capture these developments. company managers must also do their part, by ensuring that public disclosures clearly identify all significant risk exposures - whether on or off the balance sheet - and their effects on the firm ’ s financial condition and performance, cash flow, and earnings potential. with regard to securitizations, derivatives, and other innovative risk transfer instruments, accounting measurement of a company ’ s balance sheet at a point in time is insufficient to convey the full effect of a company ’ s financial risk profile. therefore, disclosures about how risks are being managed and the underlying basis for values and other estimates must be included in financial reports. unlike typical accounting reports, information generated by risk management tends to be oriented less to a particular time and more to a description of the risks. to take an example from the world of banking, in which the discipline of risk management is relatively well developed, a fair value report might say that the value of a loan portfolio is $ 300 million and has dropped $ 10 million from the previous report. however, the bank ’ s internal risk report would show much more extensive information, such as the interest rates on the loans, the credit quality of the underlying assets, and the range of values the portfolio would take under alternative future scenarios. thus, unlike a user of the fair value report, the user of a risk - management report could determine whether the fall in value was due to declining credit quality, rising interest rates, or sales or payoffs of loans. corporate risk officers have developed other types of reports that provide information on the extent to which the total return in a particular line of business compensates for the line ’ s comprehensive risk. a reader of such a report can determine whether the growing lines of business have risk exposures that tend to offset those in other business lines - thereby resulting in lower volatility for the earnings of the corporation as a whole. i particularly want to emphasize that disclosure need not be in a standard framework nor exactly the same for all organizations. rather, we should all be insisting that each entity disclose the information that its investors need in order to evaluate the entity ’ s risk profile in the most convenient and useful way. and we should keep in mind that disclosure without context may not be meaningful. transparency means that the information presented provides an accurate understanding of the entity ’ s transactions. to achieve greater transparency, organizations should continue to improve their risk management and reporting functions. when they are comfortable with the reliability and consistency of the information in these reports

, they should begin disclosing this information to the market, perhaps in summary form, paying due attention to the need for keeping proprietary business data confidential. disclosures would not only provide more qualitative and quantitative information about the firm ’ s current risk exposure to the market but also help the market assess the quality of the risk oversight and risk appetite of the organization. less than fully transparent disclosures are not limited to “ complex ” off - balance - sheet transactions. one glaring example is the treatment of expenses associated with defined - benefit pension plans. in recent years we have seen how the accounting rules for these plans can produce, quite frankly, some very misleading measures of corporate earnings and balance sheets. in effect, firms use expectations of the long - term return on assets in defined - benefit plans to calculate current - period pension costs ( income ) while disguising the volatility actually occurring in the portfolio. at the same time, they use a spot rate to discount the future liabilities. this accounting is reconciled with economic reality by gradual amortization of the discrepancies between the assumed and the actual returns experienced on pension assets. as many of you are aware, this smoothing feature can create very large distortions between economic reality and the pension - financing cost accruals embedded in the income statement. moreover, a recent study by federal reserve staff indicates that “ full disclosure ” of the underlying details, by itself, does not appear to be a panacea. 1 the study adopts the premise that most of what investors need to know about the true pension - financing costs, not the mixed attribute accounting costs, can be reflected in two numbers disclosed in the pension footnote. these two numbers are the fair market value of pension assets and the present value of outstanding pension liabilities. the study finds that these direct measures of pension assets and liabilities tend to be ignored by investors in favor of the potentially misleading accounting measures, and as a result, the average firm with a defined - benefit plan in 2001 may have been 5 percent to 10 percent overvalued relative to an otherwise similar firm without a defined - benefit plan. in general, the test for useful disclosure should be the following questions : are the firm and its accountants providing investors with what is needed to accurately evaluate the financial position of the firm and the risks that it faces? and is the information provided in a manner that facilitates accurate assessments by investors? ultimately, improved transparency would benefit corporations by reducing uncertainty about the value