This is one for the books, as it were. Mattel understated its losses in the third and fourth quarters of 2017 by $109 million. The mistake in losses resulted from an error in calculating an allowance for its tax valuation. The company’s audits committee, along with outside counsel, found that Mattel had to restate its financials (but nothing material here, so move along) and its 10-K. Oh, and the report identified a “material weakness” in internal controls. Say what? So long as it is not quantitatively material, what, me worry? To be fair, the error did not materially affect annual EBITDA, adjusted EBITDA, cash flows, or EPS, i.e., neither the fake numbers nor the real numbers were materially affected — quantitatively)
Anyone can make a mistake on allowances, particularly on taxes. The odd thing about this particular error (and the resulting finding of a material weakness in internal controls) is that no one told either the CEO nor the audit committee about the error. One more odd thing, the error did not come to light until the company’s auditor received a whistleblower letter in August 2019. Oops– one more odd thing. PricewaterhouseCoopers LLP (the supercalifragilisticexpialidocious of the Big 4 accounting firms) replaced its lead partner on the Mattel account because the former lead partner had been recommending people for senior finance positions in Mattel. The whistleblower let those beans spill as well. PwC (to save the space) and Mattel issued statements indicating that they both “take independence seriously” and that they have “robust policies and procedures in place to identify and address potential threats to independence.”
PwC can stay, nothing to see here, and we will fix those internal controls. Just “lapses in judgment by management.” Off you go! The Barometer has found that “lapses in judgment by management” loosely translated means, “Managers were too “‘a scared” to report the error.” Such a “lapse in judgment” travels in pairs. The accounting “lapse in judgment” is followed by another “lapse in judgment” the failure to appreciate that this stuff wants out there. Somehow this stuff always comes out. Sort of comical that the whistleblower sent the letter to PwC — must not have known of the HR work of the audit firm.
See Paul Ziobro, “Mattel’s Finance Chief to Leave,” Wall Street Journal, October 30, 2019, p. B5 for more insights into the issues.