Recently, Mattel and its auditor, PwC, were investigated due to a whistleblower complaint about an accounting error relating to its tax valuation allowance.

Read this and answer the following questions :

A Wall Street Journal report Wednesday says Mattel and its auditor PricewaterhouseCoopers obscured an accounting error in 2017.

The accounting error involves Mattel's ownership of "Thomas & Friends," an animated children's show.

Brett Whitaker, who was Mattel's director of tax reporting at that time, tells the Journal that the finance execs and PwC decided to change the accounting treatment of the Thomas asset and not tell Mattel's then-chief executive or its board.

Mattelstock slumped more than 3% Wednesday after a report surfaced purporting that the toy company and its auditor PricewaterhouseCoopers obscured an accounting error.

The toymaker was forced to shelve the sale of senior notes in August whena whistleblower letter was made public,claiming the company had made accounting errors in historical periods. In late October,Mattel said auditors had completed their investigationand had determined that income tax expense was understated by $109 million in the third quarter of 2017 and overstated by $109 million in the fourth quarter of 2017, with no impact for the full year.

However, it appears that the "honest mistake" may have been buried by PwC and senior finance executives in an effort to save face,according to The Wall Street Journal.

The accounting error had to do with Mattel's ownership of "Thomas & Friends," an animated children's show. The error was tied to a $562 million valuation allowance that Mattel created against its deferred tax assets in September 2017. Ultimately, the allowance was reduced by $109 million, which came from deferred tax liabilities related to Mattel's acquisition of HIT Entertainment in 2011. Reducing this allowance lowered Mattel's loss during the quarter.

The finance team, according to the Journal, had discussed fixing the error and then restating its earnings, but Mattel would need to admit that there were shortcomings in its accounting and reporting procedures.

Brett Whitaker, who was Mattel's director of tax reporting at that time, told the Journal that the finance execs and PwC decided to change the accounting treatment of the Thomas asset and not tell Mattel's then-chief executive or its board.

They reclassified the Thomas asset to make its treatment in the third quarter correct and recorded a tax expense in the fourth quarter to offset the earlier error, Whitaker said.

Notably, the Journal pointed out that PwC earned more than $9 million in fees from Mattel last year, including $1.2 million for tax services.

"As our press release last week makes clear, the error in the 2017 third quarter was not properly assessed when it was discovered, nor were the findings and conclusions documented as they should have been at that time," Mattel said in a statement to CNBC Wednesday. "Importantly, we noted that 'the errors were non-cash, did not affect operating income or EBITDA, and had no impact on Mattel's full year financial results for 2017 or subsequent periods.' As we also announced last week, we will amend our 2018 Form 10-K to restate the last two quarters of 2017."

In October, Mattel admitted there had been an accounting error and that the internal investigation had found weaknesses in its accounting procedures. The company's chief financial officer, Joe Euteneuer, also announced his departure from the company. No reason was given for his departure.

Whitaker told the Journal that Euteneur would have been aware of the decisions not to disclose the error.

"I thought it was a bit odd that the CFO would be stepping down," Linda Bolton Weiser, analyst at D.A. Davidson, said in an email to CNBC. "The out-of-period adjustments they also cited in 2019 were called 'immaterial.' Now, seeing the whole story about the 2017 restatement, it is more apparent why Joe will be leaving the company."

Additionally, a Los Angeles-based PwC partner named Joshua Abrahams, who led the Mattel audit team, has been placed on administrative leave, according to the Journal. He is expected to leave the firm as a result of his conduct during the investigation into the whistleblower letter.

"At PwC, integrity is at the heart of who we are and how we operate as a firm," the company said in a statement to CNBC. "We will always strive to do the right thing and we will continue to take the appropriate actions in response to any allegations of misconduct."

1.How can a company use valuation allowance accounts to manage their earnings?

2.Do you agree with the investigation assessment that this was an accounting error but not accounting fraud?

3.Is this really such a big deal since the error was reversed in the next quarter and the annual financial statements were not impacted? Do not forget to consider which stakeholders might be impacted by the error.

4.Who is at fault, the company, the auditor, or both?