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Identifying Fraud Risk Factors

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 A. Your responses should be completed before proceeding to Part II.




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

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?

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

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

Describe some possible concerns with Tesla’s board of directors. How might these concerns create opportunities and rationalizations for fraud?



Fraud risks related to Tesla’s incentive structures and stock performance

To what extent are executives and employees incentivized with shares and stock options (see 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?

Review Tesla’s stock performance over the last two years (refer to Exhibit 3). What fraud pressures does this stock performance create?



Fraud risks related to revenue recognition at Tesla

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)?

How might these revenue recognition practices create opportunities, incentives, and/or rationalizations for fraud?



Fraud risks related to Tesla’s business and operating conditions

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?

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)?

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?



Fraud risks indicated by the results of preliminary analytical procedures

What fraud risks may be indicated by the year-to-year comparisons of Tesla’s financial statements (refer to Exhibits 1 and 2)?

How does the company perform relative to its peers (refer to Exhibit 4)? Do these ratios and trends seem reasonable?









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 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.




Conducting the Fraud Brainstorming Session



Share and discuss your individual responses to each of the case requirement questions from Part I.

Work together to develop a fraud risk matrix (see Exhibit 5 for an example) identifying 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.

Determine how the nature, timing, and extent of the audit procedures should be altered to respond to these identified risks.



 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 B. Your documentation should include:


The date, the attendees, and the purpose of the session, as well as how long the session lasted.

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).

The team’s consensus (or lack thereof, if applicable) regarding the overall risk of fraud at Tesla Motors.

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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