to produce them were deferred and amortized over the products useful life. During 1970 through 1972, Mattel’s management understated these costs by $3.7 million which in turn overstated reported earnings. Arthur Anderson did accumulate and test these deferred costs and amortization amounts and also examined the comparison of annual sales to forecasted sales. Two material overstatements were recognized by Arthur Anderson. However, a more thorough investigation was greatly needed since deferred costs increased immensely in 1971. “The SEC charged that Arthur Anderson did not properly investigate the contractual arrangement between the inventor and Mattel and the related financial statement implications” (10). Once Mattel obtains the production rights of a product, the inventor of that product is to receive royalties when sales reach the break-even point. In 1970, this occurred for the product, Hot Wheels, and Mattel was inclined to pay such royalties but did not fulfill the agreement by charging an additional $4.4 million in expenses. Arthur Anderson neglected to ask what these expenses included and failed to examine and determine the exact amount of royalties due to the inventor. Mattel miscalculated an insurance claim for a large warehouse in Mexico that was destroyed by fire. The policy enables Mattel to gain up to $10 million as result of the loss and damages. This total amount was included in the financial statements for the fiscal year ending January 30, 1971. Both Mattel and Arthur Anderson should not have assumed that the full amount would be recovered. “The federal agency argued that the method used by Mattel to compute the amount recoverable from the insurance company, a method approved by Arthur Anderson, was not credible” (10 ). Six years later Mattel was granted only $4.4 million for the insurance claim...
