How a Macy’s Employee Concealed $154 Million in Fake Expenses

Macy’s, the iconic American department store chain, faces a significant crisis after revealing that a former employee concealed up to $154 million in fraudulent expenses over several years. The retailer disclosed the issue, stating that the worker responsible for the fraudulent accounting practices had been terminated. Macy’s employee, whose responsibilities included managing small package delivery expenses, intentionally made false accounting entries, hiding significant costs between Q4 2021 and the fiscal quarter ending November 2, 2024.

This revelation has sent shockwaves through the company, prompting it to delay the release of its third-quarter earnings, initially scheduled for November 26. Macy’s has now set a new date for the earnings report—December 11—while it conducts a thorough investigation into the matter. While the company has insisted that the fake expenses had no impact on cash management or vendor payments, it is still a troubling development for the company, which is already facing significant challenges in a competitive retail environment.

How the Fraud Happened

The fraudulent entries were made to Macy’s accounting records under the guise of delivery expenses, which typically represent a substantial portion of retail costs. According to Macy’s, the worker manipulated the accounting system by making incorrect accrual entries to hide these expenses. Between $132 million and $154 million in fraudulent delivery costs were concealed, representing around 3% to 3.5% of the company’s total delivery expenses.

Macy’s has not disclosed the motives behind the employee’s actions, but experts suggest several possible reasons for the fraudulent behaviour. Adriana Carpenter, CFO of software company Emburse, speculated that the employee may have altered the coding of the delivery transactions, charging the costs to a balance sheet account rather than a profit and loss (P&L) account. This would have allowed the payments to be recorded as cash outflows while preventing the expenses from being reported on the company’s P&L statement.

Jo-Ellen Pozner, an associate professor of management at Santa Clara University, also weighed in on the issue. She believes that the employee might have been motivated by incentives tied to cost reduction or profitability goals. If the employee’s compensation or bonuses were linked to specific financial targets, they might have had a strong incentive to hide expenses to meet those targets. This points to a broader issue in corporate incentive structures, where poorly designed incentives can lead to unethical or illegal behaviour.

The Impact on Macy’s

Despite the large sum involved, experts believe the financial impact on Macy’s may be less severe than it initially appears. David Swartz, senior equity analyst at Morningstar, noted that the expense discrepancy represents a small fraction of Macy’s total annual operating costs, exceeding $8 billion. According to Swartz, investors are likely to focus more on Macy’s ongoing strategic efforts, such as its store closures and efforts to strengthen the Macy’s brand, rather than this accounting scandal.

This fraudulent activity comes as Macy’s has been struggling with declining sales and a shifting retail landscape. The company has faced pressure to innovate and streamline operations, including plans to close 150 underperforming stores over the next three years. Despite these challenges, Macy’s remains a major player in the retail space, with ongoing efforts to reinvent itself and revitalize its store network.

Macy’s has promised a thorough investigation into the fraud and is working to ensure that any necessary corrective actions are taken. CEO Tony Spring reassured stakeholders that the company maintains a “culture of ethical conduct” and is committed to addressing the issue transparently. As the investigation progresses, the company will likely continue to focus on rebuilding its financial standing and reputation in the retail industry.