Mattel Falls After Former Exec Acknowledges Improper Accounting Practices

Toy maker Mattel Inc MAT decided to change the accounting treatment of an asset instead of fixing a problem and restating earnings, according to The Wall Street Journal.

What Happened

Mattel executives discovered an accounting error in 2018 related to its ownership of Thomas & Friends, WSJ reported. Instead of fixing the problem at the expense of some embarrassment by shareholders, Mattel executives cooperated with auditor PricewaterhouseCoopers to bury the problem and keep the board of directors and CEO out of the loop.

Mattel's former director of tax reporting, Brett Whitaker, told WSJ fixing the problem would result in a "slap on the wrist" from the Securities and Exchange Commission. On the other hand, disclosing a material weakness to investors would be akin to a "kiss of death."

Whitaker told WSJ he wasn't the whistleblower who wrote a letter in August that questioned PwC's independence and forced the toymaker to cancel a debt refinancing plan.

Mattel admitted to the accounting mistake in late October and said CFO Joe Euteneuer will resign. According to Whitaker, however, the departing executive would have had first-hand knowledge of management's decision not to disclose the mistake sooner.

See Also: Analysts Not Yet Ready To Buy Mattel Despite Earnings Beat, Stock Surge

Why It's Important

Mattel told WSJ its accounting error is simply an "honest mistake" and the change in accounting treatment was appropriate. Similarly, PwC said it takes "appropriate actions in response to any allegations of misconduct."

Mattel already increased the reported loss for the appropriate quarter by the amount of the error at $109 million, which WSJ said was offset by a $109 million reduction in the net loss for the following quarter. The net result will have no impact on the company's full-year financial results.

Mattel's stock traded lower by 2.7% at $12 per share Wednesday afternoon.