Chapter 2 Theories about Business Government .docx

Chapter 2: Theories about Business Government Relations
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AgendaThree models of government-business relationsThe
shareholder modelThe strategic modelThe stakeholder
modelCrony Capitalism
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Why Study Theories?Helpful in understanding complex social
realitiesSimplify and organize knowledge by describing patterns
and regularitiesOffer different perspectives regarding the
interactions between business and government.In practice they
define the strategies, operations, and outcomes of businesses

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Three Models of Business and SocietyBusiness centered
approachesShareholder modelStrategic business
modelStakeholder modelNote that there are other important
“players” in society, in particular, religion
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The Shareholder ModelEmphasizes economic principlesViews
business in isolationEmphasizes economic analysis and profit-
making for direct or indirect ownersEmphasizes the invisible
hand at the micro levelStresses the importance of dynamic
marketPromotes non-intervention by government Contends the
principle duty of government is to ensure that markets function
properly, and to correct market failures
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Examples of shareholder modelEconomic freedom Index
(Heritage Foundation)Rule of lawLimited
governmentRegulatory efficiencyOpen markets(Top in 2015:

Hong Kong, Singapore, NZ, Australia, Switzerland, Canada,
Chile, Estonia, Ireland, and Mauritius)Domestic example:
Investment banks
Various critiques of the Shareholder ModelDownplays market
imperfections Ignores the need for government vigilance and
intervention to protect market failureIn practice, tends to ignore
the reality of business’ demands on government and the
advantages frequently provided by governmentToo much
emphasis on monetary and material gains
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The Strategic Business ModelEmphasizes the practice of
business and successOne element: being highly competitiveMost
efficient and effective use of resources; Competing to win
through hard work and clevernessPlaying the game wellThe
model also emphasizes collaborationJoining other strong
competitors, networking, creating goodwill, focusing on
comparative strengthsPragmatically, it wants: Moderate taxes
and moderate regulations, stable policies, and protections in
global competitionTo pragmatically use/exploit governmental
resources
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ExamplesCouncil on Competitiveness
Where America Needs to Be
To drive US productivity, buttress our leadership in world
markets, and raise the standard of living for all Americans, the
United States must:
• Immediately work to:
– Ensure lower cost, easy access to high quality education and
training for all Americans
– Maintain long-term federal investments in science and
technology leadership
– Reform and simplify the tax code to stimulate investment and
attract global capital to the United States
• Over the next ten years:
– Create at least 21 million jobs
– Reduce unemployment to 5 percent
– Reduce government debt by $4 trillion to ensure America’s
long term solvency
– Invest $2.2 trillion in infrastructure to maintain competitive
advantage
– Double exportsGlobal Competitiveness Index; Community
Banks
Critique of the Strategic Business Model
More balanced and realistic than the shareholder perspective,
but Unclear and inconsistentHow do you decide your values
when they compete and evolve?
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The stakeholder modelThis perspective sees business as critical
to but nonetheless subordinate to society Stakeholders include
not only investors, partners and employees, but also customers,
the community, government, and other groups in society
affected by business (e.g., environmental groups)
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The stakeholder modelCreates duties toward multiple
constituents of the corporationWhile profits are important and
one of the mainstays of business, they do not crowd out other
business and social values in the stakeholder viewA long-term
perspective encourages an attitude of sportsmanship in
competition, with the accent being on getting better rather than
simply winning in the short termPursuit of a good reputation for
pragmatic purposesRequires business management raise its gaze
above profits to see and respond to a spectrum of other values
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Examples, company levelAnnual listing by Corporate
Responsibility
impact on the environment,
climate change behaviors,
avoidance of human rights abuse,
quality employee relations,
open corporate governance,
community-based philanthropy, and

financial integrity
Development banks
Examples, at the country level
Three stakeholder perspectives: quality of life, environmental
concern, equity
Human Development Index (UN) where US is very high
Environmental Performance Index where US is upper middle
Wealth distribution: Gini Coefficient (from .25 to .70 with low
fraction as the most equal); US in the lower middle
The stakeholder modelCritics to the stakeholder
modelUnrealistic assessment of power relationships between the
corporation and other entitiesToo vague a guideline to
substitute for the yardstick of profits Not clear who or what is a
legitimate stakeholder
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Comparison of three
modelsModelsShareholderStrategicStakeholder Role of societal
interestsComplete separation of financial and societal
interestsMix of financial interestsFinancial interests should
never override social goodIntegration of private and public
sectorSectors as separate as possible; regulation or financial
incentives for business as little as possibleSectors work together
and business benefit from government support Business sector
should not manipulate the public sector for its selfish endsSize

of governmentGovernment as small as possible; private sector
models are preferred Government being large enough to ensure
basic servicesBusiness having self-regulation and strong
professional normsKey valuesShort-term wealth creation, self-
reliance, dynamic destruction by market; win-lose
philosophyLong-term wealth creation, synergy of sectors and
selective partnerships, pragmatic use/exploitation of
government, do good when it is profitable ; change is both
strategic/rational; game theory Wealth creation never at expense
of some stakeholders; inclusion of stakeholders ; win-win
strategies; concern for the world
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When the Ideal Models Become Corrupted: Crony
CapitalismCrony CapitalismClose relationship between business
and government leading to favored treatment to individuals,
firms, or industries at the expense of the public

