Macy’s $132 million crime story raises big questions

• Macy’s said it found that an employee intentionally made accounting errors totaling $132 million to $154 million.
• Audit experts told BI that available evidence points to a failure of internal accounting controls.
• They said the problem should have been identified much earlier – regardless of an individual employee’s intentions.

There is a common saying in accounting as well as in aviation: “If you see something, say something.”

After it was revealed that Macy’s had discovered a significant error in its financial records, accounting experts told Business Insider that the company now needs to explain why its controls failed.

The retailer said Monday that it was delaying the release of its quarterly results after discovering that an employee intentionally made an accounting error totaling $132 million to $154 million over a three-year period.

Even in a situation where someone intentionally introduced errors into a company’s books, former KPMG partner Jerry Maginnis said, “Your internal control system should have caught it.”

Since retiring from the accounting firm in 2015, Maginnis is now a member of the audit committees of several companies and an executive in residence at Rowan University. He said he never managed the financial records of Macy’s, which has been audited by KPMG since 1988.

“Someone else should have checked and caught it, and so this was a breakdown in internal controls as well as poor accounting,” Maginnis told BI.

Macy’s said it fired a person who “intentionally made inaccurate accounting accrual entries” and launched an investigation. The employee is “responsible for billing costs for the delivery of small packages,” the company said.

The retailer said it spent $4.36 billion on small package delivery in the three years the error occurred, so the error represented less than 5% of that position. According to Macy’s press release, no money was misspent.

The employee’s potential motives and exactly what went wrong will likely be the subject of investigations by Macy’s audit committee, KPMG and others, accounting experts told Business Insider.

According to Ideagen Audit Analytics, a research and data provider, the last time Macy’s reported a major accounting problem was in 2006, when the company restated its financials using a “cash flow classification.”

Monday’s announcement preceded Macy’s regular third-quarter earnings report. The company announced that the next update will be released on December 11th.

“If they hadn’t delayed their earnings, we probably never would have heard about it,” said Michelle Leder, the author of a book about reading financial reports and now the operator of the website Footnoted, which analyzes securities filings. “One could argue that they may have already revealed more than they need to disclose.”

Without further details, accounting experts who spoke to BI said it was difficult to understand exactly what happened.

A possible explanation could be as simple as this: “Sometimes accountants make mistakes,” said Francine McKenna, a former accountant who now publishes The Dig, a newsletter about accounting topics and accounting firms.

“Sometimes mistakes pile up and then you go into maintenance mode,” she added. “You just keep perpetuating the mistake to hide it because you don’t want to raise your hand and say, ‘There was a mistake, I couldn’t fix it for a year and a half, and now the number is really there.’ large.'”

While stronger internal controls could relieve some of the responsibility from the individual who must make that decision, Maginnis also said the accounting profession relies on individuals making a personal commitment to telling the truth at all times.

The Sarbanes-Oxley Act’s rules requiring publicly traded companies to maintain effective internal controls are intended to detect such errors much earlier and provide accounting firms with the ability to raise warnings about corporate controls.

The pressure will now be on Macy’s auditor, KPMG, to show that it is adequately auditing Macy’s accounting practices and controls, McKenna said.

“I wouldn’t be surprised if they found a material weakness in internal controls because something isn’t working,” McKenna said. “There was a hole somewhere.”