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January 29, 2023

Uh-Oh, PwC, You’ve Gotten the Attention of the PCAOB

Somebody at the PCAOB must have read the Wall Street Journal article last week about Mattel and its auditor PwC allegedly burying an accounting error tied to Mattel’s ownership of Thomas & Friends because everyone’s favorite mess of an audit regulator is reviewing PwC’s work, according to Bloomberg, and probably whether the firm broke any auditor independence rules (as they are wont to do).

Now, as you guys probably know, the PCAOB has been without a director of enforcement since May 2018 when Claudius Modesti walked out the door (or maybe he was pushed out the door by William Duhnke?) after spending 14 years in that role. Modesti is now a partner in Akin Gump’s white-collar defense and government investigations practice in Washington, DC.

So once the WSJ broke the story about how PwC and Mattel allegedly covered up the accounting issues, I imagine there being confusion at the PCAOB about what to do, if anything. I imagine there being conversations like:

“Should we investigate this?”

“I dunno. Let’s call Claudius.”

So in my mind, someone at the PCAOB called Modesti at work to ask him what they should do. The call probably went down like this:

PCAOB: Hi, Claudius, it’s the PCAOB.

Claudius Modesti: Um, hi.

PCAOB: Did you read that Wall Street Journal article today about that former Mattel tax reporting director who said Mattel and PwC covered up some accounting error it chose not to disclose or something?

Modesti: Yes.

PCAOB: So … you think we should look into this?

Modesti: Yes.

PCAOB: OK, thanks.

Modesti: Don’t call this number again.

So the PCAOB has apparently started an investigation, according to Bloomberg:

Accounting giant PwC’s work for Mattel Inc. is being reviewed by the top U.S. audit watchdog after the toymaker said it would restate some previous financial results because of a bookkeeping error, according to a person familiar with the matter.

The Public Company Accounting Oversight Board’s scrutiny comes after Mattel said last week that some financial statements from 2017 “should no longer be relied upon due to material misstatements.” The El Segundo, California-based company, which makes Barbie dolls and Matchbox cars, also said on Oct. 29 that it found “material weaknesses” in its internal controls for financial reporting.

And the PCAOB is probably looking into findings of an internal Mattel investigation that revealed Joshua Abrahams, the PwC partner who led the Mattel audit team, had violated independence rules by recommending candidates for Mattel’s senior finance positions, according to the WSJ. He has been placed on administrative leave and isn’t expected to work for PwC much longer.

So maybe there will be fines and other sanctions doled out by the PCAOB against PwC at some point. Or maybe not. The PCAOB doesn’t have the greatest track record of disciplining Big 4 firms for shady auditing.

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