In Partial Fulfillment of The
Requirement for the Subject
Mattel, Inc.
Risk in terms of Current and Potential Profit Opportunities
All investments carry some risk, but the level of risk varies depending on which
investments you choose; in general terms, the higher the risk, the higher the potential
return – and the higher the potential loss. You simply can not build an investment portfolio
without considering a number of aspects of investment risk. (Vanguard, 2013) If
investment risk levels are not monitored it may impact your potential profit. The most
common types of investment risk include: interest rate risk, liquidity risk, credit risk,
economic risk, market risk, and currency risk.
This discussion will focus on the Mattel’s acquisition risk in terms of current or potential
profit opportunities. The two fundamental types of risks associated with acquisitions are:
financial risk and operational risk. Financial risk may include such things as paying too
much money, underestimating the amount of debt and/or liabilities, failed mergers that
generate losses rather than profits. In the same vein operation risk entails items as bad
strategic timing, inadequate or failed internal controls system, and reputational risk.
Throughout history Mattel has turned to acquisitions for potential growth. One success
story goes back to 1998, when Mattel, Inc. agreed to acquire Pleasant Company, the direct
makers of the American Girl line of dolls, for $700 million. Going forward to 2011,
American Girl has grossed a record total of $487 million in sales, almost double the $287
million in sales reported by Pleasant Company in 1997. (PW, 2011).
In contrast, in 1999 Mattel entered the educational software market and acquired The
Learning Company for 3.5 billion dollars. However a year later the Learning Company lost
$206 million, taking down Mattel’s profit with it. By 2000, Mattel was losing 1.5 million a
day and its stock prices kept dropping. The Learning Company was sold by the end of
2000. The pundit’s say this acquisition is a classic case of paying too much, one analyst is
quoted as saying: “It’s a function of overpaying for an acquisition and bad due diligence.
They should have had a better sense of what the accounting was like at the Learning Co.” –
Hayley Kissel, Analyst, Merrill Lynch. Sean McGowan, Analyst, Gerard Klauer Mattison
said “I don’t think Mattel’s management really had any idea of what the problems were or
how deep they were.” (Digital Strategies, 2002). This last statement leads well into the
next section; the synergy between the Board’s oversight by the Audit Committee and
Enterprise Risk Management (ERM).
The role of Internal Audit in the ERM process
Frigo & Anderson, (2011), cites that following the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). COSO’s release of the ERM framework, a serious
debate began regarding the true role internal audit could and should play in the entire risk
management process. (Frigo, 2011) The COSO Framework directed internal auditors to
“assist management and the board of directors or audit committee by examining,
evaluating, reporting on, and recommending improvements to the adequacy and
effectiveness of the entity’s enterprise risk management” (COSO 2004) (Frigo, 2011)
According to the Institute of Internal Auditors, the key factors to take into account when
determining internal auditing’s role is to determine whether the specific activity raises any
threats to the internal audit activity’s independence and objectivity and if it is likely to
improve the company’s risk management, control and governance processes. The internal
audit can take on a number of specific activities to support the ERM process as long as
certain safeguards are put in place to ensure that there role is not compromised.
The first activity the internal audit can do to promote the ERM process is by
recommending the use of an ERM organizational chart. Since, the internal audit has a deep
understanding and knowledge of the company risk distribution this can be an added value
to advise the board and senior management on the best ERM organizational structure.
Notwithstanding, the importance of internal audit independence they must be certain that
appropriate safeguards embedded in the company’s organizational chart to insure the audit
role does not assume any managerial roles.
A second activity deals with implementation a risk management based audit rather than the
traditional risk based audit. In doing this it will align the company’s ERM activities with
those recommended by. And thirdly, internal audit activity to move towards a risk based
audit deals with the written audit report. They should communicate a detailed audit report
arranged by risk as oppose to internal processes. The internal audit can underscore the
company’s ability to adequately or inadequately govern the entire company’s business risk.
According to Annual Stockholders Meeting held on May 10, 2013, each year, as part of the
Audit Committee’s risk evaluation process, the internal audit teams together with the
senior executives provide input with regards to any material risks facing the business units
each of them manage. These risks are then reviewed by the Audit Committee then an
internal audit plan is formalized in writing and presented to the Board along with a series
of discussion to ensure that the plan is aligned to Mattel’s strategic risk management plans.
The Board believes that the annual review process plays a significant role in ensuring that
all of the directors of Mattel are aware of the material risk facing the Company.
The ultimate responsibility to ensure that the enterprise risk management process is
appropriately managed lies with the board of directors and senior management. The
