Good morning. Macy’s is in crisis after revealing that an employee cooked the books for years and used unethical accounting practices to hide more than $100 million in expenses. On Monday, the retailer announced it would delay its full third-quarter results announcement, scheduled for Nov. 26, until Dec. 11 to complete an investigation into the employee’s activities.
The indicated person, who was responsible for the delivery costs of small packages, is no longer an employee. According to Macy’s, the employee “intentionally made incorrect accounting entries,” concealing between $132 million and $154 million in delivery costs between the fourth quarter of 2021 and the fiscal quarter ended Nov. 2. approximately $4.36 billion in delivery costs – suggesting that somewhere between 3% and 3.5% of those costs were fictitious.
Macy’s, a Fortune 500 company, said there is “no evidence that the accounting errors” had any impact on cash management operations or vendor 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.
Macy’s statement did not explain the employee’s motives for the fraudulent submissions, and the company declined to comment further. To get a better idea of what might be going on, I asked Adriana Carpenter, CFO of software company Emburse, for her assessment of the situation.
Carpenter noted that it is significant that the income statements in the accounting statements were affected, while the cash flows were not.
“This leads me to hypothesize that the accountant changed the coding of these supply transactions to write the payments to a balance sheet account (rather than a profit and loss account),” she explained. “As a result, the expenses were never reported even though the payments were properly recorded as cash outflows (payments).
The coding change could have occurred at the time the transaction took place, Carpenter explained. Or it could have been initially recorded on the income statement, and then a second journal entry was made to reverse the expense and move it to the balance sheet.
She recommends that CFOs adopt end-to-end expense management solutions that capture all non-payroll related expenses.
“It honestly happens all the time that someone messes up accounting numbers and hides costs,” Jo-Ellen Pozner, associate professor of management at Santa Clara University’s Leavey School of Business, told me.
So what’s Pozner’s take on why the Macy’s employee engaged in what appears to be blatant fraud? It may be that the pay or bonus for the work was linked to a specific number in the accounting statements.
“If the employee’s incentives were tied to cost reduction or profit increases, then he or she might have an incentive to hide costs,” Pozner said. “Sometimes we create stimuli that are maladaptive, and that’s why these kinds of things happen.”
But Pozner noted that everyone from “the most basic financial manager” to the company’s accountants, to the C-suite and the board of directors, can be held responsible for this blemish. “It’s almost always the case that one or two people take the hit,” she said. “Fraud is always a little destabilizing,” Pozner said.
The news of the accounting tricks comes at a time of turmoil for the company. In July, Macy’s announced that its board of directors had voted unanimously to end talks with private investors trying to acquire the company: Arkhouse Management Co. LP and Brigade Capital Management, LP.
Meanwhile, the company has embarked on a three-part strategy, one of which is strengthening the Macy’s nameplate, CFO and COO Adrian Mitchell recently told me. “For a number of years we’ve seen sales 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 following fourth-quarter 2023 losses and declining sales. Macy’s is targeting 350 stores, which the company believes have growth opportunities. From those stores, the company chose fifty to experiment with to see 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 there were “positive signs” in the report, including same-store sales increases of 1.9% at the “First 50” Macy’s stores and more than 3% across stores of the company. brands Bloomingdale’s and Bluemercury. “We view these results as supportive of the ‘A Bold New Chapter’ plan,” he wrote.
Swartz’s thoughts on the accounting dilemma: “While disappointing, the problem appears to be under control and the cost differences are immaterial given that Macy’s annual operating costs exceed $8 billion.” Macy’s has been a struggling company for years, Swartz told me. “Investors and analysts will focus on the progress of the strategic plan, not on this controversy,” he said.
Sheryl Estrada sheryl.estrada@fortune.com
The following sections of CFO Daily were compiled by Greg McKenna.
