where they were not traditionally expected. for example, consider the changes we have seen in financial reporting quality of corporations in all industries. in 2005, there were approximately 1, 200 restatements of previously filed financial statements by publicly traded companies - - twice the rate for 2004. the complexity of gaap accounting standards and a more stringent, literal interpretation of the application of those standards by auditors and regulatory bodies, primarily the securities and exchange commission, are two major factors that have led to the restatements. examples of prominent restatements include fas 133 hedge accounting and lease accounting issues. in the area of hedge accounting, the restatements generally resulted from the misapplication of the " short - cut " method. the organizations in question did not satisfy all of the criteria for use of the shortcut method but, nonetheless, utilized hedge accounting treatment allowed by this method. in the area of lease accounting issues, most companies simply failed to apply longstanding accounting standards related to revenue recognition reserves, accruals and contingencies, and equity accounting. most companies believed they were actually reporting correctly prior to the restatements. virtually all of these companies were audited by auditing firms that are now registered with the public company accounting oversight board ( pcaob ). the pcaob's inspection process, which involves close scrutiny of registered firms, may be a factor in the increased number of restatements. section 404 of the sarbanes - oxley act of 2002 requires each annual report of a public company to include a report by management on the company's internal control over financial reporting. looking only at banking organizations, as a result of restatements, the number of material weaknesses in internal control for the 2004 reporting period has been revised up to 52 from the 37 originally reported. this increase implies a significant amount of operational risk associated with the accounting process. generally, examiners review the sarbanes - oxley 404 process to determine whether the organization has a clear understanding of the roles of the audit committee, management, internal audit, and the external auditor and whether the organization has implemented an effective plan to achieve the objectives and requirements of sarbanes - oxley 404. examiners also review the sarbanes - oxley 404 process to determine whether the organization has an effective follow - up strategy for the remediation of significant deficiencies and material weaknesses. examiners are encouraged to utilize the results of the sarbanes - oxley 404

, due to adverse public perception of such penalty and would thus be a deterrent. however, it is noticed in recent years that the regulatory penalties do not appear to be a material cause for reputation risk for the penalised bank. perhaps, as far as banks are concerned, a penalty is now being viewed more from the perspective of affordability of its monetary value rather than the cause for its imposition. this warrants that supplementary efforts are made on several fronts to ensure the quality of service while the sense of regulatory comfort is kept in view for according various regulatory approvals in respect of each bank. unequal parties : validity of contracts banking is a trust - based relationship and the banking licence from the regulator provides an assurance of trust to the public at large. to the banks, the banking licence provides the privilege of accepting uncollateralised deposits from the public. however, the acts of stealth banking, negative option marketing, misleading advertisements, information gathering from customers for cross selling of products and services, and tie - up arrangements are inconsistent with the concept of a trust - based relationship. the lack of transparency, coupled with the difficulty of consumers in identifying key information from the large volume of material and communication in fine print, leads to an information asymmetry, which renders the banker - customer relationship one of unequals. in this context, banks would do well to keep in mind a supreme court ’ s judgement regarding the non - enforceability of a contract entered into between two unequal parties. in the case of lic of india vs. consumer education & research centre ( air 1995 sc - 1811 ), while considering the validity of lic policy under table 58 restricted only to salaried persons in government / semi - government or reputed commercial firms, the supreme court observed : “ it is well settled law that if a contract or a clause in a contract is found unreasonable or unfair or irrational, one must look to the relative bargaining power of the contracting parties. ” symmetrical compensation : case for in the reserve bank, we have been trying to enhance quality of our customer service and in the process, it was noticed that interest was not being paid to customers if there had been delay on our part. for example, in the case of savings bond scheme, the rbi commits that in case of any delay in payment of interest warrants or redemption, the holder is compensated at savings bank rate. such a commitment is also binding upon its agency banks. more important, i feel, that we