The Securities and Exchange Commission (SEC) settled charges with Mattel Inc. related to misstatements by the company in its third- and fourth-quarter 2017 financial statements.
The company has agreed to pay $3.5 million to settle the charges, which alleged that Mattel understated the tax-related valuation allowance for the third quarter of 2017 by $109 million. Further, the SEC charged that Mattel overstated the tax expense for the fourth quarter of 2017 by the same amount. As a result, Mattel’s third quarter and fourth quarter 2017 net loss and net loss per share were understated by 15 percent and overstated by 63 percent, respectively.
In addition, the SEC found that Mattel had no internal control specifically related to calculating a valuation allowance. Until Mattel’s November 2019 restatement, the $109 million tax expense error remained uncorrected, and the lack of internal control for financial reporting related to the error remained undisclosed. Thus, neither Mattel’s CEO nor its audit committee was informed of the $109 million error.
Without admitting or denying these findings, Mattel agreed to a cease-and-desist order and to pay a $3.5 million civil penalty. The SEC took into account the company’s cooperation with the SEC’s investigation and its remediation.
Separately, the SEC is initiating litigation against Joshua Abrahams, a former audit partner at PricewaterhouseCoopers, to determine if he engaged in improper professional conduct and violated auditor independence rules. The SEC alleges that Abrahams violated numerous professional standards in the third quarter 2017 interim review and the 2017 annual audit of Mattel’s financial statements. The SEC order found that Abrahams failed to verify that the uncorrected $109 million error was documented, despite knowing of it. According to the SEC, he also failed to communicate the error to Mattel’s audit committee. Further, the SEC alleges that Abrahams failed to maintain independence by providing prohibited human resource advice to Mattel, including a suggestion of who should be a candidate for an executive post.
A hearing on the matter involving Abrahams will be scheduled to decide if the SECʻs Enforcement Division has proven the allegations in the order and what, if any, remedial actions are appropriate.
“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 Los Angeles Regional Office. “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.”