Mattel, Inc. Originators of "Bill and Hold" Toy with Accounting
Story Mattel, Inc. of El Segundo, California designs, manufactures and markets various toy products worldwide. Mattel brands include: Barbie dolls and accessories, Hot Wheels, Matchbox, Nickelodeon, Harry Potter, Yu-Gi-Oh!, He-Man and Masters of the Universe, Fisher-Price, Sesame Street, Winnie the Pooh, Blue's Clues, Barney, and View-Master, as well as games and puzzles. Almost from its founding in 1945, Mattel was very successful, but the company began experiencing serious problems in the early 1970s. Mattel tried several accounting schemes to keep their growth high including a "bill and hold" program, understatement of inventory reserves, improper amortization of tooling costs, non-payment of royalties, and booking insurance recovery in the wrong period. (Knapp 2001) Here we will address the sales and accounts receivable "bill and hold" issues.
Mattel Invents the Term
In order to inflate the company's reported earnings, top executives established the "bill and hold" program. This was the first instance of the term "bill and hold" for the practice of billing customers for future sales, recording the sales immediately, and holding on to the inventory - bill and hold. The SEC gave several reasons why the subject sales should not have been recorded in 1991 (SEC 1981):
¦ The merchandise was not shipped.
¦ The merchandise was not physically segregated from Mattel's inventory.
¦ The customer could cancel the order without penalty.
¦ Mattel retained the risks of ownership.
¦ In many instances, the invoices were prepared without knowledge of the customer.
Covering Their Tracks
To support the bill and hold sales, Mattel prepared bogus sales orders, sales invoices, and bills of lading. The bills of lading were signed by the same employees as both themselves and a common carrier and were stamped "bill and hold" on the face. When the goods were actually sold much later, Mattel's inventory records were full of errors. To resolve the problem, Mattel reversed the sales booked, but this created negative sales for the next period. To fix that problem, Mattel booked a fictitious $11 million sale in their general ledger, but not their accounts receivable subsidiary ledger, creating an unreconciled difference. They reversed another $7 million of the remaining bill and hold sales in fiscal 1992. (SEC 1981)
The Audit of Sales
Mattel's auditors, Arthur Andersen, sent accounts receivable confirmations. The confirmations were returned with discrepancies in what the customers claimed and what Mattel booked. To resolve the discrepancies, the auditors obtained copies of bills of lading to determine whether goods had actually been shipped. Even though the bills of lading were stamped "bill and hold," the auditors never asked Mattel to explain the phrase. Furthermore, the bills of lading lacked required routing or delivery instructions. The employee signatures as themselves and common carriers did not get noticed. (SEC 1981) When the auditors looked at fiscal 1972 they found the $7 million reversing entry that caused that month's general ledger sales to be $7 million less than the sales figure in the corresponding sales invoice register. The staff auditor accepted the explanation of a Mattel employee that the offset to sales was due to "invoicing errors" uncovered by Mattel employees when comparing computer-prepared invoices to bills of lading. The Andersen senior reviewing the workpapers wrote the staff person, "Need a better explanation. This looks like a big problem," but the problem was investigated no further. (Knapp 2001) Had Arthur Anderson utilized analytical procedures to evaluate the overall reasonableness of Mattel's monthly sales, they should have discovered that monthly sales varied dramatically from 1970 to 1972. This was a result of errors introduced by the bill and hold scheme and the subsequent reversals.
Discussion Questions
¦ What alternative audit procedures could the Andersen auditors perform when (or if) they found the inconsistencies in conformations and bills of lading?
¦ Why do you think the staff auditor accepted the explanation of the $7 million discrepancy by the Mattel employee?
¦ Why was it not followed up?