CFO Blog: Commentary and Opinion

While the heads of internal audit usually don’t report directly to CFOs, they do look to finance chiefs for leadership. Best practice is for the head of internal audit (also called the chief audit executive, or CAE) to report functionally to the audit committee and administratively to a top executive, usually the CFO. This preserves the independence between the two functions and creates an unusual but important relationship.

Last month, I wrote about what the CFO should expect from the head of internal audit. This time, I will look at what the CAE should expect from the CFO. These traits include:

Honesty: I put this first because it is the most important attribute the CFO should expect from the CAE, and it is essential to an effective working relationship built on mutual trust.

Information and inclusion: One of the most significant challenges for the CAE is understanding what is happening within the organization, including its objectives, strategies, and plans; the management team’s concerns and priorities; and the company’s current performance and outlook. As CAE, I can focus the audit work on the key areas only when I understand what issues are important to the company and its more significant risks. As mentioned last week, the CFO and CAE share a desire for the organization to succeed, and every CAE welcomes being included when information is shared among the senior leaders of the organization.

Support: The CFO is the first person the CAE will turn to when concerns are raised over the adequacy of internal controls and the management of risks. Although the CFO may not be the “owner” of all internal controls, the CAE generally looks to him or her as the champion within the executive management team.

A mentor: There are two aspects to this. The first is the ability of the finance chief to help the CAE navigate through and be effective in discussions with top management, including the CEO. Although CAEs should have direct access to the CEO, they don’t have the same relationship with the chief executive as the CFO does -- and could always use advice on how to tackle sensitive issues. The second is the ability of the CFO to coach me and help me improve. Although I may report directly to the audit committee, the CFO should play an important part in assessing my performance and contributing to its improvement.

I also expect the CFO to support the internal audit function, including the provision of necessary resources. But internal auditors know that is not a given. They have to earn the finance chief’s support by providing valuable assurance on governance, risk management, and internal control processes, along with recommendations that improve their effectiveness.

Norman Marks CPA is a vice president with SAP and a long-term internal audit and risk-management practitioner.

Once upon a time I managed a staff of writers. They traveled a lot. I approved their expense reports. But apparently not with my eyes too wide open. Years later I ran into one of those folks, who couldn?t keep from bragging that he?d gotten me to approve a credit-card expense for a nonbusiness activity that?s illegal in 49 states. I?d have been OK living out my days without having heard about that.

The point here is that you guys are CFOs. The bucks stop with you. How many of you sign off on employees? expenses with your eyes snug behind a glaze of impatience and boredom? If you pay attention, you might see some interesting stuff. To paraphrase the late, great Art Linkletter, employees say the darndest things (on their expense reports).

On this topic, Robert Half Management Resources recently interviewed 1,600 U.S. and Canadian CFOs from a stratified random sample of companies with 20 or more employees. I know finance types are conservative, but they seem excessively touchy about some of the items they report showing up on expense reports.

For example, many tsk-tsk at reimbursing for no-no ?personal? items like cigarettes, toilet paper, hot-tub supplies, and even golf clubs. Well, who am I, and more to the point who are you, to say those were illegitimate? These expenses sound to me like they supported some innovative client-entertainment initiatives.

Annoyed at the employee who billed the company for cosmetic surgery? Where?s the vision? Could have been a customer-acquisition and retention play. Obviously.

Requesting reimbursement for automotive faux pas, like speeding tickets or a fine for crashing into a tollbooth, is also frowned upon. But what about all the times employees arrive at work or client sites with their vehicles and driving records intact? What do you say then, huh? Why do you have such a negative attitude?

What about those claims for celebrations, like a wife?s anniversary gift and dinner out, that make some of you so unhappy? Come on. The employee would almost surely be less useful with a frying-pan-shaped dent in his skull, let alone an actual frying pan embedded there.

Paying to replace a lost phone? Duh. The guy lost it at work. Hotel charge for viewing adult movies? Hey man, you?re the one who sent him on the road. It?s stressful out there. A claim for something that had already been expensed and reimbursed? Ok, ok, you can have that one. Just thank your lucky stars that so far you?ve gotten away scot-free with all those unfairly denied reimbursements for legitimate expenses.

I believe in the ıtip-of-the-icebergı theory. If you hear a couple people voice the same opinion, lots of others probably think such, too. Hence, there may be some confusion out there regarding the impact of the rift between Walgreen and Express Scripts, and Express Scriptsı proposed purchase of Medco, which the Federal Trade Commission is currently reviewing.

My January 18 article, ıWalgreen-Express Scripts War Could Cut Drug Costs,ı argued that one result of Walgreenıs exit from the pharmacy network of Express Scripts, a large pharmacy-benefits manager, could be lower prescription-drug costs for the PBMıs corporate customers.

The rationale: the nationıs largest pharmacy is now out of Express Scriptsıs network. With that light bulb on, more corporate health-plan sponsors may look at further narrowing, on their own, the number of pharmacies their plan participants can choose from. Depending on how big such a trend became, drug costs could come down as PBMs contract with each of a plan sponsorıs desired pharmacies for lower prescription rates based on the market-share boost the pharmacies would be getting.

Then, it could be anticipated that PBMs would pass on some portion of the savings theyıd realize to their corporate clients.

In response to the article, one reader politely commented: ıWhere the F are you from? Pass the savings on to consumers? Are you serious? Itıs called stock increase and executive bonuses.ı The commenter railed on that if the Medco-Express Scripts transaction goes through, ıthe ıpeopleı wonıt benefit. Itıll be a monopoly that causes more pharmacies to go out of business.ı

While I agree with some of that to some degree, several clarifying points should be made:

ı Should a large portion of the pharmacy market vanish because of a mega-PBMıs emergence, drug prices would indeed shoot up, as the commenter is apparently implying. Respectfully, though, such market carnage seems pretty unlikely. The pharmacy universe, though very large and splintered, is dominated by a number of large players. Walgreen, the largest one presently, has only about a fifth of market share by prescription dollar volume (and still resides in other PBMsı networks). While hometown pharmacies would be at great risk, Wal-Mart, CVS, Rite Aid, and others have extensive location networks and/or mail-in services.

So, even if Express Scripts successfully buys Medco and cuts Walgreen out of that network too, consumers would have plenty of choice in pharmacies. It remains to be seen if the PBM will play quite as hard a ballgame with the other big pharmacy chains, because it wouldnıt want its pharmacy network to get too small.

ı ıPass savings to consumers?ı Absolutely. If anything, when I wrote that having fewer pharmacies in a health plan ıcouldı cut down drug prices, I was being conservative.

Think about it. First, what if a plan sponsor told its PBM that it wanted to give all of its prescription business to just one pharmacy chain? Setting aside the inconvenience they might experience, the participants in that plan would see their drug costs plummet. Having two chains in the network would be cheaper than three, which would be cheaper than four. Plan sponsors get the same effect when they reduce the number of physicians available to participants.

Second, while Iım sympathetic to anyone dismayed by corporate greed, successful companies like Express Scripts arenıt bl