Spectrum of Crony Capitalism
1. Strongman modelDominance of leader and his/her group (i.e.,
dictatorships or quasi-dictatorships)Vague laws; laws instituted
abruptly by dominant figureExample:Russia under Putin
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2. Fused political-bureaucratic elite modelDominance by family
or small group of large asset owners (rather than strongman or
despot)Rampant bribery and corruption Example:Second
red/official generations in China
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3. Economic elite dominance modelDominance by economic
elites because of the power of money; often more subtleMarket
distortion and unhealthy imbalances in civil society
(Source: http://seanmarske.wordpress.com/2012/07/10/whos-
running-the-show-introducing-the-criminal-elite/)
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Economic elite dominance modelPowerful financial interests
can corrupt the society throughAbility to change critical
administrative rulemakingExerting influence via control of
mediaIncreased opportunity to be elected officialsBuying access
based on economic support of candidatesAbility to influence the
electorate with threatsTo some degree in all developed capitalist
countries; Issue: when does elite dominance become
overweening?Example: US.
ConclusionThe three “pure” types of business-government
model ungird many of our public discussions. However, the
elements are often muddled and so we talk past one
another.Exaggerating for clarity, they emphasize business
efficiency, business pragmatism, and business
ethicsGovernment itself has elements that emphasize these
elements too!Securities and Exchange CommissionUS Trade
RepresentativeUS Department of Health and Human Services
Crony capitalism is a distortion of “pure” typesIt includes
various subtypes:StrongmanFused political-bureaucratic
eliteEconomic elite-dominance modelWhile crony capitalism
tendencies can never be fully eliminated, they can be reduced
by wise policies in order to retain the trust and respect of
society for both government and business in creating a fair
society and a healthy market economy.
ISSUES IN ACCOUNTING EDUCATION American Accounting
Association
Vol. 33, No. 2 DOI: 10.2308/iace-51973
May 2018
pp. 19–34

Fraud Risk Brainstorming at Tesla Motors
Megan F. Hess
Washington & Lee University
Lindsay M. Andiola
Virginia Commonwealth University
ABSTRACT: This instructional case offers students the
opportunity to explore the fraud risk assessment process
and participate in a simulated fraud brainstorming session as
required by AS 2401 (formerly SAS 99) for financial
statement audits. Drawing on publicly available information
about Tesla, Inc. (formerly Tesla Motors), the
revolutionary company behind the popular Model S all-electric
vehicle, the case materials guide students through
multiple learning objectives. These objectives include learning
how to: (1) recognize the factors that contribute to
financial statement fraud risk; (2) identify and evaluate the
likelihood and severity of fraud risks; (3) analyze the ways
that fraud risks can lead to material misstatements in the
financial statements; (4) understand the purpose of and
how to conduct a fraud brainstorming session; and (5) develop
audit procedures that respond to assessed fraud
risks. In a post-case learning assessment, students reported
significant improvement in their knowledge,
comprehension, and application of these learning objectives.
Students also indicated that they enjoyed learning
about these concepts in the context of this popular company.
This case has both an individual and a group
component, and it is designed for use in an auditing or forensic
accounting course at either the undergraduate or the
graduate level.
Keywords: fraud risk factors; fraud triangle; brainstorming

session; fraud risk matrix; AS 2401; SAS 99.
INTRODUCTION
O
ne of the most important skills needed by accountants today is
the ability to analyze and detect fraud risks (Carpenter
2007; Center for Audit Quality [CAQ] 2010;
PricewaterhouseCoopers [PwC] 2015). The Association of
Certified
Fraud Examiners (ACFE 2016) estimates that the typical
organization loses 5 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 (i.e., Public Company Accounting
Oversight Board [PCAOB] 2016a, 2016b, AS 2401; American
Institute of Certified Public Accountants [AICPA] 2006, AU
Section 316; International Federation of Accountants [IFAC]
2008, ISA 240) require that accountants fulfill their
responsibility to obtain reasonable assurance that the financial
statements
they audit are free of material misstatement due to error or
fraud. In particular, Auditing Standard (AS) 2401 (formerly
Statement on Auditing Standards No. 99), Consideration of
Fraud in a Financial Statement Audit, requires that fraud risk

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 risk brainstorming session as part of
the planning procedures for the 2016 financial statement audit
of Tesla Motors. This case has two parts. In Part I, you will
read
We thank Allen D. Blay (associate editor) and two anonymous
reviewers for their valuable input and guidance. We also thank
Mary Durkin, Jared Eustler,
Gary Sullivan, and Kim Westermann, as well as participants at
the 2016 AAA Forensic Section Midyear Meeting for their
feedback and assistance.
Finally, we thank Anthony Williams for his research assistance.
Supplemental materials can be accessed by clicking the links in
Appendix B.
Editor’s note: Accepted by Valaria P. Vendrzyk.
Submitted: March 2016
Accepted: November 2017
Published Online: November 2017

19
background information on Tesla Motors, learn how the concept
of the ‘‘fraud triangle’’ is used to identify fraud risk factors,
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.
In Part II, you will learn how to conduct a fraud risk
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 risk
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.
It is important to note that as of September 2017, 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
2016a).
PART I
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 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 with an expected release in 2017. However, Tesla does
not limit its vision to only automobiles. The company is
described as ‘‘a technology and design company with a focus on
energy innovation’’ (Tesla Motors 2016b).
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 dealership franchises,
Tesla sells and services its vehicles through its own 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 2016b).

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, the company 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 the
vehicles. Tesla also earns revenue from the sale of regulatory
credits from energy tax credits and from the sale of components
to other manufacturers. Finally, Tesla earns revenue from
‘‘Tesla Energy,’’ a division of the company offering battery-
powered energy solutions for home, businesses, and utilities
(Tesla
Motors 2016b). Tesla’s income statement and balance sheet for
the past three years are presented in Exhibit 1 and 2,
respectively.
Tesla launched an initial public offering in June 2010 that
raised $226 million in equity. At the time, the company
employed less than 1,000 employees and had less than $150
million in revenue. The company has since experienced rapid

growth. During the period 2011–2015, 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 2013). In
March 2016, the company enjoyed a market capitalization of
almost $30 billion and traded at about $200 per share. Tesla
Motors stock performance for the period 01/01/2014 to
03/31/2016
is provided in Exhibit 3.
20 Hess and Andiola
Issues in Accounting Education
Volume 33, Number 2, 2018
Tesla’s Leadership
Tesla Motors is led by CEO and co-founder Elon Musk. Mr.
Musk made his fortune as a co-founder of PayPal, which was
acquired by eBay in 2002 for $1.4 billion. He is also the CEO of
Space Exploration Technologies Corp., 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 Corporation, a company that aims to

expand the availability of clean, affordable energy. A self-made
man and serial entrepreneur, Mr. Musk’s innovations and
charisma have earned him the reputation as a ‘‘real-life Iron
Man’’ in
reference to the Marvel Comics super hero (Smith 2014).
Mr. Musk is known for his bold vision and his even bolder
proclamations. In a live interview in 2009, he called a New
York
Times journalist that wrote a critical review of Tesla an ‘‘idiot’’
(https://www.youtube.com/watch?v¼rwDU–NPqZ0; see also,
http://www.businessinsider.com/elon-musk-calls-times-writer-a-
huge-douchebag-and-an-idiot-video-2009-4). In an early 2015
earnings call with analysts, Mr. Musk also declared that he
thought Tesla’s market capitalization could rival Apple Inc.’s
$700
billion in the next ten years, which would be more than the
market capitalizations of Ford Motor Company, General Motors
Company (GM), Honda Motor Company, Ltd., Toyota Motor
Corporation, BMW, and Mercedes-Benz combined. Mr. 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.
Tesla’s future prospects appear to depend on Mr. Musk’s ability
to achieve feats that other carmakers would never dream
of. As an incentive for him to make his bold vision a reality,
Tesla’s Board of Directors granted 5,274,901 stock options to

