By Macy’s finds itself navigating unexpected turbulence.
The retail giant announced a delay in its third-quarter earnings report, postponing the release from November 26 to December 11.
This delay is due to an internal investigation into the actions of a former employee who allegedly manipulated accounting records to conceal a substantial amount of expenses.
Concealed expenses and accounting maneuvers
The former employee, responsible for small package delivery expenses, is accused of making “intentional erroneous accounting accrual entries.”
These entries reportedly obscured between $132 million and $154 million in delivery expenses, spanning from Q4 2021 to the fiscal quarter ending November 2.
To put this in perspective, Macy’s recorded $4.36 billion in delivery expenses during that timeframe, meaning the concealed amount represents roughly 3% to 3.5% of the total.
Importantly, Macy’s asserts that these accounting discrepancies did not impact cash flow or vendor payments.
CEO Tony Spring, in a statement emphasizing the company’s “culture of ethical conduct,” affirmed that Macy’s is committed to a thorough investigation and appropriate action.
Unmasking the accounting irregularities
While Macy’s has remained tight-lipped about the specific methods employed, Adriana Carpenter, CFO of software company Emburse, offered her expert perspective.
Carpenter highlighted the discrepancy between the manipulated profit and loss (P&L) statements and the unaffected cash flow.
“This leads me to hypothesize that the accountant changed the coding of these delivery transactions to charge the payments to a balance sheet account (versus a P&L account),” Carpenter told Fortune in an interview.
As a result, while the payments were appropriately recorded as cash outflows (payments), the expense was never reported.
She suggests two possible scenarios: either the coding was altered at the point of transaction, or a subsequent journal entry reversed the initial P&L record, transferring the expense to the balance sheet.
Carpenter advocates for comprehensive expense management solutions that track all non-payroll spending.
Incentives, accountability, and the ripple effect of fraud
Jo-Ellen Pozner, associate professor of management at Santa Clara University’s Leavey School of Business, commented on the unfortunately common occurrence of accounting manipulation: “It frankly happens all the time that somebody is fudging accounting numbers and hiding expenses.”
Pozner informed Fortune that the employee’s motivation may be linked to performance-based incentives.
“If the employee’s incentives were tied to either cost reduction or profitability increases, then they might have an incentive to hide a cost,” Pozner noted.
Sometimes we create incentives that are maladaptive, and so that’s why these kinds of things happen.
She also highlighted the broad scope of potential accountability, encompassing everyone from financial managers and auditors to the C-suite and board.
However, Pozner acknowledged the typical outcome: “It’s almost always the case that one or two people take the hit.”
She also emphasized the destabilizing nature of such incidents: “Fraud is always a little bit destabilizing.”
A time of transition and transformation for Macy’s
This accounting investigation comes at a sensitive time for Macy’s.
The company recently ended discussions with potential private equity buyers and is currently implementing a three-pronged strategic plan.
A key element of this plan, according to CFO and COO Adrian Mitchell, is strengthening the core Macy’s brand.
“Over a number of years, we’ve seen that business decline over time, but we decided to make what I would call some bold moves,” Mitchell stated.
Part of this “bold” approach involves closing 150 underperforming stores over the next three years, following losses in Q4 2023 and a broader sales decline.
Macy’s is now concentrating on 350 stores identified as having growth potential, with 50 of these stores serving as testing grounds for new initiatives.
Preliminary results and a cautious outlook
Preliminary third-quarter results indicate a 2.4% year-over-year dip in net sales. However, David Swartz, senior equity analyst at Morningstar, highlighted some encouraging signs within the report.
These include a 1.9% same-store sales increase in the top 50 Macy’s locations and over 3% growth at Bloomingdale’s and Bluemercury.
“We regard these results as supportive of its ‘A Bold New Chapter’ plan,” Swartz affirmed.
Addressing the accounting issue, Swartz downplayed its long-term impact: “Although disappointing, the problem appears to be contained and the cost discrepancies are immaterial considering that Macy’s annual operating expenses exceed $8 billion.”
He believes investors and analysts will likely focus on the execution of Macy’s strategic plan rather than this isolated incident.
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