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Mattel Identifies Financial Controls to Improve, Stands by PwC (1)

Nov. 15, 2019, 6:10 PMUpdated: Nov. 15, 2019, 11:01 PM

Mattel Inc. stood by its beleaguered auditor PwC LLP but told investors that it is trying to do a better job in disclosing accounting errors.

The El Segundo, Calif.-based toymaker—in a special morning call Nov. 15 with securities analysts focused on its accounting issues—emphasized that PwC, also known as PricewaterhouseCoopers, was fit to continue as its external auditor after the firm replaced the lead audit partner and other audit team members.

Controller Yoon Hugh said the company was “moving rapidly” to improve its controls and revise training related to auditor independence. But she cautioned that it will take time to test new procedures to ensure they are working.

She highlighted two material weaknesses in the toymaker’s internal controls over financial reporting related to income tax valuation analysis and monitoring controls that existed in 2017. The company corrected the tax controls in 2018 and adjusted its disclosure committee controls this fall.

Mattel plans to formalize its policy spelling out how it evaluates, documents, and discloses accounting errors and build in stronger procedures by the end of the year.

A whistleblower complaint about the company’s accounting and the firm’s independence led to a restatement of Mattel’s 2017 third and fourth quarters, which were released Nov. 12.

Pressed by analysts about PwC’s role, Hugh said that the company didn’t hire PwC to provide services to its human resources team. However, the firm handles the company’s employee benefit plan audits, assists the company with international audit requirements, and provides tax planning and preparation, Hugh said.

PwC has served as the company’s auditor for 45 years and earned $9.4 million for all its services in 2018.

Audit committees may opt to separately engage their auditor to help vet the competence and experience of candidates for finance positions at the company. However Securities and Exchange Commission rules prohibit auditors from making decisions for management. That would include a bar on providing recommendations on who to hire for specific jobs.

It’s not uncommon for companies to hold separate calls in the wake of an investigation to reassure investors that the company is back on track and has taken appropriate measures, said Zivia Sweeney, associate accounting professor at USC Marshall School of Business, whose past corporate finance roles included controller and chief financial officer.

“The purpose of these kinds of calls,” Sweeney said, “it’s really to try and build that confidence back.”

The call provided little clarification about the underlying accounting change for an intangible asset, which ultimately triggered the $109 million tax error. But it may not matter, said Marcy Shepardson, who teaches accounting at Indiana University Kelley School of Business.

“If I were an analyst, I would want to know: ‘How does this effect my expectations about future firm performance?’,” she said. “If analysts are thinking about audit quality, does it seem like the auditor and the audit committee have taken appropriate steps to address the issue? Can I believe in the credibility of the reports going forward?”

(Updates with additional reporting. )

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com

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