WASHINGTON -- Financial instruments have become so complex that banks should consider hiring outside accountants to handle some risk-management duties, Federal Reserve Board Gov. Susan M. Phillips said Thursday.
"For years it was sufficient to have independent loan review and internal audit functions address credit and operational risks," Ms. Phillips told participants at the American Institute of Certified Public Accountants annual banking conference.
"Now, however, a number of organizations with significant market risks are finding that an independent risk management function is an appropriate control approach."
Certified public accountants, by virtue of their "training, experience and credibility" have a critical role to play in risk management, she said.
Ms. Phillips also said that bankers must spread internal risk-management controls throughout their institutions, with senior management setting an example of how the entire company should treat the subject.
Risk management "cannot be relegated to corporate staff, such as internal audit," she said.
Ms. Phillips told the audience that internal controls are not just mechanical points on a flowchart.
"[They] involve human beings who sometimes may not understand their role in the company, may be influenced to bend the rules, or may have incentives that conflict with shareholder interests," she said.
Ms. Phillips said bankers should expect regulators in the near future to require more disclosure on derivatives activities. That is in addition to the extra information regulators are requiring for call reports completed after March 1995.
Also, she said investors are not getting an accurate portrait of a company's risk exposure. To correct this, firms must include more risk-management data in their annual reports, she said.
FAS 119, a new accounting rule requiring institutions to separate trading incomes according to risk, is another step in providing the investing public with more information about an institution's risk exposure, she said.
But, Ms. Phillips said she was disappointed that FASB, formally called the Financial Accounting Standards Board, did not require firms to report how successful past risk-management strategies have been.
Ms. Phillips also said financial institutions should not focus all their risk-management energies on derivatives. Losses can come from commercial real estate loans and government bonds as well, she said.
"It is not derivatives per se that are troublesome," Ms. Phillips said, "but management's ability to identify, measure, and control risk."