Mr.
Musk that will ‘‘vest’’ or become available to him to exercise
based on his ability to lead the company toward 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 2016b).
In addition to overseeing Mr. Musk’s plans and providing the
company with guidance, Tesla’s Board of Directors is tasked
with protecting the interests of Tesla’s stockholders, including
the responsibility for risk oversight. Following best practices
for
corporate governance, Tesla’s guidelines suggest that the
majority of Tesla’s directors should be ‘‘outsiders,’’ meaning
non-
company employees, and it has a standing Audit Committee to
which both internal and external auditors report directly (Tesla
Motors 2016a). Some have raised concerns, however, about
whether Tesla’s board is as independent as it appears. CtW
EXHIBIT 1
Tesla Motors Income Statement
Fraud Risk Brainstorming at Tesla Motors 21

huge-douchebag-and-an-idiot-video-4
huge-douchebag-and-an-idiot-video-4
https://www.youtube.com/watch?v=rwDU--NPqZ0
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 Elon Musk now holds, and to prohibit immediate
family members from serving on the board (Sage 2016). Mr.
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, Mr. 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 (Fehrenbacher 2015). Employees regularly work long
hours and the atmosphere has been described as ‘‘grueling.’’
Nevertheless, many employees have enjoyed big payouts
because 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 by 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 Motors 2015).
EXHIBIT 2
Tesla Motors Balance Sheet
22 Hess and Andiola
Challenges for Tesla and Its Future
Despite the company’s rapid growth and popularity, Tesla has
also experienced a number of setbacks. The company has
struggled to reach desired production levels, which has resulted
in lengthy delays for customers. Competitors, such as BMW,
Nissan Motor Company Ltd., and GM, 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 current competitors. In
addition, analysts have raised questions about Tesla’s reliance
on emissions credits to shore up losses and the company’s
exposure to lawsuits and lobbying by dealership unions to block
states from allowing direct automotive sales to consumers
(Taylor 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 Mr.
Musk, alleging that he 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
2016b).
Tesla has big plans for the future of its business. With the
popularity of Tesla’s vehicles continuing to climb, the company
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 Corporation 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 the company’s 2015 annual report, Tesla plans to
continue expanding stores and its service infrastructure
worldwide. The company 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 2016b). 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.
EXHIBIT 3
Tesla Motors (TSLA) Stock Performance
(01/01/2014–03/31/2016)
Source: Stock chart from Yahoo! Finance.

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
2016a). Research shows that fraud 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 examples from
recent
research of how each condition is 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 than 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
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 generate 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, and Khanin
2008)
have higher risks 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.
EXHIBIT 4
Peer Comparison
24 Hess and Andiola
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 (PCAOB 2016c).
Difficulty in verifying estimates and valuations also creates
opportunities for manipulation, particularly in areas such as
intangible assets and Level 3 fair market valuations (PCAOB
2016d). 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; 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 2016b).
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’’)
(Treviño and Youngblood 1990; Arens et al. 2010). Auditors
should
be alert to the risk of bad apples for situations in which
management has a history of being dishonest and 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 in
which
good people may be tempted to make bad choices. Under the
right pressure(s), 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 the
act
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 underpaid or underappreciated.
Finally, managers might rationalize committing fraud if they
suspect that competitors are doing the same.
Detecting rationalization risks can be difficult, 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 who
explicitly values ethics and honesty and emphasizes not only
results,
but also the just means used to reach those results can foster
ethical choices, whereas a CEO who is perceived as unethical or
even ethically neutral can foster an environment in which fraud
is more easily rationalized (Treviño, Hartman, and Brown
2000).
By examining fraud risk factors using 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.
Part I Case Requirements: Identifying Fraud Risk Factors
You should work individually to complete responses to each of
the assigned case requirement questions using the

information on Tesla Motors provided above and, where noted,
in the case supplements, available for download in Appendix B.
Your responses should be completed 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 do Mr. 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
Appendix B for the link to ‘‘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 regarding 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 Appendix B for the

link to ‘‘Tesla’s 2015 Annual Report,’’ Item 7 Management’s
Discussion and Analysis (MD&A) and Item 8
Financial Statements and Supplementary Data section, Note
10)? 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 are created by
this stock performance?
3. Fraud risks related to revenue recognition at Tesla.
a. What does Tesla sell and how does the company account for
revenue, accounts receivable, and COGS (see ‘‘Tesla’s
2015 Annual Report,’’ Item 1 Business, Item 7 MD&A, and
Item 8 Financial Statements and Supplementary Data,
Note 2)?
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
Tesla’s 2015 Annual Report, Item 1A Risk Factors and

