The Securities and Exchange Commission (SEC) fined Mattel $3.5 million for allegedly overstating tax expenses and initiated litigation against a former PwC audit partner accused of failing to inform the toy company’s audit committee about its financial statement errors.

Mattel understated its tax-related valuation allowance regarding its Thomas the Tank Engine asset by $109 million in the third quarter of 2017 before overstating the tax expense by $109 million in the fourth quarter of 2017, the SEC explained in its order published Friday. As a result, Mattel understated its net loss and net loss per share in the third quarter by 15 percent, and it overstated those figures in the fourth quarter by 63 percent, the agency said.

Mattel learned of the matter when it received a whistleblower letter in August 2019 alleging the errors and raising questions about the independence of Joshua Abrahams, who at the time was Mattel’s lead engagement partner at PwC.

Mattel’s audit committee launched an internal investigation based on the whistleblower’s allegations. The company would restate its financial results for the third and fourth quarter of 2017.

Mattel filed an amended Form 10-K in November 2019 and pointed out weaknesses in its internal control over financial reporting. It said it failed to design and operate internal control over the review of income tax valuation allowance analysis, and it hadn’t created controls to assess and communicate financial statement errors and internal control deficiencies in a timely manner.

The company’s former chief financial officer, Joseph Euteneuer, failed to tell the audit committee about the $109 million error in a timely manner, the SEC said. Euteneuer stepped down from the role in 2019.

“Mattel’s accounting groups should have known that there was an internal control deficiency … associated with the calculation of the valuation allowance,” the SEC order said, “but Mattel did not document how and why the error happened and how it could be remedied, including with respect to the failure of any internal control over financial reporting and how to remedy the control deficiency.”

Mattel violated the negligence-based antifraud provisions and the reporting, books and records, and internal controls provisions of securities laws, the SEC alleged. In setting the company’s penalty, the agency took into consideration its cooperation and remediation.

Mattel did not admit nor deny the order’s findings. The company did not respond to a request for comment.

Abrahams might have engaged in improper professional conduct and violated auditor independence rules, the SEC alleged in a separate order instituting administrative proceedings.

Abrahams knew of the error at Mattel but failed to verify it was documented and didn’t communicate it to the audit committee, the agency contended. He also gave advice to Mattel’s former CFO about which candidate “would be the best fit for a senior position at the company, as well as who should not be hired,” the SEC alleged.

“An auditor’s adherence to professional standards and independence is critical to preserving investors’ trust in a company’s financial statements,” said Alka Patel, associate director of the SEC’s Los Angeles Regional Office, in a press release. “Auditors who advise their clients on who to hire will have an interest in the success of such hires and could therefore be less critical of their effectiveness, all of which undermines the auditor’s independence.”

Abrahams has 20 days to answer the allegations raised in the SEC’s order. The agency will schedule a public hearing to review evidence against Abrahams and decide what, if any, remedial actions it will take.

Abrahams resigned from PwC in 2019.