The P&L Lesson for DTC Founders Hidden in Macy's Hidden Financial Drama

Per its announcement this Monday, Macy’s is delaying its full Q3 financial reporting until December 11 due to the fact that an unnamed employee hid between $132M and $154M in delivery expenses. These “mistaken” entries were registered from the end of 2021 through Q3 of this year and, per the company’s preliminary statement, did not impact Macy's cash management or vendor payments.

Meaning, in other words, it looks like this was accounted for properly on the cash flow statement, but for some reason, did not hit the P&L - instead, was kept as a balance sheet item. This came up as the company was preparing its 2024 Q3 financials, and went unobserved for about three (!) years.

While the complete picture is not yet clear (forensic accountants are currently investigating, hence the delay in the Q3 reporting), the employee's motives are not yet entirely clear. Some have speculated a personal/department bonus due to cutting of costs (keeping them off of the P&L), while others have guessed it is just an attempt to improve the bottom line. Either way, it is a major screw-up of the internal controls of the company and of the auditors, who missed this point for quite some time.

Some basic takeaways for DTC brands:

1. First of all, it is sometimes hard to spot mistakes, especially when they are not mistakes but intentional fraud. Internal controls, and definitely external auditors, are not always thorough, and almost always miss things (sometimes crucial items).

As such, it is always important to be on top of your financials and not just hand them off to your bookkeeper or accountant. Ask hard questions and be on top of your numbers to ensure that you don’t have big mistakes sitting in your books for three years.

2. Delivery and shipping expenses are definitely supposed to be part of your P&L (and shouldn’t sit for eternity on your balance sheet). In general, shipping and delivery costs to your final warehouse are part of your product COGS (and, actually, are capitalized and will hit your balance sheet, but decreased as COGS against inventory upon final sale). At the same time, shipping and delivery from your final warehouse to the customer’s doorstep are generally expensed immediately (as non-product COGS).

In any event, they should eventually be recognized on your P&L.

3. Make sure to reconcile your ecommerce accounting statements. Reconciling between your bank accounts and financial statements is a must (and beware of the timing differences).

Some advanced tools help automate and ensure accuracy when reconciling across accounts.

4. Again, I don’t know if this is the story or not, but incentivizing employees based on financial performance of their departments is a good idea, as it aligns the team to the financial goals of the company. It could, as some suggest happened in this case, lead to accounting games in order to help the team meet their goals.

This kind of behavior should be strongly discouraged from the onset, as it defeats the entire purpose, and puts the company in a bad position.

We’ll keep following this developing story, as there may be more juicy accounting details to come (yes, such a thing does exist, at least in my universe).

Stay tuned!

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