How could Macy's overlook millions in hidden expenses for years?
An ex-employee is accused of hiding expenses totaling as much as $154 million.
Days before Macy's is set to take center stage for its annual Thanksgiving Day Parade, the department store chain this week revealed a years-long accounting debacle unlikely to inspire gratitude among shoppers and shareholders.
A former employee intentionally hid expenses totaling as much as $154 million in the company's small package delivery department over a roughly three-year period, Macy's said in a financial disclosure on Monday. The discovery forced Macy's to delay its quarterly earnings report and conference call with investors, the company said.
An ongoing, independent investigation has found no indication that the employee's inaccurate financial reporting impacted cash management or vendor payments, the company added. That disclosure suggests that the employee did not steal any funds, experts told ABC News.
Macy's said the employee is no longer working at the company.
Still, the accounting scandal raises questions about how the company failed to notice over a prolonged time span.
Macy's stock fell about 2% after the disclosure on Monday, but the company regained some of those losses in early trading on Tuesday.
Macy's did not immediately respond to ABC News' request for comment.
Here's what to know about how Macy's missed tens of million in hidden expenses, according to experts:
A likely lapse of oversight
While the motive of the employee remains unknown, the apparent persistence of a years-long effort to hide expenses likely indicates a failure of financial oversight at the company, experts told ABC News.
Corporations typically undertake internal controls, which amount to internal inspections and audits of financial reporting. Such efforts ensure that entries of expenses and revenue withstand scrutiny and, as a result, warrant trust from company officials and the wider investor community, experts said.
"In accounting we always talk about internal controls to make sure there are enough checks and balances, so things like this come to light a lot sooner, if they happen at all in the first place," Usha Rackliffe, an accounting professor at Emory University, told ABC News.
The account at the heart of the fraud -- the small package delivery department -- may have evaded notice from internal and third-party financial watchdogs because its transactions are fairly routine, experts said.
Payments made to shipping companies and others involved in product transport are relatively consistent and predictable, Jeffrey Johanns, an accounting professor at University of Texas at Austin, told ABC News.
"It's not necessarily a high-risk account that would be subject to a lot of specific focus," Johanns said.
'It's not a huge amount of money'
The hidden expenses may have escaped notice simply because they did not add up to a large sum of money, at least relative to the company's overall expenses, experts said.
A cumulative error as high as $154 million makes for an eye-popping amount hidden by a single employee, experts acknowledged. But the total at issue pales in comparison to general costs at Macy's, and the amount would appear even less conspicuous when spread across 12 quarters of reported financial results over three years, they added.
Over some three years over which the inaccurate financial reporting took place, Macy's incurred $4.36 billion in delivery expenses, the company said. At most, the hidden expenses made up 3.5% of the overall costs faced by the department.
"The dollar amount is small relative to Macy's operations," Johanns said.
Rackliffe, of Emory University, agreed. "In the grand scheme of things, it's not a huge amount of money," Rackliffe said.
A turbulent moment for the industry
The hidden expenses took place in the small package delivery department at a moment of turbulence for that part of the business: The pandemic.
Facing government shutdowns and COVID-19 fears, consumers shifted en masse toward online shopping and deliveries surged.
Digital sales at Macy's surged 12% over the final three months of 2021 as compared to the same period a year prior, the company said in early 2022. That earnings report included the first false entry inserted by the offending employee, according to the recent disclosure from Macy's.
At the same time, shipping costs increased for firms like Macy's due to a global supply bottleneck.
The upheaval in the company's delivery business as well as industry-wide shipping costs may have helped disguise the hidden expenses, since Macy's could not rely on previous expectations of costs in that area of the firm, Rackliffe said.
"This was a period where online sales were rising quite dramatically and shipping costs were at their peak," Rackliffe said. "I could see why someone at the company may have missed it at that point."
Even so, the hidden expenses escaped scrutiny for several years afterward, leaving outside observers scratching their heads about the apparent failure of oversight, Rackliffe added.
"The cost is not so much in the amount of money but in trust," Rackliffe said. "Can they recover? Absolutely. This may be a blip in the scheme of things, but only time will tell."