Mattel execs and auditor hid ‘Thomas & Friends’-related accounting error, report says

Mattel Inc.’s finance team and its outside auditor effectively buried an accounting error that affected its financial results in the latter half of 2017, according to a published report.

Finance executives and employees of the auditor, PricewaterhouseCoopers, discovered the error in early 2018 but it wasn’t accurately reflected in Mattel’s results until after a whistleblower wrote to the company in August, the Wall Street Journal reported Wednesday after interviewing Brett Whitaker, who was Mattel’s director of tax reporting at the time the error was discovered.

Whitaker, who said he was not the whistleblower, resigned from the El Segundo toy giant in March 2018.

Mattel acknowledged the error last week after an investigation and said it was restating its financial results for the third and fourth quarters of 2017. On Wednesday, the company said the error “was not properly assessed when it was discovered, nor were the findings and conclusions documented as they should have been at the time.”

But the maker of Barbie dolls and Hot Wheels toy cars also reiterated that the errors “were non-cash, did not affect operating income” and had “no impact on Mattel’s full-year financial results for 2017 or subsequent periods.”

The company last week also said its investigation of the matter showed that the error was not provided to then-Chief Executive Margaret Georgiadis or Mattel’s audit committee at the time, and that Mattel had certain “weaknesses in its internal control over financial reporting” that it’s now bolstering. It said it also “did not find that management engaged in fraud.”

Chief Financial Officer Joe Euteneuer is leaving the company after a six-month transition period, Mattel said last week. Euteneuer said he had no comment beyond the company’s statement.

The error was connected to the tax-accounting treatment of Mattel’s ownership of “Thomas & Friends,” an animated children’s show about talking trains, the Journal reported. The treatment lowered Mattel’s income-tax expense by $109 million in the third quarter of 2017 and overstated that expense by the same amount in the next quarter.

As a result, Mattel said last week that it corrected its results to show that its previously reported third-quarter 2017 net loss of $603.3 million was understated by $109 million, and that its fourth-quarter 2017 loss of $281.3 million was overstated by $109 million.

PwC said in a statement Wednesday that “integrity is at the heart of who we are and how we operate” and that it took “immediate action” to investigate and address the problem after learning of the whistleblower’s complaint.

That complaint prompted Mattel to abruptly cancel a debt refinancing in August that was part of its effort, led by current CEO Ynon Kreiz, to rebound from years of financial problems.

Those problems include heavy debt, substantial losses, falling sales — particularly at its Fisher-Price and American Girl lines — and problems related to its Fisher-Price Rock ‘n Play Sleeper products. Last year, the company lost $531 million on sales of $4.5 billion.

Mattel recalled all 4.7 million Rock ‘n Play Sleeper products after they were linked to more than 30 infant deaths since being introduced in 2009, according to the U.S. Consumer Product Safety Commission. Mattel has said that it was not at fault and that the fatalities stemmed from the sleeper being “used contrary to the safety warnings and instructions.”

In June, Mattel also rejected an unsolicited merger offer from rival MGA Entertainment Inc., a privately held Chatsworth company whose toys include L.O.L. Surprise, Little Tikes and Bratz dolls.

On Oct. 29, Mattel reported stronger-than-expected earnings for this year’s third quarter. That, coupled with resolving the accounting matter, sent Mattel’s stock soaring 14% that day. Mattel’s stock fell back 2.7% on Wednesday to $12 a share.

Kreiz has been trying to improve Mattel’s performance in part by widening the marketing of Mattel’s popular toy brands — especially in the entertainment and digital fields — and by implementing a massive cost-cutting plan.

Some on Wall Street remain cautious. Camilla Yanushevsky of CFRA Research maintained her “hold” rating on Mattel’s stock, saying in a note to clients that while the third-quarter results beat expectations, they reflected “deep cost cuts, conservative guidance and easier YoY [year-over-year] comparisons — not sustainable value creation.”