Reporting directly to the audit committee chair of Allstate Insurance Company’s board has its pros and cons, says Kathy Swain, head of the insurance giant’s 52-person internal-audit team. “The pro is that I can maintain this distance from the company,” she says. “It’s absolutely critical to the success of analyzing what’s going on in the business. The con is that, from a career standpoint, I’m a part of the company but I’m not a part of the company. I spend my time criticizing everything.”
As senior vice president of internal audit, however, Swain reports in dotted-line fashion to the company’s CFO, Steven Shebik. As part of the finance chief’s staff, she gets an inside view of the C-suite’s appetite for risk and the ethical tone it wants to set. In turn, that helps her determine if someone may be stepping out of line in the reporting of the company financials.
An 11-year veteran of the company, Swain has taken a winding path to her current post. First, as an Allstate assistant vice president in finance, she was responsible for financial and business-process solutions supported by SAP applications. In 2003, she moved into information technology and led an enterprise applications group, and in 2007 became head of internal audit. Before Allstate, Swain, a certified public accountant, was downstream deputy director of assurance and head of internal audit for BP Amoco in London.
In a recent interview with CFO, Swain spelled out what she thinks are the specific roles of the CFO and the internal-audit chief in detecting and preventing financial fraud. An edited version of that discussion follows.
What are the elements of an effective CFO approach to detecting fraud?
The first is an understanding of the business. The second is that the CFO ought to have identified those elements of their companies’ financials that use judgment. That will differ based on what business you’re in. But almost every business has some level of accounting that’s judgment-based, management-discretion based. Those are the areas that you can make changes in, and sometimes they slip through and you’re not aware of it. CFOs should review a couple of reports on a periodic basis that can point to things that were unusual, out-of-pattern or sharply different than in previous months.
What kinds of reports CFOs should be looking at regularly?
The example in the insurance industry would be deferred acquisition costs. You don’t have to write those off right away. There’s a lot of estimation that goes into the calculation of the number that sits in the financial system. And if you’re a good-size insurance company that could be a good-size number. So that’s one mechanism by which people can adjust the financials to sway the results during a period.