How could a Macy’s employee hide up to $154 million in fake expenses? Experts weigh in

The specified person who was responsible for small package delivery costs is no longer an employee. According to Macy’s, the worker “intentionally made inaccurate accrual entries” that were used to hide delivery costs of $132 million to $154 million from the fourth quarter of 2021 through the fiscal quarter ended Nov. 2. About $4.36 billion -dollars in delivery costs – suggesting that between 3 and 3.5% of these expenses were fictitious.

Macy’s, a Fortune 500 company, said there was “no indication that the erroneous accrual entries impacted cash management activities or supplier payments.” The company promotes a “culture of ethical behavior,” CEO Tony Spring said in a statement. Macy’s is working diligently to complete the investigation and ensure “this matter is handled appropriately,” Spring said.

How did the employee do that?

Macy’s statement did not explain the employee’s motivations for the fraudulent entries, and the company declined further comment. To get a better sense of what might be going on, I asked Adriana Carpenter, CFO of software company Emburse, for her take on the situation.

Carpenter pointed out that it was significant that the profit and loss entries in the accounting statements were affected, but the cash flows were not.

“This leads me to believe that the accountant changed the coding of these delivery transactions to allocate the payments to a balance sheet account (instead of a profit and loss account),” she explained. “As a result, although the payments were properly recorded as cash outflows (payments), the expense was never reported.”

The coding change may have occurred at the time of the transaction, Carpenter explained. Or it could have been recorded on the income statement first and then posted a second journal entry to reverse the charge and transfer it to the balance sheet.

She recommends CFOs adopt end-to-end expense management solutions that capture all expenses not related to payroll.

“Honestly, it happens all the time that someone is manipulating accounting numbers and hiding expenses,” Jo-Ellen Pozner, an associate professor of management at Santa Clara University’s Leavey School of Business, told me.

So what does Pozner think about why the Macy’s employee appears to have committed blatant fraud? It could be that the salary or bonus was tied to a certain number in the accounting.

“If the employee’s incentives were tied to either cost reductions or profitability increases, then they may have an incentive to hide costs,” Pozner said. “Sometimes we create incentives that are maladaptive, and that’s why things like this happen.”

But Pozner pointed out that everyone from the “lowest financial manager” to the company’s auditors to the C-suite and the board of directors could be held accountable for this wrongdoing. “It almost always happens that one or two people get hit,” she said. “Fraud is always a little destabilizing,” Pozner said.

problem appears to be “included”.

The news of the accounting shenanigans comes amid a turbulent time for the company. In July, Macy’s announced that its board had voted unanimously to end discussions with private investors seeking to acquire the company – Arkhouse Management Co. LP and Brigade Capital Management, LP.

Meanwhile, the company has adopted a three-part strategy, and one of them is to strengthen Macy’s brand, CFO and COO Adrian Mitchell recently told me. “Over the years we have seen business decline over time, but we decided to take what I would call some bold moves,” Mitchell said.

In February, the company announced it would close 150 underproductive stores over the next three years after losses in the fourth quarter of 2023 and declining sales. Macy’s is focused on 350 stores that the company believes have growth potential. Of those stores, the company selected 50 to experiment with to find out what works.

In some preliminary third-quarter results, Macy’s noted that net sales fell 2.4% year over year to $4.74 billion. David Swartz, senior equity analyst at Morningstar, wrote in a note Monday that the report contained “positive signs,” including same-store sales increases of 1.9% at First 50 Macy’s stores and over 3% at stores of the company’s brands Bloomingdale’s and Bluemercury. “We view these results as supporting their ‘A Bold New Chapter’ plan,” he wrote.

Swartz’s thoughts on the accounting dilemma: “Although disappointing, the problem appears to be contained and the cost differences are insignificant considering that Macy’s annual operating costs exceed $8 billion.” Macy’s has been a troubled company for many years , Swartz told me. “Investors and analysts will be focused on how the strategic plan progresses, not this controversy,” he said.

Sheryl Estrada
[email protected]

The following sections of CFO Daily were curated by Greg McKenna.

Leaderboard

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Big deal

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