credit portfolio by acquiring credit exposure to borrowers with which they do not have a lending relationship. for example, european insurance companies reportedly have used credit derivatives to acquire exposure to european corporations that, because they rely primarily on bank lending, have little publicly traded debt outstanding. the improvements in technology, the quick pace of financial innovation, and the evolving risk - management techniques almost ensure that businesses will increasingly use almost limitless configurations of products and services and sophisticated financial structures. accordingly, outsiders will have ever more difficulty understanding the risk positions of many large, complex organizations. these developments represent significant challenges to standard setters and to firms. for market discipline to be effective, accounting standards must evolve to accurately 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. organizations should continue to improve their enterprise - wide risk - management and reporting functions. the fei's leadership in the proposed coso enterprise risk management framework demonstrates this organization's recognition of the importance of this new discipline. i would like to challenge companies to use their new risk - management discipline as a framework also to 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. my last comment on disclosures is that 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 ). at the same time, they use a spot rate to discount the future liabilities. this accounting is reconciled with

professionals from multiple disciplines within the financial institution and may involve significant fees or high returns in relation to the market and credit risks associated with the transaction. third, they may be associated with the creation or use of one or more special - purpose entities designed to address the economic, legal, tax, or accounting objectives of the customer or the use of a combination of cash and derivatives products. fourth, and perhaps most important, they may expose the financial institution to elevated levels of market, credit, operations, legal, or reputational risks. as we are all too aware, in the most extreme cases, complex structured finance transactions appear to have been used in fraudulent schemes to misrepresent the financial condition of public companies or evade taxes. as a result, the corporations that engaged in these improper transactions and the financial institutions that structured and advised on these transactions have been subject to civil and administrative enforcement actions. the existence of these schemes has also sparked an investigation by the permanent subcommittee on investigations of the senate committee on governmental affairs, as well as numerous lawsuits by private investors. although these events have raised serious concerns, it is important to recognize that structured finance transactions and other market innovations, when used and designed appropriately, play an important role in financing corporate america. structured finance transactions, as well as financial derivatives for market and credit risk, asset - backed securities with customized cash flow features, and specialized financial conduits that manage pools of purchased assets, have served the legitimate business purposes of bank customers and are an essential part of u. s. and international capital markets. however, financial institutions may assume substantial risks when they engage in these transactions without a full understanding of their economic substance and business purpose. these risks often are difficult to quantify but the result can be severe damage to the reputations of the companies engaging in the transactions and their financial advisers, and in turn, impaired public confidence in those institutions. these potential risks and the resulting damage are particularly severe when markets react through adverse changes in pricing for similarly structured transactions that are designed appropriately. assessments of the appropriateness of a transaction for a client traditionally have required financial firms and advisers to determine if the transaction is consistent with the market sophistication, financial condition, and investment policies of the customer. given recent events, it is appropriate to raise the bar on appropriateness assessments by taking into account the business purpose and economic substance of the transaction. for those of you who are cfos or other senior officials of corporations seeking to engage in complex structured finance transactions