The role of auditors and accountants in examining the state of distress in the Nigerian banking sector
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The role of auditors and accountants in examining the state of distress in the Nigerian banking sector
BACKGROUND TO THE STUDY CHAPTER ONE OF CHECKING DISTRESS IN THE NIGERIAN BANKING SECTOR AS THE ROLE OF ACCOUNTANTS AND AUDITORS
1.1 INTRODUCTION
Distress in the Nigerian financial system is a problem that has recently arisen. The regulatory authorities appeared to be fighting a lost struggle to clean up the system.
Ebtiodaghe (1996) discovered that banking distress arises when consumers are unable to meet their contractual obligations due to the loss of their savings. The central bank is failing to meet its capitalization standards, has a small deposit base, and is mismanaged.
According to Aderiu (1997), distress in banks is based on the banks examination grading system with the word “CAMEL” which stands for C=capital sufficient, A=asset quality, Management competency, E=earning strength, and L=liquidity sufficiency. The aforementioned sections are the aggregate areas that truly qualify a bank to be labelled “healthy or sick.”
The CBN considers a bank to be healthy if it meets six criteria, including capital paid up capital, sound management (i.e. meeting CBN rules), satisfying customers’ and shareholders’ interests, and having at least 30% of its liquid assets in treasury bills and certificates.
When a bank fails to meet one or more of the above criteria and fails to correct its default position within a month, it is labelled as distressed.
A bank is considered to have failed if it is unable to service its fixed costs, meet its debt obligations to its stakeholders, has net cash greater than its capital, and can no longer function economically.
A failed bank is one that is unable to meet its responsibilities to its stakeholders because of weaknesses in its financial, operational, and managerial conditions.
The failed bank decree further defined a “failed bank” as one whose licence has been revoked by the CBN. Due to the regulatory authorities’ incapacity to bring back some of these distressed banks that finally failed, the only way to maintain public confidence and system stability is to cancel their licences and place them in liquidation.
Regrettably, this has been the fate of some of the country’s distressed institutions. Almost 36 banks are in trouble.
In Chapter 2, the study will also identify the primary internal sources of distress and its implications for the Nigerian economy.
1.2 STATEMENT OF THE PROBLEM
According to media journals and publications, the causes of widespread distress in Nigerian banks are a lack of objectivity and incompetence on the part of accountants / auditors. They have been accused of failing to play an effective role in these banks, and hence of failing to sufficiently defend the integrity of these institutions as well as the owners’ interests.
The above condition has resulted in the following issues.
1. What part did accountants/auditors have in the overall bank distress?
2. Throughout the process, did the accountants’ auditors engage into a hidden arrangement with the directors and management?
3. Do auditors bear any responsibility if they are reckless, negligent, or incompetent?
4. Did qualified, tested, and proved accountants/auditors get the job?
5. Have the provisions of the how in – CAMD and sop on been observed in the selection and appointment? Of the implicated banks’ accountants/auditors?
6. Did the accountants and auditors realise that the banks were in a perilous situation?
7. Did the accountants/auditors communicate their conclusions to the members, directors, and management?
8. Did the accountants/auditors do the appropriate thing in communicating their findings to management? What happens if they do?
9. Did the auditors offer unqualified true and fair view reports in each case of a failing bank prior to its failure, or were there cases when the auditors submitted qualified reports warning about the institutions’ state?
10. Were the auditors truly independent in the true sense of the word, or were there real and factual forces at play?
These are issues that arise, as well as queries that must be answered. However, because this project cannot seek answers to all of the issues, it is vital to set the objectives around the questions that can be answered within the limits.
1.3 OBJECTIVES OF THE STUDY
In light of the preceding debate, it is vital to discover answers to some of the more relevant research concerns. In accordance with this, the research will pursue the following goals.
1. To what extent was the financial sector’s suffering caused to the auditor’s negligence, incompetence, lack of independence, and other acts or omissions?
