Tesla Motors under fire for using prohibited accounting metrics 

Tesla Motors Inc. has come under fire from the Securities and Exchange Commission for using prohibited accounting metrics and sharing that information with investors, according to regulatory correspondence.

The SEC said Tesla in its August earnings release used “individually tailored” measurements when the electric-vehicle maker added back certain costs to revenue calculated under generally accepted accounting principles. While the SEC allows the use of some non-GAAP metrics, certain figures that adjust revenue are prohibited as detailed in the regulator’s guidelines from May 17.

The exchange between the SEC and Tesla includes four letters uploaded by the regulator from mid-September to mid-October. The documents were made public last week, roughly 40 days after the conversation was concluded. The correspondence is typically made public 20 days after the matter is resolved.

The SEC has judged the matter resolved without further action, according to an Oct. 12 letter the regulator sent to the company.

Tesla on Oct. 2 said in a press release it would drop non-GAAP revenue and other custom metrics flagged by the SEC from future earnings filings. The move came after the company in August said it was reviewing the SEC’s new accounting guidelines and taking steps to modify its non-GAAP information.

The SEC declined to comment.

The SEC used the word “tailored” to describe revenue adjustments that are specifically prohibited in its May update on regulatory guidelines.

“Whenever the SEC uses that specific term it’s a clear indication that this specific adjustment should not be used, it’s very strong language,” said Olga Usvyatsky, vice president of research and CPA at Audit Analytics.

Tesla was also chastised for its slow response to new guidance on the use of non-GAAP figures.

The regulator criticized Tesla for failing to make a “substantive” case for providing non-GAAP figures to investors. In a letter dated Sept. 23, the SEC picked apart Tesla’s prior response that its management uses non-GAAP information internally. The regulator pointed out rules that require “a statement disclosing the reason why you believe that the presentation of a non-GAAP financial measure provides useful information to investors…not how your management uses the information.”

The SEC in this case is uncharacteristically specific about wanting to see Tesla’s revised disclosures in advance, Ms. Usvyatsky said. “The language is strong, it’s not ‘please, in future filings,’” Ms. Usvyatsky said.

Tesla provided the regulator with proposed disclosures and included the new language in its third-quarter earnings release, articulating that non-GAAP information provides investors with “greater transparency” about its operations and management decision-making.

The SEC stepped up its policing of non-GAAP accounting this year. The issue was raised in 28% of SEC company correspondence through Sept. 30, up from 14% for the same period in 2015, according to preliminary data from Audit Analytics.

The regulator also issued new guidelines on custom accounting in May, prompting more than a quarter of the companies in the S&P 500 index to put GAAP results at the top of their earnings releases.

Still, it is unclear whether such prescriptive oversight will prevail under the administration of President-elect Donald Trump. Mr. Trump appointed former Republican SEC Commissioner Paul Atkins, a staunch critic of heavy regulation, to lead his financial regulation transition team.

Source: WSJ

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