Tesla’s stock price is notoriously volatile. When a profit was recorded in the third quarter, the stock jumped from about $250 a share to over $310 a share. This volatility reflects the volatility of Musk himself, who has gotten himself into so much trouble with his twitter account that he has agreed to have a lawyer act as his twitter babysitter.
Our blog is focused on integrity of financial reporting and understanding the culture of management is the key to understanding whether a company’s reports are reliable. If there is a lack of integrity in the management culture, then there will be a lack of integrity in the financial reporting. Musk sets the tone for the management culture at Tesla. He is the founder, CEO, biggest shareholder, biggest promoter, and is intimately involved in operations of the company. So, does Musk foster a culture of transparency and reliability?
Musk’s Troubles with Twitter
Musk has been embroiled in more than one controversy on twitter, but the most expensive troubles have come from false or misleading statements about Tesla that have affected the stock price. Musk set off a firestorm when he announced in August of 2018 that funding was secured for a buyout to take the company private at $420 a share.
Musk said this tweet came from discussions he had with a Saudi backed fund, but later admitted that he picked the number 420 specifically as a reference to smoking weed. The SEC was not amused and sued Musk for fraud. Within a month Musk was embroiled in yet another controversy when he smoked weed on a popular podcast.
By the end of September, Musk had settled the matter with the SEC; he personally paid a $20 million fine, and Tesla also paid a $20 million fine. In addition, he agreed to step down as chairman of the board for at least three years. The settlement also required Musk to seek legal pre-approval for tweets that could affect the company’s share price.
By February of 2019, Musk was in trouble again, this time for posting a tweet saying that Tesla would produce 500,000 vehicles in 2019, which he soon corrected. The SEC wanted Musk to be held in contempt, but the parties negotiated a deal whereby Musk essentially reagreed to seek legal preapproval for tweets that could affect the company’s share price.
The punishments meted out by the SEC are little more than slaps on the wrist for a billionaire like Musk, but they serve as a warning to shareholders that Musk’s statements about the company are not reliable.
Tesla’s Management Follows Musk’s Lead
A company’s financial reports are nothing more than statements by the management of the company, expressing their opinion about the company. Standardized formats, technical language, and spreadsheets do not magically transform these statements into objective facts. Those statements are only facts if they are true. So, has Tesla’s management done a good job of telling the truth, or have they followed Musk’s lead and made allegedly exaggerated, misleading, or false statements?
In Part IV of our series on Tesla we looked at Tesla’s statement that the acquisition of SolarCity would benefit both companies, when SolarCity was in a liquidity crisis in retrospect has been little more than dead weight. Tesla also may have misdirected shareholders by unveiling a new solar roof technology and promising to start production soon to get approval for the SolarCity acquisition. Three years later, Tesla is yet to deliver on the promise of the solar roof. In Part V we looked at Tesla’s statement to the SEC that the loss of its electric vehicle tax credit would have no material impact on sales. That statement has been proven demonstrably false.
Not only does Tesla’s management have a history of unreliable statements, but they also have some of the most complex accounting disclosures in the manufacturing industry. The combination of complexity and unreliability is a volatile combination, almost as volatile as Musk himself.
This is our last post on Tesla (for now at least), but we hope that it hammers home the critical point that the reliability and integrity of financial reporting and the culture of the management are inextricable. Concerns about the reliability of financial reporting are concerns about the culture of management. Likewise, concerns about the culture of management are concerns about the reliability and integrity of financial reporting.
For investors to make informed decisions, they need to look beyond the last quarterly report and gain some perspective honesty of management and the integrity of financial reporting.
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