Macy's $132 million mystery has auditing experts scratching their heads

• Macy's said it discovered an employee intentionally made accounting errors totaling $132 to $154 million.
• Auditing experts told BI the available evidence suggests a failure of internal accounting controls.
• They said the issue should have been caught much earlier —regardless of any single 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 sizable error in its financial records, auditing experts told Business Insider that the company must now explain how its controls broke down.

The retailer said Monday that it was delaying its quarterly earnings release 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 to a company's books, former KPMG partner Jerry Maginnis said, "Your system of internal control 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.

"Somebody else should have been reviewing and catching it, and so this was a breakdown in internal control as well as bad accounting," Maginnis told BI.

Macy's said it fired an individual who "intentionally made erroneous accounting accrual entries" and launched an investigation. The employee had "responsibility for small package delivery expense accounting," the company said.

The retailer said that it spent $4.36 billion on small package delivery expenses in the three years that the error had been taking place, making the error less than 5% of that line item. According to Macy's press release, no money was improperly spent.

The employee's potential motives and exactly what went wrong is 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 issue was in 2006 when the company restated financials over a "cash flow classification," according to Ideagen Audit Analytics, a research and data provider.

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've heard about this," said Michelle Leder, the author of a book about reading financial statements who now runs the website Footnoted, which analyzes securities filings. "You could argue that maybe they've already disclosed more than they're required to disclose."

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

One possible explanation may be as simple as "sometimes accountants make mistakes," said Francine McKenna, a former accounting professional who now publishes The Dig newsletter about accounting topics and auditing firms.

"Sometimes errors accumulate, and then what happens is you go into preservation mode," she added. "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.'"

While stronger internal controls could shift some of the onus off of individuals having to make that choice, Maginnis also said that the accounting profession depends on individuals having a personal commitment to tell the truth at all times.

Regulations set by the Sarbanes-Oxley Act, which require public companies to maintain effective internal controls, are intended to catch mistakes like this much earlier and provide an avenue for audit firms to issue warnings about company controls.

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

"I wouldn't be surprised if you'll see a material weakness in internal controls because something is not working here," McKenna said. "There was a hole somewhere."