Unlike traditional automakers, Tesla operates with a “direct-to-consumer” model meaning that it sells and services the cars it manufactures, rather than relying on franchised dealerships to do so. 

When Tesla employees complete a repair, they must classify the job within broad pay type categories, including “warranty,” “extended service agreement,” “customer pay,” “rectification,” “goodwill” and others, according to internal communications, guides and policies available to employees via a Tesla intranet and reviewed by CNBC. 

In their complaint, the tipsters included excerpts from Tesla policies, internal emails, customer service records and other documents to show that they believe employees have been miscategorizing repairs for years and that Tesla management has been aware of the problem.

Under standard warranty accounting practices in the automotive and other industries, companies set aside a portion of each sale to cover future repairs that will be conducted under warranty, Nelson explained to CNBC. These warranty reserves show up as liabilities on a company’s balance sheet and show up on the income statement as part of the costs of goods sold. Later, when repairs are recorded as “warranty,” the costs of these repairs are counted against the warranty reserves.

The complaint does not allege that Tesla deviates from this standard industry practice. It instead alleges that Tesla has allowed employees to miscategorize repairs and thereby hide some of its warranty costs.

With a “goodwill” repair, Tesla essentially foots the bill for labor, parts or accessories given to keep a customer happy. According to Tesla’s financial statements, the cost of goodwill repairs is not counted against warranty reserves and shows up on the income statement under sales, general and administrative costs.

Meanwhile, “customer pay” repairs are booked as revenue, specifically under the “services and other” category, according to its financial filings. Here, too, the repairs are not counted against warranty reserves.

By charging customers for repair work or by designating repairs as “goodwill” when they should qualify as “warranty” repairs instead, Tesla could be misstating fundamental financial information, the whistleblowers said, urging the SEC to investigate further.

“Were Tesla to accurately categorize its ‘goodwill’ repairs as warranty repairs, it would likely need to restate earnings for every quarter since at least 2017,” the tipsters wrote in their submission. “It should also be noted that nothing has ever stopped the company from appropriately sizing its warranty reserve even as its service employees handed out too much ‘goodwill’ repair coverage.”

Indeed, Tesla’s goodwill expenses were unusually high for the industry, according to automotive industry veteran Nicholas Parks, who has owned and managed car dealerships in three states, including one in California that sold battery electric vehicles.

In just under two months in late 2021, Tesla was spending over $17 million on “goodwill” in the U.S. alone, which translated to about $70 worth of goodwill on the average repair order across approximately 247,000 repairs, according to internal Tesla dashboards referenced in the whistleblower complaint and reviewed by CNBC.

This is easily 10 times more money than traditional auto dealers would spend on goodwill per repair on average in two months, Parks told CNBC.

Nelson, the accounting professor, explained why miscategorization of repairs might be of interest to financial regulators and investors.

“Where you put stuff in a financial statement matters,” she said. “If I’m taking warranty costs out of the cost of automotive sales, and pushing them down into some other line further down the income statement, that will make my gross profit margin look higher. If I’m moving it from up above in cost of sales, and moving into other expenses, it’s also not as transparent about the quality of the product.”

Because Nelson did not review all the documentation the whistleblowers had to offer the SEC nor interview them, she would not give an opinion on whether Tesla may have run afoul of accounting requirements or securities laws. However, she did say she was “surprised” that the agency didn’t indicate more serious interest in the whistleblowers.

Inconsistent communications and policy apparently contributed to employees miscategorizing items as “goodwill” or “customer pay” that should have been billed under warranty, the filers’ complaint to the SEC said. 

Tesla documents read by CNBC show that employees had to navigate a maze of directives available in internal systems, such as WARP (a Tesla-built enterprise resource planning system), intranets and group emails, to figure out how to track and classify billing for each repair.

In one internal “Goodwill Guide,” Tesla told employees that any “repair/replacement necessary to correct defects in the materials/workmanship of any parts manufactured/supplied by Tesla” should be covered by and categorized as “Warranty/Extended Warranty pay type (post-delivery).” That would apply to any customer’s car that was still under a warranty, while out-of-warranty cars would require a customer to pay for repairs.

