Macy's Missed Some Accruals

A response to Matt Levine

In today’s Money Stuff, Matt Levine has a couple of great accounting stories on Goodwill and Accruals. I strongly suggest you check it out! Lately, things have been a bit dull in the “Australian-court-rulings-on-financial-matters” front, so as a change of pace I’m going to break from my usual style to address Matt’s questions on the below story about accruals at Macy’s:

I don’t understand this at all but obviously I love it:

“[Macy’s Inc.] reported today that, during the preparation of its unaudited condensed consolidated financial statements for the fiscal quarter ended November 2, 2024, it identified an issue related to delivery expenses in one of its accrual accounts. The company consequently initiated an independent investigation. As a result of the independent investigation and forensic analysis, the company identified that a single employee with responsibility for small package delivery expense accounting intentionally made erroneous accounting accrual entries to hide approximately $132 to $154 million of cumulative delivery expenses from the fourth quarter of 2021 through fiscal quarter ended November 2, 2024. During this same time period, the company recognized approximately $4.36 billion of delivery expenses. There is no indication that the erroneous accounting accrual entries had any impact on the company’s cash management activities or vendor payments. The individual who engaged in this conduct is no longer employed by the company. The investigation has not identified involvement by any other employee.”

So many questions!

1. How do you hide $150 million of delivery expenses without affecting cash management or vendor payments? Presumably that means that those $150 million of delivery expenses were paid, and yet were not reflected on the income statement. But how?

2. Why would you hide $150 million of delivery expenses? “Intentionally”? If you are the “employee with responsibility for small package delivery expense accounting”? Are you getting a bonus based on how much delivery expense you save? Are you shipping lots of small packages to your house and hiding the expense? I want this to be an enormously creative embezzlement scheme, but there’s no indication of that. (Again: no effect on cash or vendor payments.) Failing that, I want it to be … what, a weird grudge? “My bonus was too low, I’ll show them, I’m gonna start hiding the small package delivery expenses”? 

On question one, this is some fairly basic accounting. The key point is that accounting accruals are very different from accounts payable. If you look at a balance sheet, “Accounts Payable” shows all the invoices that have made their way into the company’s software and are patiently queuing up to drain the company’s bank account. Imagine them like bills in your mailbox: they’re already sent, just waiting to be paid. And while there’s plenty of nuance (hello, Goods Receipts!), the main idea is that if it’s in accounts payable, it’s probably destined to end up as cash out the door.

“Accruals and Provisions” can generally be seen as a catch all for “all the stuff the accountants think are missing”. Let’s say you get a delivery company to ship 200 trucks worth of stuff for you in the last month, but because they have a bunch of administration they only sent you invoices for 150 trucks (they haven’t gotten around to billing last week’s stuff), and of these invoices the person who organised these shipments has only sent on 140 of them. So you’ve got 200 trucks worth of delivery “incurred”, but the accounts payable ledger only shows 140 invoices. Meanwhile, the accountants are pulling their hair out, shouting, “Where are the missing 60 trucks?” (or at least thinking it; accountants aren’t really the shouting type). They slap an adjustment onto the expense line with an educated guess about what those trucks might have cost.

The key thing is that this is just a guess, and frankly, it’s usually done at a much higher level than “we’re missing 60 trucks worth of invoices from Vendor A”, normally it’ll be part of a package of “We shipped 2000 trucks worth of stuff this month, but if I look at the ‘delivery’ expense line this month it only looks like about 1500 trucks, better shape that up”. Since this is a more “general” assumption, it goes through the “General Ledger”, not the “Accounts Payable” one. 

Since surely any reasonable business is only going to pay actual invoices and not “the accounting team’s best guess”, any change in provisions will not have an actual cash flow impact. The expense itself still hits the Profit & Loss (income) statement, but when it comes to the Statement of Cash Flows, the decrease in profits will be offset by an equal increase in “provisions”.

