are playing fair. for six years i was a member of the emerging issues task force of the financial accounting standards board, which provides the accounting industry with guidance in areas where financial reporting practices are diverging. during that time, i developed a better appreciation for the challenges that standard - setters face when dealing with topics that are becoming increasingly complex. informed and objective professionals can legitimately disagree on the best accounting standard to apply to new types of transactions. that is part of the challenge of keeping accounting standards current. the rapid pace of business innovations makes it impractical to have rules in place to anticipate every business transaction. rather, the more complex and dynamic the business world becomes, the more important it is that accounting be based on strong principles that are sufficiently robust to provide the framework for proper accounting of new types of transactions. at the core of such accounting principles should be professional standards that every corporate accountant and every outside auditor must follow. in part, auditors should be required to ask themselves whether a particular accounting method adequately represents the economics of the transaction and whether it provides readers with sufficient information to evaluate the risks. if not, it is likely that the procedure is not the best accounting method to apply. rules alone, however, do not ensure good financial reporting. at enron and other companies, weak corporate governance practices apparently permitted sham transactions and misleading financial reporting. outside auditors erred in trying too hard to please an important client. they forgot that their professional role is to assure users of financial reports that the statements fairly represent the condition of the corporation and that they communicate, not conceal, the level of risk. some observers have asserted that new accounting standards are needed. in some minor ways that may be true. but judging from publicly available information, i believe that what we need most is to restore the integrity of corporate accountants and the quality of the audit process, rather than impose extensive new rules. one reason that accounting in the united states has become so rule - based is that we tend to add new accounting standards when abuses occur even when the abuses resulted from accounting and audit failures. rather than creating new rules, forming the new public company oversight board established by sarbanes - oxley may provide a better approach and help to refocus public accountants on core principles and away from more aggressive and misleading practices. given human nature and the complexity of many accounting issues, we must expect that rules will sometimes be broken or misapplied. but a new, authoritative oversight board -

duration, of bank securities portfolios - - and of many loan portfolios as well - - has been extended. clearly, i am not about to forecast interest rates - - something i ’ ve already learned that central bankers never do. my point is that banking organizations, and investors generally, should recognize that domestic interest rates are historically low and that the possibility for a rising rate environment should not be overlooked. even stable rates could present increased risks, if savings and money market deposit accounts flow out of banks as quickly as they came in when equity markets declined. we should all ask ourselves how long depositors would be content to earn the currently low rates when those markets stabilize or improve or interest rates rise once again. at some point, even loyal customers - - those on fixed incomes, in particular - - may blink and take steps to improve their own yields. managing risks the health of financial institutions today is also a result of improvement in the risk - management process that has been ongoing at banks for years. increasingly, the entire risk management process has become more quantitative, reflecting not only the enhanced ability to collect and process data at lower cost, but also improved techniques for measuring and managing risk. as you are aware, bank regulators are working to develop a more modern international approach to bank capital - - called basel ii. although those standards, in the first instance, are being designed to address changing practices at large, internationally active banks, we can expect the lessons learned about risk management to have much broader effects. we do not anticipate, for example, that large numbers of banking organizations in the united states would formally adopt the data and analytically intensive and sophisticated processes to determine regulatory capital under development today. the costs and resources to develop such systems and frameworks are beyond the resources of all but a limited number of very large banks. we would expect, though, that the effort would eventually strengthen risk management and provide best practice examples industry wide. in quantifying credit risk, larger banking organizations are taking the lead, measuring a borrower ’ s probability of default, the bank ’ s loss given default and its likely exposure to the borrower at the time of default, taking into consideration future draw downs. the greater use of credit scoring in retail transactions provides a stronger framework to assess risk and ensure that loan pricing reflects the credit quality. such tools should perform even better as the effects of the most recent economic slowdown are incorporated into bank statistics. most consumer credit models were developed after the 1990 - 91