Fraud at Macy's

🥸 “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.

Reason❓ Accounting manipulation worth at least at $132 million.

Perpetrated by whom ❓ 🎭 By a lone accounting clerk with the responsibility for small package delivery expenses.

How❓ By “intentionally making erroneous accounting accrual entries to hide delivery expenses.”*

Size of the disaster: ❗ $132 m to $154m (3-3.5% of the total cumulative delivery expenses of $4.4 bn) over the period of 2021-2024.

Motivation❓ Investigation & forensic analysis ongoing.

Impact❓ First and foremost the word “hide” must be explained better to understand what exactly happened.

In my opinion, the clerk simply did not book accrued expenses causing a cut-off error which went undetected by internal controls.

Delivery expense must have had been entered only upon invoice received from a supplier. 📩

Therefore:

📍 Delivery expenses were not recognized in the period of their origination. 📍 Accrued liabilities in the current and previous period were understated.

🌩️ Further concerns:

As Macy`s says, neither cash nor vendor payments were affected by the issue.

However, intentional manipulation of this size is a serious issue.

If the company and its auditors did not detect three digit million figure misappropriation over three years, how solid other figures are?

The root case might be:

➖ a control weakness, ➖ possible neglect of responsibilities on the management level, ➖ an (internal control) system failure, ➖ a culture problem, ➖ a combination of some of the above.

🚨 The price is high:

Trust is priceless and the shares price is the barometer. Markets “smell” weaknesses.

📢 Crisis communication:

The rescheduled press conference will have to address these questions in a careful, confident and trustworthy way.

📚 Let`s have a look at the accounting part:

The accrual principle is established by the Hashtag#IFRSConceptualFramework (ref. Hashtag#SwissGAAP FER 1 Rahmenkonzept: Zeitliche Abgrenzung):

“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 to book an accrued expense?

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 Bank account.

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.

*Macy`s investor relations