Big Blunders Come In Small Packages
Macys blames an employee for hiding 'small package delivery' expenses. Anyone remember the boxes at Miniscribe?
“I worked in accounting for two and a half years … and decided I was just going to give comedy a try.” – Bob Newhart.
Macys kicked off the holiday shopping season on Monday with an accounting scandal.
The iconic department store chain blamed a single employee for intentionally hiding up to $154 million in small package delivery expenses over the past three years.
This is no small number. It’s bigger than the retailer’s $105 million in total net income for 2023. It’s on par with its second-quarter 2024 earnings of $150 million. And it likely made Macys look much better to investors during a challenging period for retailers.
Somehow, an unnamed associate who no longer works at the company, has been fudging since the fourth quarter of 2021. It sounds like fraud because the company says it was done intentionally. An investigation continues. There’s a lot we don’t know.
A rogue elf?
Could a little lone elf have pulled off this stunt from the bowels of the small package delivery department?
Where, oh where, were the internal controls? Where, oh where, was KPMG, Macys’ auditor since 1988? And where, oh where, was Santa, who always knows naughty from nice? Stuffing his fat face at the food court?
Macys CEO Tony Spring wasted no time touting corporate values (which were blatantly ignored) in announcing the fiasco.
“We promote a culture of ethical conduct. While we work diligently to complete the investigation as soon as practicable and ensure this matter is handled appropriately, our colleagues across the company are focused on serving our customers and executing our strategy for a successful holiday season.”
Thick as a brick
What we know from past accounting debacles – whether it’s Enron, Worldcom or Freddie (Got Fingered) Mac – is that they often occur during hard times and usually don’t begin in a vacuum.
I’m reminded of Q.T. Wiles, the CEO of a struggling Colorado manufacturer called Miniscribe, who oversaw an audacious fraud in the late 1980s that also involved small packages.
Miniscribe made hard drives, which back in the day weighed as much as bricks. Wiles thought his auditors wouldn’t know the difference if his minions packed bricks into boxes and counted them as inventory.
Miniscribe bought 26,000 bricks from a Boulder, Colo., brick supplier. Managers and associates packaged and shipped them to warehouses to goose their numbers.
Wiles was renowned as “Dr. Fix-It,” a corporate turnaround specialist for San Francisco-based venture capital giant Hambrecht & Quist. He was expected to succeed where Miniscribe’s previous management had faltered in the fast-evolving, hyper-competitive market for computer drives.
Prosecutors showed that Wiles hammered his underlings, demanding they make their numbers or leave the company. He dressed them down, and even fired them, in meetings. His angry antics terrified managers into faking their numbers while he conveniently looked the other way.
Eventually, the hole everyone dug got too deep, so they devised a scheme that was about as dumb as box of rocks.
And the rest is accounting fraud history.
Brick and mortar
In February, Macys said it would close 150 brick-and-mortar locations over the next three years and invest more in its 350 remaining stores.
“They’re underproductive, and we have to focus on making sure that we have the best stores, not the largest number of stores,” Spring told CNBC at the time.
Sales are still are down, even at the stores Macys is keeping, and its stock has lost more than 20% year-to-date.
Because of its accounting issues, the company has delayed its financial reporting until Dec. 11. Perhaps then we’ll learn more about the mystery employee who Macys says played hide-and-seek with small package delivery expenses.
So far, Macys hasn’t even hinted at whether civil or criminal charges are possible. Macys also didn’t say how it detected the issue. The employee didn’t pocket money and it’s not clear what incentives there were for an individual to do this.
The company itself had more to gain from these hidden expenses than any employee.
Up against a wall
Miniscribe shipped bricks in boxes and counted them as inventory to boost its balance sheet. Macys shipped actual goods in boxes, but it didn’t record the shipping expenses, which likely boosted its financial results during a difficult time.
Beyond the boxes, the comparison may not be entirely fair given how little Macys has disclosed so far. But it’s a safe bet we’ll learn more.
Macys still has a lot of explaining to do.
It’s a big problem when only one person at a publicly traded company knows about a $154 million accounting issue that has festered for more than three years. It reflects on management. It reflects on auditors. It spooks investors.
“While Macy’s cannot control the actions of every employee, it is worrying that these are intentional accounting errors that go back to 2021,” said Neil Saunders, managing director at the retail consulting firm GlobalData. “Such things create more nervousness for investors who are already concerned about the company’s performance.”
The last brick
Maybe it’s just as Macys claims. For reasons we can’t yet fathom, the debacle is the work of just one guy. It’s quite possible. But at other companies with accounting issues this size, it has typically taken than one cook in the kitchen.
At Miniscribe, it was astonishing how many managers and employees either knew about the bricks or participated in boxing them.
Imagine a tech executive ordering 26,000 bricks. Imagine managers and employees painstakingly stuffing them into boxes, straining muscles, leaving calluses on pencil-pushing hands.
After Miniscribe filed bankruptcy, Maxtor bought its pieces. (Maxtor was later acquired by Seagate.)
Wiles was convicted in 1994, served about two and a half years in prison, and somehow lived to be nearly a century old.
For whatever successes he had over his long career, he’ll always be remembered for his bricks.
Here’s what his brick looks like today:
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I was struck by how many first-day stories simply transcribed the filing without even raising the question of why. Perhaps to make a particular unit's numbers look good for a while? Perhaps a kickback scheme? Surely the retail world is speculating.
Makes me think of the Johnny Cash song, "One Piece At A Time". 😊