Former Macy’s Employee Allegedly Hid Up to $154 Million in Expenses

On Monday, 25 November, retailer Macy’s Inc, took the extraordinary step of delaying its official third-quarter earnings report because it said it uncovered an accounting error hiding between $132 million and $154 million of delivery expenses.

The company instead released what it called preliminary data and delayed the full report until 11 December at a time of year when analysts eagerly study major retail performance to determine whether or not the sector is poised for a strong holiday season. Included in the preliminary data release was an “Other Corporate Developments” section that said:

As a result of the independent investigation and forensic analysis, the company identified that a single employee with responsibility for small package delivery expense accounting intentionally made erroneous accounting accrual entries to hide approximately $132 to $154 million of cumulative delivery expenses from the fourth quarter of 2021 through fiscal quarter ended November 2, 2024. …There is no indication that the erroneous accounting accrual entries had any impact on the company’s cash management activities or vendor payments. The individual who engaged in this conduct is no longer employed by the company. The investigation has not identified involvement by any other employee.

The hidden expenses represent approximately 3 to 3.5 percent of Macy’s total delivery expenses during the time period according to the release. The New York Times reported that while that’s a small percentage of expenses in this area, the hidden expenses could have had significant impacts on Macy’s reported net income, which in 2023 totaled $105 million.

Macy’s announcement made clear that from its perspective this was the action of a single accountant who made fraudulent entries and was not part of a wider conspiracy to manipulate perceptions of the company’s financial standing. However, the motive for the intentional accounting errors was not forthcoming in the announcement.

Financial experts in various media outlets speculated on at least three different reasons why the errors were made.

One is that it was an accident, though this explanation would not explain Macy’s report that the errors were intentional. In this explanation, the accountant made the error, perhaps continually over time, which compounded the results.

“Could it have been a mistake?” Blake Oliver, a certified public accountant, told the Times. “Could they have been making the wrong journal entry for years, and it just went completely unnoticed?”

CIO said the former employee may have been trying to hide the expenses to make the numbers in their department look better without realizing that such practices ran afoul of the U.S. Securities and Exchange Commission. The Macy’s release specifically mentions the errors occurred in accrual entries, and CIO noted that accrual accounting practices can be complex and particularly hard for auditors or investigators to uncover errors or malfeasance.

“Sometimes errors accumulate, and then what happens is you go into preservation mode,”  financial author and expert Michelle Leder told Business Insider. “You just keep perpetuating the error in order to hide it because you don’t want to raise your hand and say, ‘An error happened, I couldn’t get it fixed for a year and a half and now the number is really big.””

Experts speaking to both The Wall Street Journal and The New York Post took the purposeful intent of hiding the expenses in accrual accounts theory one step further, saying, without direct knowledge or evidence, that the former employee may have felt pressure or been seeking high approval ratings or career advancement for running an efficient system.

“Retailers have been under pressure to lower delivery expenses in the face of rising costs and an increase in online shopping that have eaten into profits, said Ron Friedman, a managing director at CBIZ, formerly Marcum, an accounting and advisory firm,” the Journal reported. “One possibility is the employee was trying to boost the profitability of their department to increase compensation, Friedman said.”

Similarly Santa Clara University Professor Jo-Ellen Pozner told Fortune, “If the employee’s incentives were tied to either cost reduction or profitability increases, then they might have an incentive to hide a cost. Sometimes we create incentives that are maladaptive, and so that’s why these kinds of things happen.”

The Fortune report continued: “But Pozner noted that anyone from ‘the most basic financial manager’ to the company’s auditors to the C-suite and board of directors, might be held accountable for this snafu. ‘It’s almost always the case that one or two people take the hit,’ she said. ‘Fraud is always a little bit destabilizing.’”

However, the same Fortune article quoted a securities analyst who did not think the Macy’s news would be particularly disruptive. “Although disappointing, the problem appears to be contained and the cost discrepancies are immaterial considering that Macy’s annual operating expenses exceed $8 billion,” David Swartz with Morningstar said.

For more information about occupational fraud investigations, check out Security Management's November coverage here.