In an unexpected disclosure on Monday, Macy's acknowledged the discovery of financial misreporting which led the venerable retailer to postpone the release of its third-quarter earnings. As stated by Macy's, a single former employee is believed to have hidden between $132 to $154 million in delivery expenses, an act that remained undetected for nearly three years. Despite the significant sum, which amounted to between 3% and 3.5% of Macy's total recognized delivery expenses of around $4.36 billion, the company has not detected an impact on cash management or vendor payments, as confirmed by Fortune.
Yet, while Macy's has emphasized a culture of ethical conduct, the revelation brings into question the company's internal checks and balances. As per a statement obtained by Crain's New York, the accounting discrepancies rose to the surface as Macy's prepared its most recent quarterly report, causing the delay of its earnings release to December 11 from its original November 26 schedule.
The malfeasance stemmed from what appear to have been falsified accrual entries made by the Macy’s employee, according to an assessment by Adriana Carpenter, CFO of Emburse, who hypothesized in a discussion with Fortune that improper coding of delivery transactions could have taken place, potentially masking expenses as balance sheet items rather than recording them as direct hits to the profit and loss account. Amid this financial fog, Macy’s CEO Tony Spring insisted that the investigation is being taken seriously and the matter will be addressed with the appropriate rigor.
Speculation abounds regarding the motives behind such a considerable misrepresentation of expenses. Jo-Ellen Pozner, associate professor of management at Santa Clara University’s Leavey School of Business, indicated to Fortune that the employee's compensation structure, possibly linked to decreasing costs or augmenting profitability, might have played a part in incentivizing the concealment of costs. Regardless of the underpinning reasons for the fraud, the issue has sparked concern over accountability, reaching into the heights of Macy's management and auditing practices.
The uncovering of this accounting anomaly comes at a time when Macy's has already been navigating choppy waters. Attempts at reviving the struggling retailer include planned closures of underperforming stores and refocusing efforts on what have been referred to as the "First 50" – a selection of stores earmarked for experiments to test new growth strategies. CFO and COO Adrian Mitchell, as highlighted by David Swartz, senior equity analyst at Morningstar in a note cited by Fortune, has communicated confidence in the company's "A Bold New Chapter" plan, despite the recent hurdle this accounting conundrum represents.
