Mattel has announced that its Audit Committee of its Board of Directors has completed an independent investigation into allegations detailed in a whistleblower letter sent to Mattel's outside auditors on 02 August 2019.
The letter questioned whether there were accounting errors in historical periods and whether Mattel’s outside auditor was independent.
Over the past two months the Audit Committee, together with independent counsel from O’Melveny & Myers LLP and forensic accountants from FTI Consulting, thoroughly investigated the letter’s allegations.
The investigation found that income tax expense was understated by US$109 million in the third quarter of 2017 and overstated by US$109 million in the fourth quarter of 2017, with no impact for the full year. Other allegations in the letter were unfounded.
Mattel's previously reported net loss of US$603.3 million for the third quarter ending September 30, 2017 was understated due to an error in calculating its tax valuation allowance. The correct reported net loss for the quarter ended September 30, 2017 should have been a net loss of US$712.3 million.
A change in accounting for an intangible asset in the fourth quarter of 2017 resulted in an effective correction of the error for the 2017 annual results.
However, the tax expense remained uncorrected in Q3 2017 and was therefore overstated in the quarter ended December 31, 2017. As a result, Mattel’s previously reported loss of US$281.3 million for the quarter ended December 31, 2017 should have been reported as a net loss of US$172.3 million.
The errors were non-cash, did not affect operating income or EBITDA and had no impact on Mattel’s full year financial results for 2017 or subsequent periods.
According to the investigation's findings, the errors were discovered by management in Q3 2017, but were not properly assessed, nor were the findings documented or disclosed to the then-CEO Margaret Georgiadis, the Audit Committee or in its 2017 10-K.
"The investigation revealed that a confluence of one-time events, management’s reliance on the accounting advice sought and received on the error from the lead audit engagement partner of Mattel’s outside auditor, and lapses in judgment by management contributed to these failures," Mattel said in a statement.
"The investigation did not find that management engaged in fraud.
"In light of the findings of the investigation, Mattel determined that there were material weaknesses in its internal control over financial reporting at the time of the preparation of its financial statements for the quarters ending on September 30, 2017 and December 31, 2017.
"The letter also contains allegations regarding the independence of the lead audit partner of Mattel’s outside auditor," Mattel continues.
"The Audit Committee investigated these allegations, many of which were unfounded.
"However, the Audit Committee’s investigation and a separate investigation by Mattel’s outside auditor concluded that certain actions in specific HR-related activities by the lead audit partner of Mattel’s outside auditor – namely providing recommendations on candidates for Mattel’s senior finance positions – was in violation of the SEC’s auditor independence rules. He also provided feedback on senior finance employees.
"Both the Audit Committee and Mattel’s outside auditor separately concluded after evaluating the nature and severity of these matters that Mattel’s outside auditor remains capable of exercising objective and impartial judgement on all issues with respect to pending and relevant past audits.
"The Audit Committee determined that Mattel’s outside auditor should remain as Mattel’s independent registered public accounting firm," the statement said.
Mattel chairman and CEO Ynon Kreiz said that he will work with the Committee and the Board to ensure these errors do not occur again.
"Mattel agrees with the Audit Committee’s findings and conclusions.
"The Audit Committee has identified issues and control weaknesses that need to be addressed.
"To help ensure that the matters identified by the investigation do not recur, I will work with the Audit Committee and Board to implement remedial measures, which will include enhanced accounting and independence policies, internal controls and employee training.
"We will ensure these issues are resolved thoroughly and quickly so that we can continue to execute on our strategy with the highest level of internal control and diligence," he said.
In light of these findings Mattel has stated it will do/has done the following things:
- Amend its 2018 Annual Report to restate the Company's financial results for Q3 and Q4 2017 and identify material weaknesses in its internal control over financial reporting.
- Mattel's outside auditor has replaced its lead audit engagement partner and other members of its audit engagement team with Mattel.
- After Mattel filed its 2017 10-K but before receiving the Letter, Mattel hired a new Controller and a new Senior Vice President of Tax and it outsourced Mattel’s internal audit function to a third party service provider. Furthermore, Mattel announced a CFO transition plan and is conducting a search for a new CFO.
- Mattel is developing a policy and more robust procedures relating to the assessment, documentation and disclosure of accounting errors and is reviewing its disclosure committee controls and procedures.
The findings were released on 29 October.