Macy's Accounting Scandal Raises Questions About Which Errors Matter

The Wall Street Journal · 2024-12-18 06:00

By Mark Maurer

Macy's decision to not withdraw old financial statements despite making sizable adjustments to earnings figures after finding $151 million in false bookkeeping entries has some accountants scratching their heads.

The retailer last month said an employee responsible for small-package delivery expense accounting intentionally made erroneous bookkeeping entries since late 2021. The discovery led Macy's to delay reporting its quarterly results for two weeks and spurred a selloff of shares.

Last week, Macy's said an internal investigation found no material impact or needed restatements to previously filed financials. The errors didn't affect net sales, vendor payments, operating cash flows or compliance with debt covenants, the company said in a filing, so it treated the errors as a minor revision.

The decision is questionable given the weight of revisions on the retailer's 2023 earnings, academics and accountants said.

Macy's, in an 8-K filing, made several adjustments to its fiscal year 2023 earnings, among other periods. The company corrected its net income for the period as $45 million, down 57% from an initially reported $105 million.

The retailer also fixed its pretax income at $43 million, down 65% from the $124 million it had booked.

"Macy's says it did not impact trends in profit and that's true, but only because the trend was already downward," said Douglas Carmichael, an accounting professor at Baruch College and former chief auditor for the Public Company Accounting Oversight Board. "It dramatically increased the downward trend."

The company's 2023 net income was far lower than in previous years, $1.42 billion in 2021 and $1.15 billion in 2022, in part due to a previously disclosed $1 billion asset write-down.

"Their disclosure that [the errors] had no material impact on any historical annual or interim period is, to me, not supported," Carmichael added.

Macy's considered an $81 million reduction to its $8.95 billion gross margin and $2.32 billion in adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted Ebitda, that it reported for 2023 weren't material amounts, said people familiar with the company's thinking.

The reduction represented about 1% of gross margin and 3.5% of adjusted Ebitda.

Companies must report earnings without significant errors. If such mistakes are found, companies must disclose them within four business days. A major restatement, also known as a "big R," involves reissuing financials reflecting corrections to one or more errors that materially affect those statements.

Serious errors can result in a falling stock price, difficulty accessing funding or regulatory fines.

In a revision, or "little r," a company addresses minor problems by correcting errors in forthcoming financial statements without needing to alert investors.

"The 'big R' restatements tend to have a larger stock price reaction to it and that in my mind means the error is more serious, but also markets might pay attention to it a bit more," said Matthew Glendening, an associate accounting professor at the University of Missouri-Columbia.

U.S. public businesses, including special-purpose acquisition companies, filed 186 major restatements this year as of Dec. 12, compared with 173 minor revisions, according to research firm Ideagen Audit Analytics. "Big R" reissuances represented 52% of restatements, compared with an average of 34% between 2010 and 2023.

Macy's last week also said longtime auditor KPMG's blessing of its financial-reporting controls should no longer be relied upon because of the material weaknesses the retailer found, and that it is making changes to its controls to address the weaknesses. Such weaknesses are defined as one or more deficiencies that could lead to a major misstatement. KPMG declined to comment.

"I'm happy that Macy's has at least told us what's going on, but I'm not happy with their not restating," said Ed Ketz, an associate accounting professor at Pennsylvania State University.

The Securities and Exchange Commission in recent years has warned companies and their auditors against improperly casting large adjustments as immaterial based on non-numeric factors. When an adjustment is large, such as 5% or more of pretax net income, the SEC and courts require companies to assess if it is significant in other ways, said Lynn Turner, a former SEC chief accountant and an author of SEC guidance on materiality.

"The larger the number gets, such as in the case of Macy's where it is over 10%, it's very hard to justify as being immaterial," Turner said, referring to the company's 2023 net income and pretax income. "It's just out of the ballpark."

The SEC's materiality guidance leaves discretion on such an issue up to company executives, audit committees and auditors, and allows aspects of rationales to go undisclosed, said Rachel Thompson, an assistant accounting professor at North Dakota State University.

"It's not really black and white," Thompson said.

Write to Mark Maurer at mark.maurer@wsj.com

(END) Dow Jones Newswires

December 18, 2024 06:00 ET (11:00 GMT)