At the Federal Reserve, experience has shown that supervising large, complex banks calls for supervisors with a high level of technical expertise, the intellectual ability to make difficult specific judgments based on general principles, and the strength of character to remain open-minded but steadfast in the face of pressure from the management of supervised institutions. The accounting industry needs to be certain it is attracting people with these same attributes. As to accounting rules, one of the major issues today concerns executive stock options, as I have noted. Grants of stock options and the exercise of these grants are, as we know, disclosed in the footnotes of a firm's reports, but this information typically is not accounted for in the firm's income statement or balance sheet. Some might argue that, as long as the information on stock options is disclosed, exactly how the information is accounted for is unimportant since disclosure in and of itself is sufficient. In theory, this view may be justified. In practice, however, what we have found is that information that is disclosed but remains off the accounting statements is unlikely to be fully incorporated into the price of the stock. Another major issue with respect to accounting rules - and there is some overlap with disclosure issues here - concerns how intangible assets and complex financial transactions are treated. Intangible assets are generally thought to include a valuable trademark, a renowned reputation, or an efficient process in delivering goods or services.

Progress on the disclosure front, however, will be limited until accounting standards are enhanced to ensure proper valuation and to reflect innovations over the past decade, in terms of both new products and modern risk management techniques. Accounting systems serve a variety of purposes, but none is more important than helping creditors and investors make rigorous and clear-eyed decisions as to which enterprises meet the market tests of efficiency, competitiveness, and profitability. Sound accounting systems also enable investors to determine the value of enterprises. In so doing, the systems assist in attracting capital, both foreign and domestic. In my view, therefore, ongoing efforts to enhance and harmonize accounting standards worldwide should continue and even intensify. This past year brought widespread questioning of the quality and integrity of the information available to the market and the behavior of some corporate executives. Although the developments that gave rise to this questioning are regrettable, there has, in fact, been a positive side. The public uproar that these developments have created and the turmoil they have generated in the financial markets have been immensely powerful as forces for meaningful reform. I further believe that the painful experiences of this year will help educate a generation of younger managers about the importance of integrity and sound corporate governance based on independent oversight and strong internal checks and balances. The process of addressing these problems has clearly begun. In this country, we already have on the table a number of proposed changes from both private and public sector participants.