Toymaker Mattel Inc. and its auditor, PricewaterhouseCoopers, buried an accounting error made in late 2017 to avoid embarrassment and a potential “kiss of death” for the company, according to a report from The Wall Street Journal.
Mattel’s finance team notified executives in early 2018 that they had discovered a tax expense linked to the company's animated children’s show "Thomas & Friends" was understated by $109 million in the third quarter of 2017 and overstated by the same amount in the fourth quarter, the Journal reported, citing documents and an interview with Brett Whitaker, the company’s former director of tax reporting.
While company executives had considered restating Mattel’s earnings, and, in effect, acknowledging the mistake, senior officials and PwC instead “decided to change the accounting treatment of the Thomas asset, effectively burying the problem,” the Journal reported, adding that managers decided not to tell Mattel’s board or CEO at the time.
The error was revealed in a whistleblower letter sent to Mattel in August. The mistake "was not properly assessed when it was discovered, nor were the findings and conclusions documented as they should have been at that time," a spokesperson said
The error involved an accounting charge -- basically, a theoretical cost that didn't change cash balances. It affected neither operating income nor earnings before interest, taxes, depreciation and amortization, a profitability measure known as Ebitda, the spokesperson said.
The mistake didn't change the bottom line on Mattel's full-year financial results for 2017 or later periods, the spokesperson added, though the company will amend its regulatory filing for that year to address it. Mattel's chief financial officer at the time has since stepped down.
“It was known within Mattel that if we took this approach, at worst we might get a slap on the wrist from the Securities and Exchange Commission,” Whitaker told the Journal. He stepped down from his post in March 2018. “But if the company disclosed a material weakness, a senior executive said to me it would be ‘the kiss of death.'"
It was a challenging period for Mattel, which had garnered weak sales during the lucrative holiday shopping season and rejected a takeover bid from rival Hasbro. Toys 'R Us, a major nationwide customer, had filed for bankruptcy protection, and Mattel's shares were slumping.
“But if the company disclosed a material weakness, a senior executive said to me it would be ‘the kiss of death.'"
Whitaker told the outlet PwC had a hand in the decision not to disclose the mistake. He recalled seeing one PwC employee “walking down the hall, high-fiving people, after this decision was made,” according to the outlet. A PwC representative denied that claim, The Journal reported.
“My team was dumbfounded by it."
Mattel, which has used PwC’s services for 45 years, acknowledged the error Oct. 29, following an internal investigation spurred by the whistleblower complaint and referred to the hiccup as “an honest mistake,” according to a statement obtained by the Journal.
In a statement to FOX Business, PwC said it took action immediately upon learning of the whistleblower report, starting a rigorous investigation that included reviewing nearly 45,000 documents and conducting 30 interviews.
"At PwC, integrity is at the heart of who we are and how we operate as a firm," the accounting firm said. "We will always strive to do the right thing, and we will continue to take the appropriate actions in response to any allegations of misconduct. PwC takes its role as an independent auditor seriously."
The PwC partner who headed Mattel's audit team was placed on administrative leave, according to the Journal.