The Securities and Exchange Commission today announced that California-based Mattel Inc. has agreed to pay $3.5 million to settle charges relating to misstatements in its third and fourth-quarter 2017 financial statements. Separately, the SEC is initiating litigation against Joshua Abrahams, a former audit partner at PricewaterhouseCoopers LLP, or PwC, to determine whether he engaged in improper professional conduct and violated auditor independence rules.
According to the SEC’s order, Mattel understated the tax-related valuation allowance for the third quarter of 2017 by $109 million and overstated the tax expense for the fourth quarter of 2017 by the same amount. As a result, Mattel’s third quarter and fourth quarter 2017 net loss and net loss per share were understated by 15% and overstated by 63%, respectively. In addition, the SEC’s order finds that, at the time, Mattel had no internal control specifically related to calculating a valuation allowance. As explained in the order, until Mattel’s November 2019 restatement, the $109 million tax expense error remained uncorrected, and the lack of internal control for financial reporting related to the error remained undisclosed. As alleged, neither Mattel’s CEO nor audit committee was informed of the $109 million error.
The SEC’s separate order against Abrahams alleges that he violated numerous professional standards in the third quarter 2017 interim review and the 2017 annual audit of Mattel’s financial statements. According to the order, Abrahams failed to verify that the uncorrected $109 million error was documented, despite knowing of it, and failed to communicate the error to Mattel’s audit committee. The order further alleges that Abrahams failed to maintain independence by providing prohibited human resource advice to Mattel, including suggesting to Mattel’s then-CFO which candidate would be the best fit for a senior position at the company, as well as who should not be hired. The matter involving Abrahams will be scheduled for a public hearing before the Commission to decide if the Enforcement Division has proven the allegations in the order and what, if any, remedial actions are appropriate.
“An auditor’s adherence to professional standards and independence is critical to preserving investors’ trust in a company’s financial statements,” said Alka N. Patel, Associate Director of the Los Angeles Regional Office. “Auditors who advise their clients on who to hire will have an interest in the success of such hires and could therefore be less critical of their effectiveness, all of which undermines the auditor’s independence.”
The SEC’s order against Mattel finds that it violated the negligence-based antifraud provisions and the reporting, books and records, and internal controls provisions of the securities laws. Without admitting or denying these findings, Mattel agreed to a cease-and-desist order and to pay a $3.5 million civil penalty. The SEC’s order also notes that, in determining to accept Mattel’s settlement offer, the Commission took into account the company’s cooperation with the SEC’s investigation and its remediation.
The SEC’s investigation was conducted by Tony Regenstreif and Lorraine Pearson and was supervised by Victoria A. Levin and Rhoda Chang. The litigation against Abrahams will be led by Stephen Kam and supervised by Gary Y. Leung.