chain of command to their boss, who then repeats the process for all of their managed areas. when the report gets to the top of the organization, the ceo and cfo issue the final management report on internal controls to bank regulators. further, the external auditor is to review the report and attest to its validity. at the fed, we have been looking at the reports produced by banks at which internal control breakdowns led to significant losses. we have found instances in which failures of internal controls that were known to management were not mentioned in the management report. these failures include basic types of internal control breakdowns, such as failure to reconcile accounts in a timely fashion or failure to segregate duties in critical transaction - processing or accounting functions. in some of these cases, the external auditor did not identify the known failure in the attestations. we are working with banks to make sure this basic control process has substance in the future. management reports on internal controls can also help bank boards of directors and audit committees gain a better understanding of the nature of the risks and the quality of the controls in place. audit committees should not just hear that the outside auditors have " signed off " on the fdicia report. rather, the report itself can be the basis for an effective discussion of internal controls among managers, internal auditors, external auditors, and the audit committee. audit committee members can use these reports to discuss how risks are changing and what the priorities for strengthening controls should be. audit committees can also use the reports to bring to their attention recurring concerns control weaknesses that managers continue to fail to address in a timely manner. having seen weaknesses in the quality of external auditors'review of financial reporting and internal controls, the bank regulators have issued an exposure draft to define a policy under which an auditor can be debarred from serving as an auditor of a bank. bank regulators have had this authority since fdicia but have not chosen to use it in the past. regulators have relied on the quality assurance process of public accounting firms and the peer review process of the american institute of certified public accountants'( aicpa ) to monitor the quality of auditors. but as you all are aware, the events of the past year have clearly shown that these self - regulatory controls have not always been effective. the sarbanes - oxley act established the public company accounting oversight board, which will be the regulator charged with monitoring the quality of audit work. since bank regulators rely heavily

##ably displace costly factors of production whenever profit margins have been threatened. moreover, the accelerating use of newer technologies has markedly enhanced the flexibility of our productive facilities. it has dramatically reduced the lead times on the acquisition of new equipment and enabled firms to adjust quickly to changing market demands. this has indirectly increased productive capacity and effectively, at least for now, eliminated production bottlenecks and the shortages and price pressures they inevitably breed. this greater ability to pare costs, increase production flexibility, and expand capacity are arguably the major reasons why inflationary pressures have been held in check in recent years. others have included the one - time fall in the prices of oil, other commodities, and imports more generally. in addition, a breaking down of barriers to cross - border trade, owing both to the new technologies and to the reduction of government restrictions on trade, has intensified the pressures of competition, helping to contain prices. coupled with the decline in military spending worldwide, this has freed up resources for more productive endeavors, especially in a number of previously nonmarket economies. more generally, the consequent erosion of pricing power has imparted an important imperative to hold down costs. the availability of new technology to each company and its rivals affords both the opportunity and the competitive necessity of taking steps to reduce costs, which translates on a consolidated basis into increased national productivity. the acceleration in productivity owes importantly to new information technologies. prior to this it revolution, most of twentieth - century business decisionmaking had been hampered by limited information. owing to the paucity of timely knowledge of customers ’ needs, the location of inventories, and the status of material flows throughout complex production systems, businesses built in substantial redundancies. doubling up on materials and staffing was essential as a cushion against the inevitable misjudgments made in real time when decisions were based on information that was hours, days, or even weeks old. while businesspeople must still operate in an uncertain world, the recent years ’ remarkable surge in the availability of real - time information has enabled them to remove large swaths of inventory safety stocks, redundant capital equipment, and layers of workers, while arming them with detailed data to fine - tune specifications to most individual customer needs. despite the remarkable progress witnessed to date, history counsels us to be quite modest about our ability to project the future path and pace of technology and its implications for productivity and economic growth. we must remember that the pickup in productivity is relatively recent, and