So, to answer Matt’s question: yes, it will impact the income statement, but the income statement doesn’t actually reflect cash flows - it represents accountants’ best guesses of income and expenses and any of their fudging gets washed away when you look at a Cash Flow statement through the movement in provisions. 

Now, onto the second question: why would someone intentionally hide $150 million in delivery expenses? While I can’t read the mind of the “small package delivery expense accounting” vigilante, let’s dig into some plausible scenarios.

Once a business gets big enough, it will make sense to have its own internal accounting team rather than using the services of a firm like KPMG, PWC, etc. to manage their day-to-day financial reporting. Different functions in the business will have different accountants “assigned” to them, so there will be a specialist “Demand” accountant who works with the sales team, a “Supply Chain” accountant who works with procurement and logistics, and so on. Each of these accountants will end up in a close relationship with their stakeholders - they’re coaches, forecasters, and occasionally the bearers of bad budgetary news.

But! By having the accounting team as “part of the business” rather than an independent outside observer, the risk of bias becomes a lot greater. As the “team accountant” you want to please your boss and the people you work with every day, and saying “we spent too much money on deliveries” is kind of awkward. Imagine you’re the supply chain accountant, and it’s month-end crunch time. You’re knee-deep in spreadsheets and realize you need to accrue for another 500 trucks’ worth of deliveries. Then you glance at the budget and—yikes—the current delivery expense line already matches the forecast. If you add in the missing costs, you risk exposing that either a) your forecasting skills are less “clairvoyant wizard” and more “blindfolded darts,” or b) the delivery manager is organizing trucks like a toddler playing Tetris.

You think ahead to the month end review meeting and think “if I show the correct number, my boss is going to ask me about my bad forecast and I’ll feel bad”, or maybe “if I talk through this with the deliveries manager, it’ll be really awkward to tell him he’s bad at his job”. So perhaps rather than manually accrue for the missing invoices, you “accidentally” miss it this month. Or maybe the rates when you set the budget at the start of the year were $1000/truck, but the most recent invoice was $1500/truck, so you choose to accrue at the lower rate. Basically, to avoid the awkward conversation you “hide” a bunch of extra expenses. No grand embezzlement scheme here—just the unholy combination of agreeableness and social awkwardness driving questionable accounting decisions. Who needs bonuses when anxiety does all the heavy lifting?

Certainly pay plans can exacerbate this situation - it’s pretty common for company bonuses to be based on EBIT, which does incorporate expenses but doesn’t incorporate cash flows - the conversation with the boss would be even more awkward if you say “I know my last forecast said we were on track for everyone to get their bonus, but I fat fingered the formula and actually we’re about $150 million short”. Of course, while pay plans can fuel bad accounting decisions, they’re not strictly necessary. Sometimes sheer embarrassment and the desire to avoid the wrath of an entire bonus-hungry workforce are motivation enough to fudge the numbers.

This is why external auditors are super important! To get a more detached view from the biases that can come into play from an embedded team. But even more important than auditors is fostering a workplace culture where accountants can say, “No, you can’t keep spending money like this,” without feeling like the office villain.

That’s why accountants go through ethics training—so they know it’s okay (nay, heroic!) to disagree and uphold the financial truth, even if it means ruffling feathers. Sure, it’s not as glamorous as a Marvel movie, but in the accounting world, saying “no” is the ultimate act of bravery.

Again, this isn’t the only explanation  - “I hate my job so I’m going to make some funny adjustments to the balance sheet which will cause a nightmare when I leave” could also work. Or maybe it was just plain old incompetence, the silent killer of sound accounting. But let’s not underestimate the day-to-day dilemmas accountants face: balancing accuracy, diplomacy, and the occasional urge to flip a table over a misaligned budget. It’s a high-stakes game, even if the stakes are mostly spreadsheets.

P.S. Somehow since stopping this newsletter I’ve gotten a few new subscribers. So to anyone pointing others here - Thanks! I’d like to do more but as noted in the intro, there just haven’t been many judgements/ASIC announcements/Australian accounting research papers that have sufficiently captured my interest to write about. But rest assured I’ll keep watching!