Macy’s $132 Million Mystery Raises Big Questions

• Macy’s said it discovered an employee intentionally made accounting errors totaling $132 to $154 million.
• Audit experts told BI that the available evidence suggests a failure of internal accounting controls.
• They said the problem should have been caught much earlier — regardless of any individual employee’s intent.

In accounting as in air travel, a common saying applies: “If you see something, say something.”

Following the news that Macy’s discovered a significant error in its financial records, audit experts told Business Insider that the company must now explain how its controls broke down.

The retailer said Monday it delayed its quarterly earnings after discovering an employee deliberately made an accounting error totaling between $132 million and $154 million over three years.

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

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

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

Macy’s said it fired an individual who “intentionally made erroneous accounting entries” and launched an investigation. The employee had “responsibility for expense accounting for small packages,” the company said.

The retailer said it spent $4.36 billion on small package delivery costs in the three years the error had occurred, making the error less than 5% of that line item. According to Macy’s press release, no money was misused.

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

The last time Macy’s reported a major accounting problem was in 2006, when the company changed financials over a “cash flow classification,” according to Ideagen Audit Analytics, a research and data vendor.

Monday’s announcement preceded Macy’s regularly scheduled third-quarter earnings report. The company said its next update will come on December 11.

“If they weren’t going to delay their earnings, we probably never would have heard about this,” said Michelle Leder, the author of a book on reading financial statements who now runs the website Footnoted, which analyzes securities filings. “One could argue that they may have already disclosed more than they are required to disclose.”

Without more details, the accounting experts who spoke to BI said it is difficult to understand exactly what happened.

One possible explanation could be as simple as “sometimes accountants make mistakes,” said Francine McKenna, a former accountant who now publishes The Dig newsletter on accounting topics and accounting firms.

“Sometimes mistakes accumulate and what happens is you go into conservation mode,” she added. “You just keep perpetuating the mistake to hide it because you don’t want to raise your hand and say, ‘There’s been a mistake, I couldn’t get it fixed for a year and a half, and now the number is really big.'”

While stronger internal controls could shift some of the burden from individuals who must make that choice, Maginnis also said the accounting profession depends on individuals having a personal obligation to tell the truth at all times.

Regulations set by the Sarbanes-Oxley Act, which require public companies to maintain effective internal controls, aim to catch mistakes like this much earlier and allow accounting firms to issue warnings about corporate controls.

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

“I wouldn’t be surprised if you would see a significant weakness in internal controls because something is not working here,” McKenna said. “There was a hole somewhere.”