Fraud at Macy's
Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.
“Man is not what he thinks he is, he is what he hides.” Andre Maraux
Macy's, the US retailer (department stores, beauty) last minute postponed the press release of the 3rd quarter results scheduled for Monday, November 28th due to accounting manipulation worth at least at $132 million.
The fraud was allegedly perpetrated by a lone accounting clerk with the responsibility for small package delivery expenses. The employee “intentionally making erroneous accounting accrual entries to hide delivery expenses.”* Over the period between 2021-2024 the employee "hid" $132 m to $154 m (3-3.5% of the total cumulative delivery expenses of $4.4 bn).
What exactly does "hiding delivery expenses" mean?
I believe the clerk simply did not book accrued expenses causing a cut-off error on cost side which went undetected by internal controls. Delivery expense must have had been entered only after an invoice was received from a supplier and not in the period in which a delivery took place.
In contrast, accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.
How double entries for an accrued expense look like?
1️⃣ Delivery service provided (eg by a courier), no invoice in the current period (month): Debit Delivery expense/ Credit Accrued liability
2️⃣ Receipt of an invoice: Debit Accrued liability/ Credit Accounts payable
3️⃣ Settlement: Debit Account payable / Credit Cash/ Bank account.
The malpractice at Macy's resulted into:
- delivery expenses not recognized in the period of their origination and,
- understatement of accrued liabilities in the current and in previous periods.
Macy's claims that neither cash nor vendor payments were affected by the issue. However, an intentional manipulation of this size is a serious issue.
Macy's employs 86 thousand people in the US, only 8% are represented by unions.
The employee alleged with the fraud does not work for the company anymore.