Item 8 Financial Statements and Supplementary Data, Note 2
and Note 13). How might some of these business risks
from the external environment also create fraud risks within
Tesla?
b. What fraud risks are posed by Tesla’s expansion plans and
the company’s ability to operate as a going concern (see
‘‘Tesla’s 2015 Annual Report,’’ refer to Item 1A)?
c. What related-party transactions support Tesla’s financial
performance (see ‘‘Tesla’s 2015 Annual Report,’’ 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 may be indicated by the year-to-year
comparisons of Tesla’s financial statements (refer to Exhibits
1 and 2)?
b. How does the company perform relative to its peers (refer to
Exhibit 4)? Do these ratios and trends seem
reasonable?
PART II
Fraud Brainstorming Session Best Practices
Brainstorming refers to an idea-generation process in which
multiple participants share and explore their thoughts on a

particular topic. The brainstorming approach is advantageous in
that the process can help participants identify and synergize
multiple ideas and perspectives in a relatively short amount of
time. However, the process is not always effective;
brainstorming sessions may fail to deliver quality results for a
number of reasons. Participants may consciously or
unconsciously engage in ‘‘social loafing’’ and hesitate to share
their ideas because they think their efforts are either less
important or less identifiable (Latané, Williams, and Harkins
1979). Research shows that inexperienced auditors may be
especially prone to social loafing when working in a group
setting, which may cause them to produce significantly fewer
and
less well-developed mental simulations of possible fraud
schemes (Chen, Trotman, and Zhou 2015). Fraud brainstorming
sessions may also suffer process losses from ‘‘production
blocking,’’ a phenomenon whereby participants lose an idea
while
waiting their turn and listening to others (Diehl and Stroebe
1987). Brainstorming sessions can also deteriorate due to
‘‘groupthink,’’ a phenomenon whereby a group coalesces on a
single perspective rather than considering multiple ideas or
points of view (Beasley and Jenkins 2003).
To minimize these obstacles to effective fraud risk
brainstorming, groups should use content facilitation
techniques, such

as prompts, to stimulate idea generation (Lynch, Murthy, and
Engle 2009). The case requirements you completed in Part I of
this case are examples of the types of prompts used by auditors
in actual fraud risk brainstorming sessions. To minimize the
risks of groupthink and production blocking, auditors commonly
work individually to develop a list of fraud risks prior to
joining the brainstorming session, and spend an average of five
hours on preparing for each session (Dennis and Johnstone
2016). Brainstorming sessions can also be enhanced by
following best practices (see Brazel, Carpenter, and Jenkins
[2010] for
a recent field study of fraud risk brainstorming activities in
audit firms). These best practices include a brainstorming
session
that:
a. is led by a partner or forensic specialist;
b. includes an IT audit specialist;
c. is held early in the audit process (pre-planning or audit-
planning stage);
d. includes extensive discussion about how management might
perpetrate fraud;
e. includes extensive discussion about audit responses to fraud
risk;
f. includes significant contributions from managers on the audit
team; and

g. includes significant contributions from the audit partner.
Responding to Assessed Fraud Risks
In addition to using the concept of the fraud triangle as a tool to
identify fraud risks, auditors may work in their fraud risk
brainstorming sessions to create a fraud risk matrix to help them
better identify and respond to assessed fraud risks. A fraud risk
matrix is a tool that helps auditors connect identified fraud risk
factors with possible fraud schemes and the account balances
that may be affected. The fraud risk matrix allows auditors to
make a preliminary assessment of the likelihood and
significance
26 Hess and Andiola
of such a scheme occurring within their client’s company. This
then allows them to adapt the nature, timing, and extent of their
planned audit procedures to respond to the more likely and/or
more significant identified fraud risks. Exhibit 5 provides an
example of a fraud risk matrix.
Auditing standards note that determining the nature, timing, and
extent of planned audit procedures is a matter of

professional judgment. When the likelihood and/or significance
of material misstatement due to fraud or error is high, the
auditor should respond by planning audit procedures that will
increase both the quality—that is, the reliability and
relevance—
and the quantity of the evidence collected (AICPA 2006). For
example, when the likelihood of a particular fraud scheme is
low
and the significance is low (e.g., employees being paid for
unworked overtime when little to no overtime was reported in
the
year), the audit team may decide that inquiries of associated
personnel are sufficient to determine whether evidence of a
material misstatement exists for the account balances affected
by such a scheme. When the likelihood of a particular fraud
scheme is high, but the significance is low (e.g., employees
submitting false travel expense reimbursement claims for
amounts
not requiring a receipt), the audit team may respond with
additional procedures beyond inquiries of personnel to include
both
tests of controls and analytical procedures, and determine
whether additional substantive procedures are needed as this
evidence
is evaluated. However, when the potential significance of a
fraud scheme is high even when the likelihood may be low (e.g.,

members of management colluding to overstate revenue),
auditors should plan for more substantive testing. Substantive
testing
can include observing and/or re-performing significant
transactions, recalculating balances, obtaining third-party
confirmations,
and making physical inspections of assets and records. In
response to increased risks of fraud, the timing of testing may
also be
adjusted to perform more testing near the end of a period rather
than at an interim date.
Once the fraud risk brainstorming session is complete, a
member of the team is designated to document the results of the
session, which include: the identified fraud risks, the potential
fraud schemes and the balances that would be affected, the
group’s assessment of the likelihood and significance of such
schemes occurring, and the plan for adapting the nature, timing,
EXHIBIT 5
Sample Fraud Risk Matrix
and/or extent of audit procedures to respond to this fraud risk
assessment. This documentation may take the form of a

memorandum that is added to the audit file.
Part II Case Requirements: Conducting a Fraud Brainstorming
Session
In Part II of this case, you will work in a group to simulate an
audit team that is conducting a fraud risk brainstorming
session for Tesla Motors. Your instructor will provide you with
further instructions regarding the composition of your audit
team and the timing of this brainstorming session. The
following case requirements will help guide your activities in
this
simulated brainstorming session.
1. Conducting the fraud brainstorming session.
a. Share and discuss your individual responses to each of the
case requirement questions from Part I.
b. Work together to develop a fraud risk matrix (see Exhibit 5
for an example) that identifies the three fraud risk factors
that your team believes present the greatest concern to the audit
based on your team’s assessment of their likelihood
and significance. Focus on those fraud risk areas that pose the
greatest potential threat for a material misstatement in
the financials.
c. Determine how the nature, timing, and extent of the audit
procedures should be altered to respond to these identified

risks.
2. Documenting the results of the fraud brainstorming session.
Document your conclusions from this brainstorming session in a
memorandum for the audit file. A template for your
reference is included in Appendix A. Your documentation
should include:
a. The date, the attendees, and the purpose of the session, as
well as how long the session lasted.
b. The three most concerning fraud risks at Tesla, the potential
fraud schemes and account balances that would be
affected, and the group’s assessment of the likelihood and
significance of such schemes occurring in a fraud risk matrix
(from 1b above).
c. The team’s consensus (or lack thereof, if applicable)
regarding the overall risk of fraud at Tesla Motors.
d. The team’s plan for adapting the nature, timing, and/or extent
of audit procedures to respond to this fraud risk
assessment.
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Carpenter, T. D. 2007. Audit team brainstorming, fraud risk
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Diehl, M., and W. Stroebe. 1987. Productivity loss in
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Accounting Horizons 13 (4): 365–383.
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Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial
Statements. IAS 240. Available at:
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survey-2013.html

