Have you ever misplaced a dollar bill? How about $154 million dollars?
That's what happened at mega-retailer Macy's.
CNBC reported that “a single employee with responsibility for small package delivery expense accounting intentionally made erroneous accounting accrual entries and falsified underlying documentation,” according to a financial filing with the Securities and Exchange Commission. The investigation discovered “material weakness in its internal control over financial reporting” that allowed the person to circumvent validating information with “manual journal entries.”
The recent news of the multi-million-dollar accounting misstep highlights the critical importance of comprehensive internal controls. Particularly in the context of retail tenants and ASC 842 lease accounting compliance.
The Financial Accounting Standards Board (FASB) governs the recognition, measurement and disclosure of lease transactions. Their main goals with ASC 842 are transparency and accuracy. The Macy's incident underscores the need for this.
Macy’s independent investigation uncovered that one employee intentionally hid delivery expenses for three years, leveraging manual journal entries to bypass internal controls. This accounted for a relative drop in the bucket of their overall revenue. However, the incident showed a "material weakness" in Macy's financial reporting process.
This is a clear reminder for public and private companies under ASC 842. There needs to be a focus on internal controls. This will help detect financial mistakes before they happen.
For businesses with enterprise-level real estate portfolios, the stakes are high. ASC 842 requires detailed reporting and strict compliance.
It’s easy for someone who doesn’t handle the extremely detail-oriented tasks of lease accounting to cast aspersions on Macy’s. But real lease accountants who have been in the trenches are more open-minded.
“Everyone makes mistakes,” said Matt Waters, CPA and Director of Lease Accounting at CoStar Real Estate Manager. “The issue here was not the initial mistake, it was the years of covering it up.”
From Waters’ perspective, there were three main issues at play:
Khalil Bouban, former lease accountant for a mega-retailer and current Senior Implementation Consultant at CoStar Real Estate Manager, added, “I can only add that this is another symptom of the ‘Lack of Accountants’ in the market. Having more candidates dedicated to the profession who are the cream of the crop will mitigate some of this, as they will be following best practices. I hope that change will turn the tide and we can start to see quality and passionate professionals enter this field and right the ship.”
ASC 842 lease accounting aims for transparency. It requires companies to show both finance leases and operating leases on their balance sheets. This level of scrutiny can serve as a protective layer against financial misstatements if implemented effectively.
Here’s how:
ASC 842 encourages companies to adopt automated technology solutions to track and report lease data. CoStar Real Estate Manager can reduce the risk of mistakes and unauthorized entries.
Lease accounting processes should include robust internal controls. Checks and balances like dual verification for entries and regular audits for all lease classifications are great first steps. The material weakness at Macy’s demonstrates the necessity of reinforcing these safeguards.
Lease accounting requires periodic reconciliation of lease liabilities and right-of-use assets. Regular reviews can identify discrepancies early, preventing long-term issues.
Macy’s CEO Tony Spring highlighted the need for integrity. He said the company has added new controls to improve internal processes.
“The responsible individual is no longer with the company, following discovery of their actions,” said Spring. “We’ve also identified and begun to implement additional controls to be a stronger and more disciplined organization so that an action like this could not happen again.”
His sentiment aligns with the main ideas of ASC 842. Compliance is not just a rule to follow. It shows a company’s commitment to ethical financial practices.
For companies managing leases, leadership plays a pivotal role in fostering a culture of accountability. Training teams adequately in ASC 842 compliance and ethical financial reporting can mitigate risks. And that applies to risks associated with both accidental errors or intentional misstatements.
The Macy’s incident serves as a cautionary tale for businesses navigating lease accounting under ASC 842. To avoid similar pitfalls:
Invest in technology: Lease accounting software can automate complex calculations, reducing reliance on manual entries.
Strengthen controls: Implement clear policies and multiple layers of review for all financial reporting processes.
Prioritize transparency: Regularly disclose lease obligations in financial reports to maintain stakeholder trust.
Educate teams: Provide comprehensive training on ASC 842 to ensure compliance and understanding across the organization.
By following these principles, organizations can ensure compliance and protect their reputation in a more open financial world. Use this situation as a reminder. Compliance with accounting standards like ASC 842 is not merely a regulatory obligation—it’s a business imperative.