2. Were the auditors trained, called, and experienced enough to determine the true present health of the banks, and did they do so?
3. Was it ethical or correct for the auditors to convey the true state of affairs to bank management while providing an unqualified opinion to the members?
1.4 THE SIGNIFICANCE OF THE STUDY
Every research project aspires, among other things, to contribute to several areas of practical and academic improvement. This one is no exception. The body of literature and material is expected to be compiled in order to define the role of auditors in the distress case.
By grouping them together, they form a body that other researchers may refer to. It is envisaged that the effort will make a substantial contribution to theory and knowledge in this manner.
Furthermore, the position of auditors will be brought into sharper focus, allowing accountants and readers of accounting reports to be more precisely aware of their respective roles and expectations.
1.5 SCOPE OF THE STUDY
This study will concentrate on the financial distress in Nigerian banks. The word banking industry does not cover new financial intermediaries such as community banks, peoples banks, primary mortgage institutions, and finance commercial and merchant banks, particularly those that have gone into liquidation.
This study will also look at the role of accountants/auditors in preventing current bank difficulty and failure in Nigeria. Accountants/auditors in this context will only include external auditors. It will scrutinise their responsibilities to their client banks.
The treatments and answers to this distress, on the other hand, will be discussed.
1.6 LIMITATIONS OF THE STUDY
With the cancellation of 36 distressed banks’ licences by law and the subsequent takeover by the Nigerian Deposit Insurance Corporation (NDIC) for the purpose of liquidation, it became nearly difficult to receive any kind of information from the most affected banks because they are in liquidation.
The NDIC refused to divulge certain “classified” information, while workers at the impacted bank were denied access to the documents. This development posed a significant barrier and a hindrance to this investigation.
1.7 DEFINITION OF TERMS
BANK DEFICIENCY
A failed bank is one that is unable to meet its responsibilities to its stakeholders because of weaknesses in its financial, operational, and management conditions, which could have rendered it insolvent.
LIQUIDATION
To liquidate a business firm (for example, a bank) is to declare it bankrupt.
CAPITAL SUFFICIENCY
Capital adequacy is the amount of capital required by a bank to ensure its financial health and soundness, as judged by supervisory and regulatory authorities.
INTERMEDIATION IN FINANCIAL
Financial intermediation is the traditional business of banks, in which funds are mobilised from surplus spending units and allocated to deficit units.
ADVANCE AND NON-PERFORMANCE LOANS
Non-performing loans and advances are loans and advances that have been unserviced for 90 days or more. Loans and advances that have not been serviced for 90 days are considered poor, 180 days are considered bad, and 365 days are considered lost.
EMPLOYED CAPITAL:
Long-term loans and debentures, as well as the interest of the proprietors or storeholders.
FRAUD
Dishonest behaviour motivated by monetary gain that may be illegal.
AUDITING
Auditing is the independent review of an organization’s financial statements in order to generate an opinion on which to base an impartial report.
1.8.HYPOTHESIS STATEMENT
The following hypotheses have been developed for the purposes of this investigation;
1ST HYPOTHESIS
HYPOTHESIS [H0]:- To what extent was the banking sector’s suffering caused to the auditor’s negligence, incompetence, lack of independence, or other acts or omissions?
Alternative Hypothesis [H1]: Distress in the banking sector was not caused by the auditor’s negligence, incompetence, lack of independence, or other acts of omission.
HYPOTHESIS NO. 2
NULL HYPOTHESIS [H0]:- Were the auditors equipped by training, calling, and experience to find the banks’ true present health, and did they do so?
Alternative Hypothesis [H1]: Auditors were not equipped by training, calling, or experience to determine the true current condition of banks.
3rd Hypothesis
Null Hypothesis [H0]: Was it ethical or proper for the auditor to communicate the true state of affairs to bank management while delivering an unqualified opinion to the member?
Alternative Hypothesis [H1]: It was unethical for the auditor to convey the true state of affairs to bank management while providing members with an unqualified assessment.
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