Latané, B., K. Williams, and S. Harkins. 1979. Many hands
make light the work: The causes and consequences of social
loafing. Journal
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Lynch, A. L., U. S. Murthy, and T. J. Engle. 2009. Fraud
brainstorming using computer-mediated communication: The
effects of
brainstorming technique and facilitation. The Accounting
Review 84 (4): 1209–1232.
MacLean, T. L. 2008. Framing and organizational misconduct:
A symbolic interactionist study. Journal of Business Ethics 78
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Mishina, Y., B. J. Dykes, E. S. Block, and T. G. Pollock. 2010.
Why ‘‘good’’ firms do bad things: The effects of high
aspirations, high
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illegality. Academy of Management Journal 53 (4): 701–722.
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doi.org/10.5465/AMJ.2010.52814578
PricewaterhouseCoopers (PwC). 2015. Data Driven: What
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data-driven-paper-feb2015.pdf
Public Company Accounting Oversight Board (PCAOB). 2016a.
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PCAOB.
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Ramos, M. 2003. Auditors’ responsibility for fraud detection.
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Available at: https://www.teslamotors.com/about
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Alto, CA: Tesla Motors. Available at:
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(2): 241–258. https://doi.org/10.5465/AMJ.2008.31767230
APPENDIX A
Memo Template to Document the Results of a Fraud
Brainstorming Session

Date: [DATE OF SESSION]
Participants: [NAME OF ALL SESSION PARTICIPANTS]
Length of Session: [TIME IN HOURS_MINUTES]
Purpose of the Session: [FILL IN]
https://doi.org/10.1016/S0165-4101(01)00028-3
https://doi.org/10.1287/orsc.1060.0241
https://doi.org/10.2308/acch.1999.13.4.365
http://www.ifac.org/system/files/downloads/a012-2010-iaasb-
handbook-isa-240.pdf
institute/articles/2013/07/integrity-survey-2013.html
institute/articles/2013/07/integrity-survey-2013.html
https://doi.org/10.1037/0022-3514.37.6.822
https://doi.org/10.1007/s10551-006-9324-x
https://doi.org/10.5465/AMJ.2010.52814578
https://doi.org/10.5465/AMJ.2010.52814578
https://www.pwc.com/us/en/faculty-resource/assets/pwc-data-
driven-paper-feb2015.pdf
http://www.reuters.com/article/us-solarcity-m-a-tesla-
idUSKCN0ZE2ZL
http://www.reuters.com/article/us-solarcity-m-a-tesla-
idUSKCN0ZE2ZL
tech-billionaire-and-real-life-Iron-Man-Elon-Musk.html
tech-billionaire-and-real-life-Iron-Man-Elon-Musk.html
http://fortune.com/2013/06/12/9-questions-for-teslas-elon-musk/
http://fortune.com/2013/06/12/9-questions-for-teslas-elon-musk/

https://www.teslamotors.com/about
http://ir.tesla.com/corporate-governance-
document.cfm?DocumentID=14836
http://files.shareholder.com/downloads/ABEA-
4CW8X0/1651466307x0xS1564590-16-
13195/1318605/filing.pdf
http://files.shareholder.com/downloads/ABEA-
4CW8X0/1651466307x0xS1564590-16-
13195/1318605/filing.pdf
https://doi.org/10.1037/0021-9010.75.4.378
https://doi.org/10.2307/41166057
https://doi.org/10.5465/AMJ.2008.31767230
Part A—Assessment of Fraud Risks
[INSERT FRAUD MATRIX HERE]
Part B—Overall Fraud Risk Assessment
As a group, how would you rate the overall potential of a risk of
material misstatement due to fraud at this client (e.g., low
risk, moderate risk, or high risk)? Provide justification for your
assessment and note any dissension about this assessment
among the team members, if applicable.
Part C—Planning the Nature, Timing, and Extent of Procedures
Based on the identified fraud risk factors and the level of
assessed fraud at this client, how would your group modify the

nature, timing, and/or extent of the planned audit procedures?
Discuss at least three audit procedures that should be performed
on this audit in response to the fraud risk factors identified
above. Your group should try to be as specific as possible (i.e.,
the
account(s) that you would focus on, the procedure(s) you may
perform, and when you would perform the procedure).
1. [FILL IN]
2. [FILL IN]
3. [FILL IN]
APPENDIX B
iace-51973_ Tesla’s Code of Business Conduct and Ethics:
http://dx.doi.org/10.2308/iace-51973.s01
iace-51973_ Tesla’s 2015 Annual Report:
30 Hess and Andiola
CASE LEARNING OBJECTIVES AND IMPLEMENTATION
GUIDANCE

This instructional case involves identifying fraud risk factors at
a public company and conducting a fraud risk
brainstorming session, consistent with the guidance under AS
2401, Consideration of Fraud in a Financial Statement Audit.
We see the instructional value of this case as two-fold. Not only
does the case incorporate important auditing and forensic
concepts like assessing fraud risk and applying the fraud
triangle, but also the case gives students first-hand experience
with
conducting a fraud risk brainstorming session in a team
environment and documenting this process. While there are a
number
of cases published in the last 15 years that focus on the issue of
identifying fraud risk factors and responding to fraud risks
(e.g.,
Agoglia, Brown, and Hanno 2003; Ballou and Mueller 2005;
Owhoso and Weickgenannt 2010; Gifford and Howe 2011;
Rufus
and Hahn 2011; Dickins and Reisch 2012; Dee, Durtschi, and
Mindak 2014), we are not aware of any instructional cases that
combine fraud risk assessment with guidance on how to conduct
and document a fraud risk brainstorming session. Students
also indicated that they found this case to be realistic and
enjoyed learning about these concepts in the context of this
popular
company.

