At a meeting before filming began on "There's Something About Mary," the director admittedly flashed his genitals at the actress to be "funny."
In a statement to ABC News, Farrelly says, "True. I was an idiot. I did this decades ago and I thought I was being funny and the truth is I’m embarrassed and it makes me cringe now. I’m deeply sorry."
The story from the late 1990's was unearthed recently after an outlet noticed a quote from Diaz in Newsweek back in 1998.
"When a director shows you his penis the first time you meet him, you've got to recognize the creative genius," she told the outlet.
A request for comment on clarification from Diaz was not immediately returned to ABC News.
While "There's Something About Mary" opens with a scene involving Ben Stiller's character getting his own genitals stuck in his pant zipper, whether or not that factors in to why the director felt the need to do this in front of Diaz was not made clear by the director or in the original story.
But the 1998 Newsweek story does focus on the "cheerfully retrograde humor" from the Farrelly brothers (Peter and Bobby) and the actress' quote comes off as such.
The actress was also interviewed by The Sunday Times back in 1998 and added that after she got the script for "Mary," she asked to talk about that scene and said, "We were in a restaurant and Peter Farrelly showed me his penis. That was enough, really. He got a positive response. That was all he needed to know. That was fine by me."
Diaz added in this interview that she tried to do the Stiller scene a different way, but it didn't work.
"Trust me...they know 'funny', it is that simple," she added, supporting the Farrelly brothers.
Farrelly added in that interview, reinforcing his statement that he showed his genitals only as an attempt at comedy, "Anything is possible. So long as it gets laughs. That's it."
The news of this 20-year-old story comes after Farrelly's new film "Green Book" stole the show at the Golden Globes, taking home three awards including for Best Screenplay, Best Supporting Actor and Best Motion Picture, Comedy or Musical.