Toy company Mattel announced this week that has completed an independent investigation, led by its audit committee, into the allegations by a whistleblower of accounting improprieties and a lack of independence by the company’s external auditor.
The investigation determined that income tax expense was understated by $109 million in the third quarter of 2017, and overstated by $109 million in the fourth quarter of 2017, but had no impact for the full year. According to the company: “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.” The investigation also determined that Mattel has certain material weaknesses in its internal control over financial reporting.
Mattel said the investigation found it had “certain material weaknesses in its internal control over financial reporting” but it “did not find that management engaged in fraud.” It also announced that chief financial officer Joseph Euteneuer will leave the company.
The audit committee also concluded that the objectivity and impartiality of Mattel’s outside auditor has not been impaired, and that Mattel’s outside auditor can continue as its independent auditor. Mattel’s outside auditor agrees with that conclusion.
Mattel will undertake a series of remedial actions, outlined below, including the amendment of the company’s 2018 annual report to restate the last two quarters of 2017, and certain related information, and the strengthening of its internal control over financial reporting. It also announced it was outsourcing Mattel’s internal audit function to a third party service provider.
Background
On August 8, 2019, Mattel announced that it had received a letter from a whistleblower and would investigate its allegations. Over the past two months, the audit committee, together with independent counsel from law firm O’Melveny & Myers and forensic accountants from FTI Consulting, thoroughly investigated the letter’s allegations. Mattel provided all requested documents and made all requested witnesses available to the audit committee. Mattel’s outside auditor conducted its own investigation and informed the audit committee that it had shared all relevant information.
The Audit Committee’s investigation found errors in publicly-filed Mattel financial statements for the last two quarters of 2017, failures to properly consider and disclose such errors to the then-CEO, Margaret Georgiadis, and the audit committee once they became known, and violations of auditor independence rules. Other allegations in the Letter were determined to be unfounded or immaterial.
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.
“Mattel agrees with the audit committee’s findings and conclusions,” said Mattel’s Chairman and CEO Ynon Kreiz. “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.”
Remedial Actions
Mattel has been and is continuing to work on addressing the issues identified in the audit committee’s investigation.
First, Mattel determined that it is appropriate to amend its 2018 annual report to (1) restate the company’s financial results for the third and fourth quarters of 2017 and certain related information; and (2) identify material weaknesses in its internal control over financial reporting for the third and fourth quarters of 2017. Mattel has discussed the restatements with its outside auditor and is working diligently to prepare and file the amended report by November 12, 2019.
Second, Mattel’s outside auditor has replaced its lead audit engagement partner and certain other members of its audit team for its audit engagement with Mattel. The audit committee and Mattel’s management support this decision.
Third, Mattel has 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.
Fourth, 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. Mattel is also supplementing its policy and training with respect to auditor independence. 