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THE ROLE OF EXTERNAL AUDITORS AND BANK INSPECTORS IN THE DISTRESS CONDITION OF BANKS

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CHAPTER ONE

1.1     INTRODUCTION

Nigerian banking industry is today arguably one of the most sophisticated in Africa. It has embraced Information Technology including computerization, Internet and other forms of electronic banking. It has grown in number and branch network from about 10 banks in 1960 to 120 banks in 1990 courtesy of Babangida deregulation in 1986 and now to above 91. CBN sanitization polices played a vital role since 1998 till date.

Since then the Industry has succeeded in its major role of financial intermediation (money from the surplus sector to the needy sector) stimulation of real sector growth and overall enhancement of trade. Obviously the industry has failed in majority e.g. those roles possibly scored high in just a few banks. For one Nigeria has not experienced real in industrialization.

Most of the surviving companies in Nigeria are Multinational that survives on imported capital. That no truly industrial firm has grown to a multinational status is a pointer to the old ones that in manufacturing, mining and other real production activities have suffered form perennial inadequate funding due to numerous banking malpractices thereby resulting to distrust to the industry with the multiplier effect led to distress and possibly liquidation. This does not mean that these are the only cause of the stunted growth in the real sector; but they are considered as the major causes. Others, like poor industrial base its adequate statistical data research, non – statutory rate changes and in short general corruption and financial indiscipline are among other factors.

Besides frauds and forgeries crimes are rising in the banking system especially since the advent of electronic banking producing the use of electronic card for settlement of transactions. In fact it is feared that the next real threat to the industry will arise from Internet based crimes. In the early 1950s some 22 banks mainly indigenous ones failed due to under capitalization, inexperienced and managerial incompetence. From early 1990 to 1997 about 312 banks were liquidated due to insider abuse, lack of skilled manpower and poor capital base. This time around the fear is that cyber crime will wreck many banks in seconds. This fear is real and here lies the main challenges to Nigerian banks as they embrace electronic banking. It will not be easy to protect ones system from hackers and lackers and other intruders. The headache will not necessarily be available of sketched experienced manpower nor will it be inadequate capital; but will mainly be a factor of an effective inefficient and incompetent nature of Auditors particularly in the performance of statutory roles, responsibilities and functions etc.

Presently many banks are on their own, raising their paid up capital to CBN N25 billion mark, even though this capital base may not be relatively adequate when compared with what obtains in some overseas banks. The level is encouraging given by the volume of business and some of the local transactions it is undertaking.

Despite these shortcomings, Nigerian banking system has made some giant strides since independence. Many of them have grown from being one branch to having a network of branches. Though many of them have yet to show their presence in rural areas, which is no longer totally unaware of what banking is all about. Thanks to community banking system introduced in December 1990. Many rural communities can boast of at least a community bank, which helps to mobilize rural wealth for economic growth and achievement. There are also many mortgage financial institutions, discount houses and finance companies. All these are actors in Nigerian financial system.

Worthy of note also is the great transportation of the services rendered by Nigerian banks, which has progressed from era of issuing tally numbers to customers to the use of computers. There is now friendly touch to relationship with the customer and also one can bank from home to office nationally and internationally.

The era when banks try everything to short change the customer is fast disappearing. In fact COT fee banking is gradually taking root in Nigeria. But some tutorials to desist from tampering with Naira notes paid out of customers balance (incomplete payment to the customers) is rising and cashiers are capable for the ugly practice. This misconduct does not however take the shine off the transformation of the industry. The CBN has introduced universal banking- a system that allows bank chose which services to render. This implies that the divide between Merchant and commercial; banking no longer exists. With the new system banks can now exercise flexibility and can decide to engage in insurance, mortgage, investment and retail banking services.

But the problem facing the banks does not depend on the type of facilities in the Banking system, but on the dangers, fraud, forgeries and current corruption and financial indiscipline posed greatest challenges facing management.

Here the Auditor is supposed to play a vital role for this law or such of the constitution and legal powers if possible for prosecute perpetrators of these crimes that had endangered the Nigerian economy from growth and development. Instead it is however paradoxical that we speak of and have management aided fraud. In this case management is expected to be custodian of all corporate resources. They are observed to have perpetrated acts of fraud, corruption and financial indiscipline.

