Once the Wall Street Journal broke the story last November that Mattel’s finance team and PwC auditors reportedly buried an accounting error that affected the toy giant’s financial results toward the end of 2017, you knew there would be some fallout.
First, Bloomberg followed the WSJ report by writing that the PCAOB would be investigating PwC’s audit work for Mattel during that period to see if anything nefarious was going on. Now, we’ve learned that Mattel investors have filed a complaint in California federal court against Mattel, current and former Mattel executives, and PwC, alleging that they have “suffered significant losses and damages” as a result of Mattel’s and PwC’s accounting trickery and the resulting decline in the market value of Mattel’s stock.
The proposed class-action lawsuit filed on Jan. 31 by the New Orleans Employees’ Retirement System claims that shareholders who purchased Mattel stock between Aug. 2, 2017 and Aug. 8, 2019 weren’t given an accurate depiction of the company and should be compensated for any loss they suffered from the wrongful filings, Law360 reported.
The shareholders “have suffered damages in that, in reliance on the integrity of the market, they purchased Mattel stock at artificially inflated prices and were harmed when the truth about Mattel negatively impacted the price of the company’s stock,” the complaint said.
“The financial statements did not fairly present in all material respects the financial condition and operational results of the company,” the complaint said.
The complaint, which names Mattel, PwC, ex-Mattel CEO Margaret Georgiadis, current Mattel CEO Ynon Kreiz, and outgoing Mattel CFO Joseph Euteneuer as defendants, alleges that Mattel “misled investors concerning its financial condition and the effectiveness of its internal control over financial reporting … by understating its income tax expense by $109 million in the third quarter of 2017 and then by working with its auditor, PwC, to manipulate the company’s accounting to conceal this misstatement and avoid restating the company’s financial results.”
The alleged accounting cover-up was connected to Mattel’s ownership of the show featuring the talking train from the island of Sodor, “Thomas & Friends.” The investors claim that:
- Mattel’s tax valuation allowance of $561.9 million as reported in the Q3 2017 Form 10-Q was understated by $109 million, wrongly offset by the valuation of its “Thomas & Friends” asset through a miscategorization of that asset.
- Mattel’s tax valuation allowance as reported in the 2017 Form 10-K was overstated by $109 million, as a result of the company’s cover-up of the accounting error.
- The financial statements did not fairly present in all material respects the financial condition and operational results of Mattel.
- Mattel’s disclosure controls and procedures were ineffective and failed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
- Georgiadis and Euteneuer failed to disclose significant deficiencies and material weaknesses in the internal control over financial reporting.
As one whistleblower [Brett Whitaker, Mattel’s former director of tax reporting] recently revealed, the Company’s senior accounting executives internally determined to conceal the errors in the Company’s financial statements because, by taking this approach, “at worst we might get a slap on the wrist from the Securities and Exchange Commission” but disclosing the truth and revealing a material weakness in internal controls would have been a “kiss of death.” Throughout the Class Period, the Company misrepresented its financial condition and the effectiveness of Mattel’s internal controls, including through false certifications that Georgiadis, Kreiz, and Euteneuer filed with the SEC during each quarter during the Class Period.
Further, PwC issued audit opinions to accompany Mattel’s annual reports stating that the Company’s consolidated financial statements presented fairly, in all material respects, the financial position of the Company and that the Company’s internal control over financial reporting was effective.
The complaint goes on to say that on Aug. 8, 2019, Mattel disclosed that it was made aware of an anonymous whistleblower letter, claiming the company had made accounting errors. As a result, Mattel shelved a $250 million debt offering scheduled to close that day.
In response to this news, Mattel’s stock price fell from $13.43 per share on August 8, 2019, to $11.31 per share on August 9, 2019 on unusually high trading volume, a decline of over 15% in one trading day.
Then, on October 29, 2019, the Company admitted that, following an investigation by its Audit Committee, it would be restating Mattel’s financial reports for the third quarter 2017 and year-end 2017 and revising its financial reports for its previously issued 2016, 2017, and 2018 annual financial statements, and that the Company’s internal control over financial reporting was not effective. According to the results of the internal investigation, Mattel determined that “lapses in judgment by management contributed to these failures” and announced the resignation of Defendant CFO Euteneuer.
Mattel also reported that its accounting errors were made based on “management’s reliance on the accounting advice sought and received on the error from the lead audit engagement partner of Mattel’s outside auditor,” PwC.
From the get-go, PwC, which has been Mattel’s auditor since 1974, has said that this whole thing was just an “honest mistake” and told Law360 in a statement that the “lawsuit has no merit and the complaint relies heavily on anecdotal information from a single news article [i.e., WSJ] that the firm has already refuted.”
But if it really was an “honest mistake,” why was PwC so eager to launch partner Joshua Abrahams, who led the Mattel audit team?
At least PwC is doing a good job giving its attorneys something to do these days.