the board should be engaged enough in the process to determine if these reviews are in fact independent of the operating areas they are designed to review, and that the senior officers in those roles can speak freely on issues that need to be addressed. audit committee members should have regular time in meetings to talk with the outside auditors without managers present. best practices for audit committee processes have been laid out many times, including in the 1980s by the treadway commission and in 2000 by the blue ribbon committee. beyond that, boards of directors and managers should periodically test where they stand on ethical business practices. for example, they should ask, “ are we squeaking by on technicalities, adhering to the letter but not the spirit of the law? are we compensating others and ourselves based on our contributions to the organization, or are we taking advantage of opportunities and abusing our positions? ” the arthur andersen matters and other corporate events currently being addressed also provide lessons for bankers as they try to increase earnings by cross selling more products. when line officers are compensated on sales and cross selling, a strong, independent quality - assurance or risk review function becomes even more essential. for public accounting firms, strong quality assurance functions are needed to protect the core business integrity of attestation services when the firm is trying to win consulting contracts. in banks, where credit is still the dominant risk exposure, the chief credit officer should make sure unacceptable credit risks are not taken to win fee income business whose net revenue may not cover credit exposures. if the financial and reputation integrity of the corporation are to be protected, decentralized processes demand a system of strong, independent internal controls. when revenue and risk come into conflict, the board of directors and executive management must decide where to draw the line. they should be able to rely on the independent control processes to alert them when exceptions to accepted standards occur. my intent today is to remind everyone of the importance of maintaining sound ethical practices to help protect the reputation of your bank. as recent events have demonstrated, if we fail to do so, the market will eventually enforce the discipline. and that discipline can be harsh and sometimes indiscriminate. investors and customers act decisively, once confidence is lost. conclusion sound accounting, auditing, and disclosure, consistently applied, have long been at the heart of efficient markets. the issues currently being identified as breakdowns in these basic functions should serve as wakeup calls to managers, boards of directors and auditors. we

susan s bies : lessons to be re - learned from recent breakdowns in corporate accounting remarks by ms susan s bies, member of the board of governors of the us federal reserve system, before the institute of international bankers, new york, 10 june 2002. * * * good afternoon. thank you for the invitation to speak today with members of the institute of international bankers. my remarks will not be in the traditional “ what have we learned from... ” format, but rather the more realistic what we should re - learn from enron and other recent, well - publicized breakdowns in accounting, auditing, and corporate governance. as a regulator dealing with these types of issues, i find i draw on my experience in bank financial management and accounting. i also want to continue to meet groups like yours so that i can stay aware of current issues facing bank managers. i am going to touch on three broad areas in addressing issues arising from recent breakdowns in corporate accounting : the current state of accounting and auditing in the united states, the role that bankers should play as users of financial information, and good corporate governance practices that bankers should apply within their own organizations. let me be clear about my premise. the root causes of the breakdowns in corporate financial reporting that have been widely disclosed in the past few months are ineffective corporate governance, financial reporting, and risk management practices. the lessons we can re - learn from recent events should not be news to anyone. rather, recent events should serve as a wake up call to corporate boards, management, and auditors to follow through on their fundamental and traditional professional and ethical standards of conduct and control processes. the issues are not new, but the scope and frequency of breakdowns are of concern. as news reports and congressional testimony on various aspects of these breakdowns occur, corporations and auditors should address the issues raised so that they do not compromise the reputation of their organizations. accounting practices in complex organizations first, let me address the state of accounting and audit practices. mergers and business innovations have increased the scale and scope of large organizations. further, significant developments in financial theory and technology have led to the development of financial instruments that facilitate the separation and reallocation of risks to parties more willing and able to bear them. a byproduct of these developments is that it has become ever more difficult for outsiders to understand the financial positions of complex organizations. the current framework of financial reporting in the united states effectively represents the performance of most corporations