Following the completion of an independent investigation into allegations of accounting errors contained in a whistleblower letter, the audit committee of children’s entertainment company Mattel announced it has uncovered material weaknesses in its internal controls over financial reporting (ICFR).
The company has set out to remediate the issues, ousting its chief financial officer among other steps taken.
The whistleblower letter, received by Mattel’s outside auditor Aug. 2, questioned the independence of that auditor and whether there were accounting errors in historical periods. Mattel’s audit committee then investigated the allegations.
“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,” Mattel said. The investigation also determined Mattel has certain material weaknesses in its ICFR.
Over the past two months, the audit committee, together with independent counsel from O’Melveny & Myers and forensic accountants from FTI Consulting, investigated the letter’s allegations, according to the company. “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 with the audit committee.”
In addition to the two 2017 misstatements, the audit committee’s investigation cited violations of auditor independence rules and failures to properly consider and disclose such errors to then-Chief Executive Officer Margaret Georgiadis and to the audit committee once they became known.
“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. “The investigation did not find that management engaged in fraud.”
The whistleblower letter also contained allegations regarding the independence of the lead audit partner of Mattel’s outside auditor. The audit committee investigated these allegations, many of which were described by Mattel as “unfounded.”
“Mattel agrees with the audit committee’s findings and conclusions. The audit committee has identified issues and control weaknesses that need to be addressed.”
Ynon Kreiz, Chairman and Chief Executive Officer, Mattel
The audit committee’s investigation and a separate investigation by Mattel’s outside auditor, however, concluded certain actions by the lead audit partner—namely providing recommendations on candidates for senior finance positions—violated the Securities and Exchange Commission’s auditor independence rules.
“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 judgment on all issues with respect to pending and relevant past audits,” Mattel said. “The audit committee determined that Mattel’s outside auditor should remain as Mattel’s independent registered public accounting firm.”
Chief Financial Officer Joseph Euteneuer will leave the company after a transition period of up to six months. The company is conducting a search for a new CFO.
Mattel said it “has been and is continuing to work on addressing the issues identified in the audit committee’s investigation.” Its other remedial actions include amending its 2018 Form 10-K to restate the last two quarters of 2017 and certain related information and strengthening its ICFR.
Mattel also announced its outside auditor has replaced its lead audit engagement partner and certain other members of its audit team for future engagements. “The audit committee and Mattel’s management support this decision,” the company said.
Mattel has hired a new controller and a new senior vice president of tax, and it has outsourced its internal audit function to a third-party service provider.
“Mattel agrees with the audit committee’s findings and conclusions,” said Mattel Chairman and Chief Executive Officer Ynon Kreiz in a statement. “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.”
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