An independent investigation by the audit committee for Mattel’s board of directors found errors in the toymaker’s publicly filed financial statements for the third and fourth quarters of 2017.
Mattel’s net loss was understated by US$109 million in Q3 2017 and overstated by US$109 million in Q4 2017. The Q3 net loss was reported as US$603.3 million due to an error in calculating the company’s tax valuation allowance, and should have been reported as US$712.3 million. The error was discovered due to a change in accounting for Mattel’s fiscal 2017 report, but because it remained uncorrected in the company’s Q3 report—and was not disclosed in Mattel’s Q4 2017 financial report—this resulted in an “effective correction” by overstating the Q4 2017 net loss (Mattel reported US$281.3 million for the quarter but should have reported US$172.3 million).
The investigation launched after an August 2, 2019 letter from a whistleblower alleged accounting errors in the company’s financial reports and questioned whether Mattel’s outside auditor was independent.
Yesterday, Mattel announced CFO Joseph Euteneuer will leave the company after a transition period of up to six months. A search for the company’s next CFO is currently underway. Euteneuer joined Mattel in September 2017, replacing the toyco’s long-time CFO Kevin Farr who departed in July 2017.
The investigation found that the errors weren’t disclosed to then-CEO Margaret Georgiadis and the audit committee at the time, with the investigative committee ultimately determining that Mattel’s management didn’t engage in fraud.
The committee did conclude, however, that the error was not properly assessed and that Mattel’s findings related to the error were not documented. A confluence of “one-time events,” Mattel’s reliance on accounting advice based on an error from the lead audit engagement partner of the toymaker’s outside auditor and “lapses in judgement” by Mattel management contributed to the broader issue.
Mattel’s outside auditor has since replaced its lead partner, as well as other members of its audit team for its work with the toymaker. Following the errors in Q3 and Q4 2017, but before the whistleblower letter, Mattel also outsourced its internal audit function to an outside third-party service provider.
The committee’s investigation concluded the errors had “no impact” on Mattel’s full-year financial results for fiscal 2017, but also determined Mattel’s procedures around financial reporting are flawed. Mattel will amend the company’s Q3 and Q4 2017 financial reports and “strengthen” its procedures around financial reporting by developing a more robust policy related to the assessment, documentation and disclosure of accounting errors.
The investigative audit committee consisted of independent directors, counsel from O’Melveny & Myers LLP and forensic accountants from FTI Consulting.
The committee’s findings come as Mattel reported its Q3 2019 financial results. Gross sales for the period grew 3% to US$1.65 billion thanks to the strength of Mattel’s Barbie and Hot Wheels brands.
The dolls category grew 5% to US$567.6 million, with gross sales for Barbie up 10% to US$412.8 million. The vehicles category also saw increases (up 13% to US$346.9 million) thanks to gross sales for Hot Wheels growing 25% to US$293.3 million.
The action figures, building sets and games category grew 12% to the tune of US$311.4 million.
Gross sales for the American Girl category decreased 14% to US$54.8 million, driven by lower sales in retail stores.
Mattel’s infant, toddler and preschool category declined 11% to US$431 million. Gross sales for the company’s Fisher-Price and Thomas & Friends category fell 3% to US$396.3 million.
In North America, gross sales fell 1% to US$880.4 million, driven by a decline in Mattel’s infant, toddler and preschool category (including Fisher-Price Friends and Power Wheels). Internationally, gross sales increased 10% to US$721.7 million due to strength in the dolls (Barbie, Polly Pocket and BTS); vehicles (Hot Wheels); and action figures, building sets and games (Toy Story 4) categories.