For a specific issue — “blistering” headrests in car seats manufactured by Tesla — the company gave employees different directions about how to bill customers for service to replace the part. One internal Tesla document seen by CNBC said the blistering headrest “is not a defect, and therefore not covered under warranty” and that repairs should be offered as goodwill. Confusingly, that document linked to another page in the company intranet saying customers should have to pay to get their headrests fixed.

Tesla also treated replacement of defective tail lamps as “customer pay,” after determining that chemicals used in commercial car washes could cause stress cracks in their lenses, according to internal documents read by CNBC. But in a seemingly contradictory note, an internal e-mail in the second quarter of 2021 referencing the issue said, “First repair and replacement of parts can be covered under Goodwill – Vehicle Quality.” 

The whistleblower complaint says that Tesla has been aware of inconsistencies in how employees treat repairs. During the second half of 2021, Tesla was working to improve data accuracy from its service division, according to internal records reviewed by CNBC. It set up score cards for each region to include assessments of pay type data, and goodwill and warranty costs. The company was aiming for better than 90% accuracy in service centers’ pay type data at that time, the internal records said.

Parks, the former automotive dealer, said with traditional dealerships, 99% or higher accuracy would be expected, and dealerships typically employ a number of specialists to ensure accuracy. “If dealership employees do not enter information about a repair correctly, then a claim may not get paid or you may end up having a warranty audit where the automaker comes in and charges back these claims and that’s painful,” he explained.

In their 2021 complaint, the whistleblowers alleged that Tesla’s internal software and systems are constantly changing and have been rife with bugs and vulnerabilities throughout the years, and that third-party accountants or auditors may not have been given full access to, or thoroughly vetted, all of them.

The complaint said the whistleblower who had been a Tesla employee was authorized to access a wide array of records — including policies, internal emails, and sales- and service-related data — at Tesla through software and systems used daily by thousands of employees for normal work, including both custom-built and off-the-shelf programs. 

CNBC spoke with one current and two former Tesla employees who corroborated that most people working for Tesla have broad access to apps and information inside the company by default. They also noted the array of apps within Tesla has grown through the years, as would be expected with a growing business in a complex industry. These people requested anonymity as they were not authorized to speak on Tesla’s behalf.

The complaint embedded images of what the whistleblowers said were emails, spreadsheets and screenshots of some of Tesla’s homegrown software and back-end systems. It said these showed that non-administrative and non-executive employees had access to read and edit data points, via a developer tool called MySQL Workbench, that could later feed into Tesla’s shareholder communications and financial statements.

In one example, the tipsters said screenshots showed other Tesla employees changed the status of material used in manufacturing from “scrap” to “work in progress.” Scrap refers to material generated from a manufacturing job that is unusable waste.

In another example, the complaint said screenshots showed Tesla employees had manually changed the status of “used” cars to “new” in a program that tracked vehicle deliveries data. This could affect Tesla’s delivery numbers, they said, though they didn’t try to estimate the overall impact and instead encouraged the SEC to investigate further. 

Tesla’s auditing firm since 2005, PricewaterhouseCoopers, has also done tax-related consulting work for Musk enterprises SpaceX and The Boring Company, according to internal Tesla materials the whistleblowers offered to the SEC. In correspondence to the agency expanding on their complaint, the whistleblowers alleged this raises questions about the firm’s independence and objectivity in judging Tesla’s financials.

Besides offering internal materials from Tesla, the whistleblowers pointed to obscure public records from the California Alternative Energy and Advanced Transportation Financing Authority that they say also showed PricewaterhouseCoopers did non-audit work for Musk companies while serving as Tesla auditor. 

Although there are only four major auditing firms, there are dozens of reputable firms Musk’s privately held enterprises could have turned to for tax consulting.

Securities law expert Lipton said that generally, auditors are not supposed to do certain kinds of consulting services for their audit clients or for affiliates of their clients if “a reasonable person would question your independence.”

According to records reviewed by CNBC, the SEC assigned an employee to look into possible conflicts of interest in January 2022 but closed that ticket in April without interviewing the whistleblowers or evaluating their documentation.

PricewaterhouseCoopers declined to comment. Tesla did not respond to multiple inquiries for comment.