Learning Objectives
There are five learning objectives for this case:
1. To recognize the factors that contribute to financial statement
fraud risk (Part I).
2. To identify and evaluate the likelihood and severity of fraud
risks for a particular organization (Part I).
3. To analyze the ways that fraud risks can lead to material
misstatements in the financial statements (Parts I and II).
4. To understand the purpose of and how to conduct a fraud
brainstorming session as a team (Part II).
5. To develop audit procedures that respond to assessed fraud
risks (Part II).
Implementation Guidance
This case is designed for use in either undergraduate- or
graduate-level courses that feature an emphasis on fraud risk
assessments or assurance (e.g., auditing, fraud, forensic
accounting). This case offers students the opportunity to explore
the
fraud risk assessment process and to participate in a simulated
fraud brainstorming session. To be most effective and more
closely simulate an actual fraud brainstorming session, we
recommend that Part I of the case be completed by students
individually as a take-home assignment. Instructors will need to

provide students with the case document in order for them to
complete Part I. Students should turn in Part I as an individual
assignment (Deliverable 1), and then use their responses from
Part I as inputs for the brainstorming session in Part II. Students
report spending approximately 3.5 hours to complete all of the
case requirement questions in Part I. To minimize the time
required, instructors may choose to divide the case requirements
among the students (e.g., half of the students complete case
Requirements 1 and 2 (six questions) and the other half
complete
case Requirements 3 through 5 (seven questions). Before
moving to Part II, we encourage instructors to dedicate some
class
time (10–15 minutes) to review student responses to Part I and
explain the tasks and deliverables associated with Part II. More
guidance on discussing the key concepts of this case is provided
in the Teaching Notes.
For Part II of the case, instructors will need to group students
into small audit teams (‘‘investigation teams’’ if using in a
forensic accounting class) to hold a fraud risk brainstorming
session. The instructor will also need to provide students with
guidance on when they should hold their brainstorming session
and how long they should spend brainstorming. We
recommend that students dedicate no more than one hour to the
brainstorming session and reserve one to two hours for

documenting their results (Deliverable 2). We suggest that Part
II be completed as a take-home group assignment, but
instructors also could complete Part II of the case as an in-class
activity.
Following the completion and documentation of the team
brainstorming sessions, we recommend that instructors lead a
class discussion of the key learning objectives from the case
(about 30 minutes). Guidance on these topics and solutions are
available in the Teaching Notes. This discussion should
highlight some of the challenges of (1) assessing fraud risk
factors, (2)
conducting effective brainstorming sessions, and (3) linking
risk factors to appropriate audit responses. Through this
discussion, instructors can elicit observations from the students
on the effectiveness of their brainstorming session, as well as
specific examples of the fraud risk factors documented in their
fraud risk matrices and the suggested audit procedures to reduce
these risks.
Customizing the Case
The usage of this case can vary somewhat depending on the
specific student audience. The instructor can tailor the
difficulty of the case and the focus of the case depending on the
knowledge and skill level of the students, as well as the focus

of the class (i.e., auditing versus fraud). To increase the
difficulty of the case, instructors can implement one or more of
the
following ideas:
� Assign additional readings from the academic literature
related to financial statement fraud risks (e.g., MacLean 2008;
Mishina, Dykes, Block, and Pollock 2010) or fraud
brainstorming (e.g., Brazel, Carpenter, and Jenkins 2010;
Dennis
and Johnstone 2016). As part of the class discussion of the key
learning objectives, the instructor can facilitate a
dialogue on the findings taken from the academic research
literature.
� Assign additional analytical procedures for Part I, such as the
calculation of Beneish’s (1997) ‘‘M-Score’’ for Tesla.
Instructors may find Wells’ (2001) article ‘‘Irrational Ratios’’
helpful in guiding students’ efforts to calculate and
interpret Beneish’s M-Score.
� Increase the number of fraud risks documented in the fraud
risk matrix and the number of audit procedures described in
the memorandum of the fraud brainstorming session.
To simplify the case, instructors can implement one or more of
the following ideas:

� Allow students to work in groups of two to complete Part I.
� Remove the case requirement in Part II that requires students
to identify the nature, timing, and extent of audit
procedures.
� Conduct Part II as a class activity with the entire class
participating in the session as one team.
Evidence of Efficacy
To assess the effectiveness of the case, we tested it in five
undergraduate audit classes (185 students) and two graduate
fraud classes (39 students) at three public and two private
universities (four independent instructors and one author). Pre-
and
post-test surveys were Institutional Review Board (IRB)
approved, were formatted similarly to those in Worrell (2010)
and
Dow, Watson, and Shea (2013), and were administered using
comparable procedures to avoid any potential demand effects.
The pre-test survey was administered a few days prior to
assigning the case. Students were informed that the survey was
to
assess their knowledge and comfort level with specific course-
related topics, that it was entirely voluntary, and that all
responses would remain anonymous. The post-test survey was
administered on the submission date of the completed
Deliverable 2.

The questions used in the survey, the pre-test and post-test
means, and significance levels are presented in Table 1, Panel
A. In addition, Table 1, Panel B presents the results of several
additional questions asked after completion of the case. To
assess
the case’s impact on students’ knowledge, we asked students six
questions before and after case completion that dealt with their
understanding of the key learning objectives of the case.1 Table
1, Panel A shows that the case significantly increased students’
knowledge of fraud risk factors and fraud brainstorming
sessions (p , 0.001, two-tailed in both). In addition, the case
made
students more comfortable with applying the fraud triangle,
creating a fraud risk matrix, adapting audit procedures, and
conducting a fraud brainstorming session (p , 0.001, two-tailed
for all).
In addition, Table 1, Panel B indicates that students perceived
the case to be a realistic scenario (77.0 percent agree or
strongly agree), that was interesting (75.8 percent agree or
strongly agree), and provided a positive learning experience
(78.2
percent agree or strongly agree). In addition, students felt that
the case required them to think critically (80.6 percent agree or
strongly agree) and apply their professional skepticism (78.2
percent agree or strongly agree). We also asked students to
provide verbal feedback about the case. An overwhelming