Management including the auditor is the generality of tasks, rules and functions geared towards the effective and efficient utilization of essential and diverse resources for the achievements of a predetermined corporate goal. This is within the constraints posed by the legal and ethnical standards of the society and other environmental realities.

Functionally, we are referring to Marketing, Finance, human Capital Topicion. Administration, Management Information System and Information Communication Technology (ICT) including all other corporate services. In terms of task it involves the following interrelated activities, planning, organizing, staffing, leading, deciding, controlling, coordinating, innovating and ensuring corporate perpetuation.

The manager who is at the Apex of these management functions and task will do well to remember that management takes place within an organization that resources are scare and have alternative uses, the critical importance of human capital, that uncertainties is the external environment that must produce results and personifies the organization.

In these regard the need for the creation and use of the Audit is highly indispensable in reaching the predestined goals. Here Audit is seen as the coverage to highlight and fearlessly investigate where applicable malpractices and other fraudulent activities perpetrated by the officers, customer and even management. This is because the management determines the employment and progress in the workplace or relationship and fees.

Ethnically, the Auditor should do what he has to do no matter what is involved. In reality however, this may not be so. Sometimes the Auditor is seen to have collaborated with management or even officials to perpetrate acts of corruption and financial indiscipline.

But rather than thinking of what actions to take when it happens, the auditor plays a critical role in ensuring that an efficient and effective internal control measures are put in place to cover all the activities (processes) in the organization. The aims usually are to:

  • Protect Organizations assets against theft and waste. This is done through various means including
  • Segregation of duties (principle of dual control), which prevents one person from initiating and executing fraud.
  • Specific job allowances so that each staff has specific task for which he is in charge.
  • Rotation of staff within the department or organization. It prevents staff from developing long term fraud agenda and enables the next person to detect such plans in place.

In whatever may be the case, the Auditor’s role of detection and prevention of financial crimes and set up control system are not much different from universal roles which have been previously maintained for the External Auditors who ensures compliance with regulatory stipulations and given opinion as to the state of affairs.

For the internal Auditor to ensure that policies and procedures are in place and are maintained. As it relates to fraud and other malpractices, it is important to note that the External Auditor is not a police dog specializing in fraud detection. He should however highlight cases of fraud and other discoveries during Auditing to enable the management take actions. The Auditor is seen as being involved in most challenging activities such as:

  • Pressure from financial and social works etc.
  • Wrong value systems (getting quick opportunity occasioned by weak internal control system).
  • Wrong consequences
  • Feeling of insecurity in the work place.
  • Criminal tendency amongst staff
  • Ensuring that proper books of account are maintained in line with professional and other standards.
  • Books examinations as to be able to determine a true and fair view of state of affairs at a given period of time.
  • Checks whether there are weaknesses or otherwise in the system.

Above all ensures compliance with the regulatory requirements. The monetary authorities CBN enforcement and compliance with the monetary laws as contained in BOFID and CAMD. But while ascertaining the true and fair view in relation to job of the External Auditor is seen to be insured in examining records and procedures to ensure that directors, management policies, regulatory controls and guidelines are observed and complied with.

In the Nigerian banking system, the Auditors roles are mostly performed by the Inspectors whose functions include serving as watchdogs over banks assets and liabilities.

  • Ensuring that books are balanced regularly and specifically with the banks operational guidelines.
  • Prevention and early detection of irregularities on loans and cheques related fraud are the most common, ascertaining for 40% of all cases of fraud in 1996. Even though they have been termed bank frauds, some of these occur in organizations and involve organizations, particularly the computer fraud and advance fee fraud (419).

In whatever form the fraud may be, the Auditor should ensure that at all times he behaves professionally in the conduct of his duties. This enhances his performances and acceptance of his reports and recommendations by all relevant parties. Such professional and ethical standards require them to act as follows:

  • Always exercise professional moral judgments in their actions.
  • Perform their duties in ways that will generally serve the public interest that enhances public trust serving with high level of integrity.
  • Maintain objectivity and independent performance of his duties.
  • Enhance his professional competence.
  • Maintain objectivity and independence.

Finally treat all information that comes his way in the process of auditing with utmost confidentiality and good faith.

These factors when analyzed, articulated and enforced in the course of financial intermediations and operation of banks will not only reduce the high rate of bank failure and distress experienced in Nigerian banking system but will equally enhance the immediate development of universal financial mobility and capital formation.

