The SEC separately has initiated litigation against Joshua Abrahams, Mattel’s former lead engagement partner, who resigned from PwC in 2019, “to determine whether he engaged in improper professional conduct and violated auditor independence rules,” the SEC said.
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 percent and overstated by 63 percent, respectively.
Mattel had been alerted to the alleged material misstatements in August 2019, when Mattel disclosed in a Form 8-K that it was made aware of an anonymous whistleblower letter alleging accounting errors and questioning Abrahams’s independence. An investigation by the audit committee concluded that there were material misstatements, according to the SEC order. “The audit committee also concluded (as did PwC in its own investigation) that Abrahams violated auditor independence rules,” the SEC order stated.
The SEC’s order further found that, at the time, Mattel had no internal control specifically related to calculating a valuation allowance. 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, according to the order. Neither Mattel’s CEO nor its audit committee were allegedly informed of the expense error.
The SEC’s order against Mattel, which neither admitted nor denied the findings, found the company violated the negligence-based antifraud provisions and the reporting, books and records, and internal controls provisions of the securities laws. In determining to accept Mattel’s settlement offer, the SEC said it considered the company’s cooperation with the investigation and its remediation measures.
‘Failure to Maintain Independence’
The SEC’s order against Abrahams alleges 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,” the SEC said. He also allegedly “failed to communicate the error to Mattel’s audit committee,” the SEC stated.
The order further alleged “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.”
“An auditor’s adherence to professional standards and independence is critical to preserving investors’ trust in a company’s financial statements,” said Alka Patel, Associate Director of the SEC’s 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.”
A public hearing before the Commission will be scheduled to decide if the Enforcement Division has proven the allegations in the order and what, if any, remedial actions are appropriate. 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.