• Macy’s said it discovered that an employee had intentionally made accounting errors totaling $132 million to $154 million.
• Audit experts told BI that the available evidence points to a failure of internal accounting controls.
• They said the issue should have been recognized much earlier, regardless of an individual employee’s intentions.

There is a common saying in both accounting and aviation: “If you see something, say something.”

Following news that Macy’s had discovered a significant error in its financial records, audit experts told Business Insider that the company must now explain how its controls failed.

The retailer said Monday it was delaying its quarterly earnings release after discovering an employee deliberately made an accounting error that amounted to between $132 million and $154 million over three years.

Even in a situation where someone deliberately introduced errors into a company’s books, former KPMG partner Jerry Maginnis said, “Your system of internal controls should have caught this.”

Since retiring from the accounting firm in 2015, Maginnis now serves on the audit committees of several companies and is an executive in residence at Rowan University. He said he has never handled financials for Macy’s, which has been audited by KPMG since 1988.

“Someone else should have reviewed and intercepted it, and so this was a failure of internal control and poor accounting,” Maginnis told BI.

Macy’s said it had fired an individual who “intentionally made incorrect accounting entries” and launched an investigation. The employee was “responsible for accounting for small package delivery costs,” the company said.

The retailer said it spent $4.36 billion on small package delivery costs in the three years since the error occurred, making the error less than 5% of that line item. According to Macy’s press release, no money was spent illegally.

The employee’s possible motives and what exactly went wrong will likely be the subject of investigation by Macy’s audit committee, KPMG and others, accounting experts told Business Insider.

The last time Macy’s reported a major accounting problem was in 2006, when the company restated its financials based on a “cash flow classification,” according to Ideagen Audit Analytics, a research and data provider.

Monday’s announcement preceded Macy’s regular third-quarter earnings report. The company said the next update will be released on December 11.

“If they weren’t deferring their earnings, we probably would never have heard of this,” said Michelle Leder, the author of a book on reading financial statements and who now runs the website Footnoted, which analyzes securities filings. “You could say that they may have already revealed more than they need to reveal.”

Without more details, accounting experts who spoke to BI said it is difficult to understand exactly what happened.

A possible explanation could be as simple as “sometimes accountants make mistakes,” says Francine McKenna, a former accounting professional who now publishes the newsletter The Dig on accounting topics and accounting firms.

“Sometimes errors pile up, and what happens is you go into retention mode,” she added. “You just keep perpetuating the mistake to cover it up because you don’t want to raise your hand and say, ‘A mistake happened, I couldn’t fix it for a year and a half, and now the number is really like this.’ big.'”

While stronger internal controls can take some of the burden off individuals having to make that choice, Maginnis also said the accounting profession depends on individuals who have a personal commitment to telling the truth at all times.

The Sarbanes-Oxley Act regulations, which require public companies to maintain effective internal controls, are intended to identify these types of errors much earlier and allow audit firms to issue warnings about corporate controls.

The pressure will now be on Macy’s auditor, KPMG, to demonstrate that it is appropriately scrutinizing Macy’s accounting practices and controls, McKenna said.

“I wouldn’t be surprised if you see a material weakness in internal controls because something is not working here,” McKenna said. “There was a hole somewhere.”