number of responses indicated that students liked that the case
used a
real, recognizable, and current company, with real data and
information. For example, one student commented that ‘‘the
issues
Tesla faces are realistic issues that auditors have to be able to
analyze and assess for any company.’’ In addition, several
students pointed out that they liked conducting the actual
brainstorming session to be able to pool their ideas and better
understand how the session would work in practice. Thus, the
case appears to provide a realistic learning environment to help
students prepare for procedures they will be asked to do in audit
practice.
TEACHING NOTES
Teaching Notes are available only to non-student-member
subscribers to Issues in Accounting Education through the
American Accounting Association’s electronic publications
system at http://aaapubs.org/. Non-student-member subscribers
should use their usernames and passwords for entry into the
system where the Teaching Notes can be reviewed and printed.
Please do not make the Teaching Notes available to students or
post them on websites.
1 We investigated whether the responses differed by level (i.e.,
undergraduate, graduate), but results were quantitatively
similar. Therefore, the combined
results are presented in Table 1.
32 Hess and Andiola

http://aaapubs.org/
If you are a non-student-member of AAA with a subscription to
Issues in Accounting Education and have any trouble
accessing this material, then please contact the AAA
headquarters office at [email protected] or (941) 921-7747.
REFERENCES
Agoglia, C. P., K. F. Brown, and D. M. Hanno. 2003. Dickinson
Technologies, Inc.: Assessing control environment and fraud
risk. Issues
in Accounting Education 18 (1): 71–78.
https://doi.org/10.2308/iace.2003.18.1.71
Ballou, B., and J. M. Mueller. 2005. Helecom communications:
Considering fraud risk on an engagement before and after
analyzing a key
business process. Issues in Accounting Education 20 (1): 99–
118. https://doi.org/10.2308/iace.2005.20.1.99
TABLE 1
Student Learning Perceptions
Panel A: Questions Asked Before and After Case Completion
Survey Item

Pre-Case
Mean
(SD)
Post-Case
Mean
(SD) t-statistic
1. Rate your level of knowledge of identifying fraud risk factors
of an organization. 3.34 4.70 10.7***
(1.26) (1.11)
2. Rate how comfortable you feel applying the fraud triangle to
identify fraud risk factors. 3.66 4.98 10.0***
(1.35) (1.09)
3. Rate your level of knowledge of the purpose of fraud
brainstorming sessions. 3.34 5.10 12.8***
(1.38) (1.16)
4. Rate how comfortable you feel creating a fraud risk matrix.
2.64 4.52 14.8***
(1.20) (1.17)
5. Rate how comfortable you feel adapting audit procedures to
respond to assessed fraud risks. 3.23 4.41 9.3***
(1.24) (1.13)
6. Rate how comfortable you feel conducting a fraud
brainstorming session. 3.08 4.91 14.0***

(1.32) (1.09)
Panel B: Questions Asked After Case Completion
Survey Item
Strongly
Disagree
1
Disagree
2
Somewhat
Disagree
3
Neutral
4
Somewhat
Agree
5
Agree
6
Strongly
Agree
7
Mean

(SD)
This case represents a realistic scenario. 0.0% 0.0% 1.2% 4.8%
17.0% 39.4% 37.6% 6.07
(0) (0) (2) (8) (28) (65) (62) (0.92)
The case encouraged me to think critically
about the factors that contribute to fraud
risk.
0.0% 0.6% 0.6% 4.3% 13.9% 49.1% 31.5% 6.04
(0) (1) (1) (7) (23) (81) (52) (0.91)
The case encouraged me to apply
professional skepticism.
0.0% 0.0% 0.0% 4.8% 17.0% 46.7% 31.5% 6.05
(0) (0) (0) (8) (28) (77) (52) (0.83)
I found the case interesting. 0.0% 0.0% 4.8% 3.6% 15.8%
46.7% 29.1% 5.92
(0) (0) (8) (6) (26) (77) (48) (1.02)
The case was a positive learning experience. 0.0% 0.6% 2.4%
6.7% 12.1% 45.5% 32.7% 5.98
(0) (1) (4) (11) (20) (75) (54) (1.02)
***Signifies p , 0.001.

Panel A presents results of a pre-case and post-case comparison
of a set of six questions. Responses were provided on a series of
seven-point scales with 1
labeled ‘‘low knowledge’’ and ‘‘highly uncomfortable’’ and 7
labeled ‘‘high knowledge’’ and ‘‘highly comfortable’’ (for
questions 1 and 3, and 2, 4–6,
respectively). The pre-case data includes 185 (146
undergraduate and 39 graduate) students and the post-case data
includes 165 (132 undergraduate and 33
graduate) students.
Panel B presents results of five additional post-case questions.
Responses were provided on a series of seven-point scales with
1 labeled ‘‘strongly
disagree’’ and 7 labeled ‘‘strongly agree.’’
mailto:[email protected]
Beneish, M. D. 1997. Detecting GAAP violation: Implications
for assessing earnings management among firms with extreme
financial
performance. Journal of Accounting and Public Policy 16 (3):
271–309. https://doi.org/10.1016/S0278-4254(97)00023-9
Brazel, J. F., T. D. Carpenter, and J. G. Jenkins. 2010.
Auditors’ use of brainstorming in the consideration of fraud:
Reports from the field.
The Accounting Review 85 (4): 1273–1301.

