel The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country. In addition, the U.S. government has a number of laws and regulations regarding business gratuities which may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. The Company's Legal Department can provide guidance to you in this area. 12. Waivers of the Code of Business Conduct and Ethics Any waiver of this Code for executive officers or directors may be made only by the Board of Directors and will be promptly disclosed, along with the reasons for the waiver, as required by law or stock exchange regulation. 13. Reporting any Illegal or Unethical Behavior Employees are encouraged to talk to supervisors, managers or other appropriate personnel about observed illegal or unethical behavior and when in doubt about the best course of action in a particular situation. It is the policy of the Company not to allow retaliation for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct. Any employee may submit a good faith concern regarding questionable accounting or auditing matters without fear of dismissal or retaliation of any kind. 14. Compliance Procedures We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know if a violation has occurred. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. These are the steps to keep in mind: Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible. Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is. Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem. Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor's responsibility to help solve problems. Seek help from Company resources. In the rare case where it may not be appropriate to discuss an issue with your supervisor, or where you do not feel comfortable approaching your supervisor with your question, discuss it locally with your office manager or your Human Resources manager. You may report ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, your anonymity will be protected. The Company does not permit retaliation of any kind against employees for good faith reports of ethical violations. Always ask first, act later: If you are unsure of what to do in any situation, seek guidance before you act. CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS The Company has a Code of Business Conduct and Ethics applicable to all directors and employees of the Company. The CEO and all senior financial officers, including the CFO and principal accounting officer, are bound by the provisions set forth therein relating to ethical conduct, conflicts of interest and compliance with law. In addition to the Code of Business Conduct and Ethics, the CEO and senior financial officers are subject to the following additional specific policies: 1. The CEO and all senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the SEC. Accordingly, it is the responsibility of the CEO and each senior financial officer promptly to bring to the attention of the Disclosure Committee any material information of which he or she may become aware that affects the disclosures made by the Company in its public filings or otherwise assist the Disclosure Committee in fulfilling its responsibilities as specified in the Company's Disclosure Controls and Procedures Policy. 2. The CEO and each senior financial officer shall promptly bring to the attention of the Disclosure Committee and the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. 3. The CEO and each senior financial officer shall promptly bring to the attention of the General Counsel or the Legal Department or the CEO and to the Audit Committee any information he or she may have concerning any violation of the Company's Code of Business Conduct and Ethics, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. 4. The CEO and each senior financial officer shall promptly bring to the attention of the General Counsel or the Legal Department or the CEO and to the Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of violation of the Code of Business Conduct and Ethics or of these additional procedures. 5. The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of the Code of Business Conduct and Ethics or of these additional procedures by the CEO and the Company's senior financial officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code of Business Conduct and Ethics and to these additional procedures, and shall include written notices to the individual involved that the Board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the Board) and termination of the individual's employment. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past. TESLA MOTORS INC FORM 10-K (Annual Report) Filed 02/24/16 for the Period Ending 12/31/15 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 3500 DEER CREEK RD PALO ALTO, CA 94070 650-681-5000 0001318605 TSLA 3711 - Motor Vehicles and Passenger Car Bodies Auto & Truck Manufacturers Consumer Cyclical 12/31 http://www.edgar-online.com Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. 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 (State or other jurisdiction of incorporation or organization) 91-2197729 (I.R.S. Employer Identification No.) 3500 Deer Creek Road Palo Alto, California (Address of principal executive offices) (650) 681-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: 94304 (Zip Code) Title of each class Common Stock, $0.001 par value Name of each exchange on which registered 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. TESLA MOTORS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2015 INDEX Page PART I. Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures 4 13 27 28 28 28 PART II. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 29 31 32 43 45 74 74 74 PART III. Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services 75 75 75 75 75 PART IV. Item 15. Exhibits and Financial Statement Schedules 75 Signatures 82 2 Forward-Looking Statements The discussions in this Annual Report on Form 10-K contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, profitability, expected cost reductions, capital adequacy, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words \"anticipates\