Speaking at a national industry conference sponsored by the American Institute of CPAs, Federal Reserve Board Governor Susan Bies said the Fed stands ready to challenge accounting practices it sees as too aggressive, and she gave examples of areas being eyed by the Fed in an effort to help overcome today's accounting weaknesses.

"Informed and objective professionals can legitimately disagree on the best accounting standard to apply to new types of transactions," explained Gov Bies, who spent six years on the Emerging Issues Task Force. These differences, combined with the rapid pace of change in the banking industry, have convinced Gov. Bies that neither more accounting rules, nor a change to principles-based accounting standards, will solve the problems that surfaced in the recent round of accounting scandals.

Instead, the Fed is working with the accounting profession to restore the integrity of other factors, including the audit process. Gov. Bies said weaknesses in the quality-assurance processes of public accounting firms helped convince the Fed to provide discipline, when necessary, in the application of the guidance issued by accounting authorities.

Actions already taken by the Fed to instill the right level of discipline include requiring nonperforming loan pools at one large banking organization to be re-consolidated into its financial statements, when it was determined that the risks and control of the assets were not removed from that organization through the creation of special-purpose vehicles as required by generally accepted accounting principles (GAAP). The banking regulators also jointly issued for comment new guidance about unacceptable accounting practices related to credit cards.

Future initiatives will likely address what the Federal Reserve Board considers a general lack of documentation of control weaknesses. Regulators are currently reviewing workpapers of external auditors to get a better understanding of how the attestation process can be improved to better meet the objectives of the Federal Reserve Board.