Thanksgiving has always been one of my favorite holidays. Who doesn’t like spending time with family, eating, watching the Macy’s Day parade, and rooting for your favorite football team? I particularly remember one Thanksgiving when the kids were young, and we ventured into the city to watch the parade in person. It was a clear, cold, and windy day as we cautiously watched the floats march down Sixth Avenue.
For many of us, the Macy’s Thanksgiving Day Parade is synonymous with the beginning of the holiday season. But this year, the wind surrounding Herald Square and the iconic retailer has nothing to do with the parade or the season of giving. Yesterday, Macy’s announced the delay in its quarterly earnings report due to fraud detected within its accounting system. What makes this event even more significant is that the fraud was perpetrated by an employee within the accounting department. Early reports have estimated the losses to be approximately $150 million over three years.
Fraud represents a real and costly challenge for businesses. It undermines productivity and profitability while costing companies billions of dollars each year. Despite its prevalence, employee fraud often goes unnoticed, ignored, or undetected by business owners, auditors, and legal counsel.
The motivations for fraud, whether committed by senior managers, middle-level employees, or other staff, frequently mirror those portrayed in fictional narratives we often see in our favorite television shows. Individuals may succumb to financial pressures fueled by greed, gambling debts, failed investments, or the strain of maintaining an unsustainable lifestyle. These motivations make employee/workplace fraud a recurring issue. But this week’s revelation is not just a fictional storyline in your favorite TV series. It’s a real-world incident now dominating the headlines of every major news outlet.
The prevalence of employee/workplace fraud is staggering. It is so significant and important for attorneys to understand that I devote an entire case study to my Fordham Law School class reviewing a fraud scheme and damage report for the losses due to employee theft at a hypothetical retail store. But this week’s revelation at Macy’s is far from hypothetical as it undermines many of the foundation principles of its finances.
Employee fraud falls right down to the bottom line, often going undetected for almost two years. Fraud is more often discovered through tips than any other detection method. Smaller companies are disproportionately affected, often lacking the robust internal controls to safeguard business assets.
Fraud in the workplace generally falls into three main categories: management fraud, employee fraud, and external fraud. Management fraud involves misrepresenting financial statements or misusing company resources by senior executives. Employee fraud refers to theft or improper use of resources by non-senior employees. Conversely, external fraud is committed by individuals outside the organization, such as vendors or customers.
The warning signs of fraud often fall into recognizable patterns. Accounting anomalies, such as record discrepancies, missing documentation, or unusual transactions, are common indicators. Internal control weaknesses, such as insufficient oversight or a lack of checks and balances, may also point to vulnerabilities. Behavioral red flags, including employees living beyond their means or showing signs of financial stress, often accompany fraudulent activity. Analytical symptoms, such as unexplained revenue losses or unexpected financial performance issues, indicate that a fraud audit may be warranted.
When fraud is suspected or uncovered, confidentiality is critical. Businesses often fail to consult legal counsel promptly or neglect to engage independent forensic accountants. Retaining a forensic accounting team can be crucial in criminal or civil proceedings, providing critical evidence and insights to determine the case’s outcome.
While employee fraud may be common, its consequences are far more severe than a mere nuisance. Attorneys and business owners should understand the various types of employee fraud, recognize the warning signs, and take proactive measures to address and prevent it. Doing so can safeguard their clients’ businesses and help protect their financial health and reputation.
This year, the Macy’s Thanksgiving Day parade may be overshadowed by this new revelation, but they are certainly not alone. There have been several high-profile employee theft cases in the last few years, encompassing many industries outside of the retail space, such as financial institutions, healthcare, real estate, and government contracting. And if I were a betting man, I would expect the next flood of high-profile fraud cases to be related to the billions of dollars distributed for the various COVID-19 pandemic financial assistance programs.
So, while Macy’s may not be alone, the current fraud detected will certainly undermine the credibility of its auditors and senior management. They can only hope that this event can be quickly remedied and prevented in the future. I wonder if the person who found this defalcation will be standing next to Santa, waving to the crowd high upon a float this coming Thursday.
Happy Thanksgiving to you and your family, especially to the folks at Macy’s.
Mark S. Gottlieb is a Certified Public Accountant and credentialed forensic accountant at MSG Accountants, Consultants, & Business Valuators located in New York City. Mr. Gottlieb’s practice is devoted to forensic accounting examinations, business valuation, and various litigation support services. He is also an Adjunct Professor at Fordham Law School.
Mr. Gottlieb has been recently appointed to the CFF (Certified Financial Forensics) Champion Program of the American Institute of Certified Public Accountants. The Champion Program has been established to lead the advancement of the forensic accounting profession amongst the professional and business communities.
He can be contacted at 646-661-3800 x 117 or by email at msgcpa@msgcpa.com. For more information about fraud and forensic accounting, please visit www.msgcpa.com.