Audit Analytics

Accounting Quality Insights

Restatement and Internal Investigation Alert: Mattel Inc. [MAT] October 30, 2019

This alert indicates that a company traded on a major exchange identified material errors
and as a result had to restate financial statements.

On October 30, 2019, Mattel Inc. [Nasdaq: MAT] disclosed several notable events, including: a non-reliance restatement
determined to be necessary following an independent investigation stemming from a whistleblower letter, internal
control weakness, auditor independence issues with its lead audit engagement partner, and the impending departure of
the Chief Financial Officer.

Regarding the non-reliance restatement, Mattel disclosed that financial statements for the third and fourth quarters of
2017 can no longer be relied upon due to material errors related to income tax expense. It was 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, with no impact for the full year. The errors had no impact on Mattel’s full year financial results for 2017
or subsequent periods.
Restatement
Company Mattel Inc. [Nasdaq: MAT] Source 8-K 2019-10-30
Location El Segundo, California CIK 63276
Revenue $4,511 million Market Cap $3,514 million
Industry Game, Toy, and Children’s Vehicle Manufacturing
Auditor PricewaterhouseCoopers LLP (auditor since 1974)
Restated Period 2016-01-01 to 2019-06-30
Auditor Letter or Discussion Yes
Board or Audit Committee Involvement Yes
SEC (or Other Regulatory) Investigation No
Accounting Rule (GAAP/FASB) Application Failures:
➢ Tax expense/benefit/deferral/other issues
Other Significant Issues:
➢ Material Weakness – Section 404 or 302 issues identified

The need for a restatement was discovered during an independent investigation into the allegations contained in a
whistleblower letter that was sent to Mattel’s outside auditor on August 2, 2019. Both the Audit Committee of Mattel’s
Board of Directors and their outside auditor conducted investigations into the allegations contained in the letter.

The investigation of the whistleblower letter found errors in Mattel’s financial statements, in addition to failures to
properly disclose errors to the then-CEO and the Audit Committee once they became known. Mattel’s management
identified the 2017 accounting error during its accounting closing procedures for the quarter ended December 31, 2017,
but the error was not appropriately assessed, and the findings were not documented.

According to Mattel, “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 asserts that management did not engage in fraud, but a material weakness in internal controls was identified.

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Audit Analytics
The whistleblower letter also contained allegations regarding the independence of the lead audit partner of Mattel’s
outside auditor. The investigation concluded that the lead audit partner participated in certain actions that violated the
SEC’s auditor independence rules. Specifically, the actions included providing recommendations on candidates for
Mattel’s senior finance positions and providing feedback on senior finance employees.

As a result of the independence violations, Mattel’s auditor, PricewaterhouseCoopers, replaced its lead audit
engagement partner and other members of its audit team for its engagement with Mattel. Earlier this year, PwC was
fined $7.9 million by the SEC due to violating auditor independence rules and engaging in improper professional
conduct.

Worth noting, in 2018, the lead audit engagement partner in question also served as the lead engagement partner for
Herbalife Nutrition Ltd. [NYSE: HLF] and Spout’s Farmers Market, Inc. [Nasdaq: SFM]. Interestingly, Herbalife’s auditor
resigned in 2013 due to auditor independence violations, and the Company subsequently engaged PwC as its
independent auditor.

Going forward, Mattel will restate the quarterly financial data for the three month periods ended September 30, 2017
and December 31, 2017, in addition to restating Management’s Report on Internal Control over Financial Reporting and
Evaluation of Disclosure Controls and Procedures on the Annual Report for the year ended December 31, 2018. Mattel’s
auditor will also be reissuing its audit report to reflect an adverse opinion on the Company’s internal controls over
financial reporting as of December 31, 2018.

Additionally, the Company will revise its previously issued 2016, 2017, 2018 annual financial statements to correct other
immaterial misstatements, as well as interim financial statements for the three months ended March 31, 2019 and six
months ended June 30, 2019.

In the same SEC filing announcing the non-reliance restatement, Mattel also disclosed that the Company is conducting a
search for its next Chief Financial Officer and that its current CFO, Joseph Euteneuer, will leave the Company after a
transition period of up to six months; Mr. Euteneuer served in the capacity of CFO since September 2017.

A five-year history of Mattel’s accounting, control, and related events follows.

Characterization of Restatements
A financial restatement is perhaps the most immediate and significant red flag in respect to a company’s accounting
quality. It should come as no surprise, then, that financial restatements have negative implications on stock
performance.

Studies have found that company stock of a restating firm underperforms the market for the
fifty days following a restatement (Audit Analytics, 2007)1. Negative market reaction to a
restatement lingers even longer, close to three years after a restatement is announced.
(Chen, Cheng and Lo, 2013)2

1
http://www.auditanalytics.com/0002/view-custom-reports.php?report=410f7913a36b50e25a3281bd0959b10f
2
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2253689

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 Audit Analytics

Mattel Inc. [MAT] – History of Accounting, Control, and Related Events

Disclosure Date Filing Event Disclosure

Non-Reliance Mattel will restate financial statements for Q3 2017 and Q4 2017 to correct
2019-10-30 8-K
Restatement material errors related to income tax expense

Joseph J Euteneuer will depart from Chief Financial Officer position;

2019-10-30 8-K CFO Departure
effective after a transition period of up to 6 months

Whistleblower Letter & Mattel disclosed they were made aware of an anonymous whistleblower
2019-08-08 8-K
Internal Investigation letter and would investigate the matters set forth in the letter

Intangible asset impairment in the amount of $4.3 million impairment

2019-02-22 10-K Impairment
recorded, related to discontinued brands and products

Property, plant, equipment impairment in the amount of $13.9 million

2019-02-22 10-K Impairment
recorded, related to discontinued use

Deviation from Deviation from Benford’s Law indicates higher probability of earnings
2019-02-22 10-K
Benford’s Law manipulation

2019-02-22 10-K Altman Z-Score Noted Company Z-Score indicates deteriorating financial health

Margaret H Georgiadis departed from Chief Executive Officer position;

2018-04-20 8-K CEO Departure
effective 2018-04-26

Intangible asset impairment in the amount of $9.2 million recorded, related

2018-02-27 10-K Impairment
to discontinued trademark
Property, plant, equipment impairment in the amount of $41.6 million
2018-02-27 10-K Impairment recorded, related to equipment for discontinued products and reduced
carrying value of retail store leasehold improvements
Kevin M Farr departed from Chief Financial Officer position;
2017-07-17 8-K CFO Departure
effective 2017-09-29

Christopher A Sinclair departed from Chief Executive Officer position,

2017-01-17 8-K CEO Departure
appointed Executive Chairman of the Board; effective 2017-02-08

Deviation from Deviation from Benford’s Law indicates higher probability of earnings
2015-02-25 10-K
Benford’s Law manipulation

Bryan G Stockton departed from Chief Executive Officer position; effective

2015-01-29 8-K CEO Departure
2015-01-25

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