Dee, C., C. Durtschi, and M. P. Mindak. 2014. Grand Teton
Candy Company: Connecting the dots in a fraud investigation.
Issues in
Accounting Education 29 (3): 443–458.
https://doi.org/10.2308/iace-50763
Dennis, S. A., and K. M. Johnstone. 2016. A field survey of
contemporary brainstorming practices. Accounting Horizons 30
(4): 449–472.
Dickins, D., and J. T. Reisch. 2012. Enhancing auditors’ ability
to identify opportunities to commit fraud: Instructional resource
cases.
Issues in Accounting Education 27 (4): 1153–1169.
Dow, K. E., M. W. Watson, and V. J. Shea. 2013.
Understanding the links between audit risks and audit steps: The
case of procurement
cards. Issues in Accounting Education 28 (4): 913–921.
Gifford, R. H., and H. Howe. 2011. Relating operational and
financial factors to assess risk and identify fraud in an
operational setting.
MacLean, T. L. 2008. Framing and organizational misconduct:
A symbolic interactionist study. Journal of Business Ethics 78
(1–2): 3–
16. https://doi.org/10.1007/s10551-006-9324-x

Mishina, Y., B. J. Dykes, E. S. Block, and T. G. Pollock. 2010.
Why ‘‘good’’ firms do bad things: The effects of high
aspirations, high
expectations, and prominence on the incidence of corporate
illegality. Academy of Management Journal 53 (4): 701–722.
https://
doi.org/10.5465/AMJ.2010.52814578
Owhoso, V., and A. Weickgenannt. 2010. Vinand Petroleum,
Inc.: Initial audit engagement and fraud risk case for a
specialized industry.
Rufus, R. J., and W. Hahn. 2011. Mountain State Sporting
Goods: A case of fraud? A case study in fraud examination.
Issues in
Accounting Education 26 (1): 201–217.
Wells, J. T. 2001. Irrational ratios. Journal of Accountancy 192
(2): 80–83.
Worrell, J. L. 2010. Blazer communications: A procurement
audit simulation. Issues in Accounting Education 25 (3): 527–
546. https://
doi.org/10.2308/iace.2010.25.3.527
34 Hess and Andiola
https://doi.org/10.1016/S0278-4254(97)00023-9

https://doi.org/10.1007/s10551-006-9324-x
https://doi.org/10.5465/AMJ.2010.52814578
https://doi.org/10.5465/AMJ.2010.52814578
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 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
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.
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.
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 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
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.
http://www.edgar-online.com
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 re
ports pursuant to Section 13 or 15(d) of the Act. Yes ¨
No x
Indicate by check mark whether the registrant (1) has filed all re
ports required to be filed by Section 13 or 15(d) of the Securitie
s Exchange Act of 1934 (“Exchange Act”) during the
preceding 12 months (or for such shorter period that the registra
nt 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 ele
ctronically and posted on its corporate Web site, if any, every In
teractive 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 tha
t the registrant was required to submit and post such files). Ye
s x
No ¨
Indicate by check mark if disclosure of delinquent filers pursua
nt to Item 405 of Regulation S-
K (§229.405 of this chapter) is not contained herein, and will no
t be contained, to the best of
registrant’s knowledge, in definitive proxy or information state
ments 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 accelera
ted filer, an accelerated filer, a non-
accelerated filer or a smaller reporting company. See the definit
ions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in R
ule 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 compan
y (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 r
egistrant’s most recently completed second fiscal quarter, was
$26,340,519,416 (based on the closing price for shares of the re
gistrant’s Common Stock as reported by the NASDAQ Global S

elect Market on June 30, 2015). Shares of Common Stock held b
y
each executive officer, director, and holder of 5% or more of th
e outstanding Common Stock have been excluded in that such p
ersons 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 re
gistrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2015 Annua
l Meeting of Stockholders are incorporated herein by reference i
n Part III of this Annual Report on Form 10-K to the extent
stated herein. Such proxy statement will be filed with the Securi
ties 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. Business 4

Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 27
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Mine Safety Disclosures 28
PART II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 29
Item 6. Selected Financial Data 31
Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations 32
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
43
Item 8. Financial Statements and Supplementary Data 45
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 74
Item 9A. Controls and Procedures 74
Item 9B. Other Information 74
PART III.
Item 10.
Directors, Executive Officers and Corporate Governance 75
Item 11. Executive Compensation 75
Item 12.
Security Ownership of Certain Beneficial Owners and Manage

ment and Related Stockholder Matters 75
Item 13.
Certain Relationships and Related Transactions, and Director I
ndependence 75
Item 14. Principal Accountant Fees and Services 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”, “believes”,

“estimates”, “expects”, “intends”, “may”, “plans”, “projects”,
“will”, “would” and similar expressions are intended to identify
forward-looking statements,
although not all forward-looking statements contain these
identifying words. We may not actually achieve the plans,
intentions or expectations disclosed in our
forward-looking statements and you should not place undue
reliance on our forward-looking statements. Actual results or
events could differ materially from
the plans, intentions and expectations disclosed in the forward-
looking statements that we make. These forward-looking
statements involve risks and
uncertainties that could cause our actual results to differ
materially from those in the forward-looking statements,
including, without limitation, the risks set
forth in Part I, Item 1A, “Risk Factors” in this Annual Report
on Form 10-K and in our other filings with the Securities and
Exchange Commission. We do not
assume any obligation to update any forward-looking
statements.
3
P ART I
I TEM 1. BUSINESS
Overview
We design, develop, manufacture and sell high-
performance fully electric vehicles and energy storage products.
We have established our own network of

vehicle sales and service centers and Supercharger stations glob
ally to accelerate the widespread adoption of electric vehicles.
Our vehicles, electric vehicle
engineering expertise, and business model differentiates us from
incumbent automobile manufacturers.
We currently produce and sell two fully electric vehicles, the M
odel S sedan and the Model X sport utility vehicle (SUV). Both
vehicles offer exceptional
performance, functionality and attractive styling. We commence
d deliveries of Model S in June 2012 and as of December 31, 20
15 we have delivered over 107,000
new Model S vehicles worldwide. We have continued to improv
e Model S by introducing performance, all-
wheel drive dual motor, and autopilot options, as well
as free over-the-air software updates.
We commenced customer deliveries of Model X in the third qua
rter of 2015. This unique vehicle offers exceptional safety, seati
ng for seven people, all-
wheel drive, and our autopilot functionality. We are currently ra
mping production and deliveries of Model X in the United State
s and plan to offer it in Europe and
Asia in 2016.
After the Model X, our goal is to introduce the Model 3, a lower
priced sedan designed for the mass market. We intend to unveil
Model 3 in the first quarter
of 2016 and start production and deliveries in late 2017.
The commercial production of fully electric vehicles that meets
consumers’ range and performance expectations requires substa
ntial design, engineering,
and integration work on almost every system of our vehicles. O
ur design and vehicle engineering capabilities, combined with th
e technical advancements of our

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