 

1.2     BACKGROUND OF THE STUDY

The idea of bank inspection and external auditing evolved over years. It is not a new phenomenon. Neither is it a product of distress condition in the banks due to varying degrees and complexities of business of these classes of professionals as indispensable. While the bank Inspectors serves the role of Internal Auditors in the Banking Institutions, the External Auditor is the statutory shareholder Watchdog.

Bank Inspector ensures that management directives and policies are complied with especially as it affects disbursement of depositors’ funds. Several banks were unable to pay account from people’s deposits and vaults. These were due to several factors among which include

  • High Interest rate
  • Non repayment of loans and advances
  • Excessive debts
  • Inefficiency in the banking operations
  • Lack of security to Debts
  • Fraud, forgeries etc

These and more were responsible for these financial problems. Therefore it becomes necessary that neither management nor the shareholders are present at the scene of the actual execution of banks policies and regulations.

The Inspectors are appointed with the sole aim of visiting branches to ensure that policies, especially as it affects granting of loans and collaterals are strictly adhered to. They are always expected to make reports of their findings, and in most cases recommend disciplinary measures for the erring managers. The Inspectors known as Internal Auditors are the employees of the bank. They must be independent from the entire administrative and operating departing department. In other words, the internal audit department should be a separate department in its own right. The objective of internal check or Auditing is therefore to assist all members of management in their effective discharge of their responsibilities by furnishing them with analysis, appraisals, recommendations and pertinent comments concerning activities reviewed.

Internal Auditors are concerned with any phase of business activity in which they will be of interest to the bank. This involves going beyond the accounting and financial records to obtain a full understanding of the operations under review. It can therefore be said that Bank Inspection is an independent appraisal function within a banking institution for the monitoring of the various checks and balances in order to ensure control and quality of performance. It is a system of checking operations in the banking industry and this routine checks is continuous in nature, being undertaken by staffers engaged for that purpose.

Since however the inspector is an employee of bank, his independence is not always a guarantee. Theoretically, he is meant to perform his duties in absolute freedom but in actual practice, it is not always the case.

In most cases, in the distress condition of banks, managements are the culprits in violating their own policies. In this case the Inspector becomes helpless when management refuses to subject itself to laid down rules and regulations; who is Inspector going to report to concerning violations of lending policies; It becomes obvious that the inspector is handicapped to the extent which management decides to abuse its own laid down policies.

Statutory Audit per se is concerned mainly with expression of opinion on the performance of management, which is shown by the financial statements it presented to the shareholders. It is expected that the management has the responsibility of detecting fraud if any.

In this class of audits, the duties of the auditor are clearly spelt out in section 360 and schedule 6 of the companies and Allied Matter Decree 1990. Such duties can be greatly extended by the additional instruction from the clients, but cannot in any way be reduced. For statutory audits, it is essential for the auditor to exercise absolute independence. The procedure for his appointment, removal and remuneration must conform to the provisions of sections 357, 362 and 361 respectively of Companies and Allied Matters Decree 1990.

These two types of audit have a common interest, which is ascertaining that there is an effective system of internal check operating satisfactorily and an adequate accounting system capable of providing the information necessary to prepare true and fair financial statements.

There are some fundamental differences, which include;

  • Scope- The extent of work undertaken by the management, whereas that of the external auditor arises from the responsibilities placed on him by statute.
  • Approach – Internal auditor approaches a firm with a view to ensuring that the accounting system is efficient, so that the information presented to the management throughout the period under review is accurate and disclose the material facts. The External auditor’s approach however is governed by his duly to satisfy himself that the financial statement to be presented to the shareholders show a true and fair view of the profit, or loss for the financial period under review and of the state of the company’s affairs at the end of that period.
  • Responsibility- The internal auditor’s responsibility is to the management, whereas the external auditor is responsible directly to the shareholders.

With the role of bank inspector and that of the statutory auditor combined, one finds it difficult to understand why distress is the common language in the vocabulary of banks of recent.

 

1.3                   STATEMENT OF PROBLEM

It has been observed that management policies are ignored in most organizations, thereby resulting in poor performances by such organizations. This is largely due to avarice and selfishness. Even under a distress condition in the banking industry, many have found the woes of the banks as the quickest means of self-aggrandizement. The resultant effect is that while people are making honest effort to resuscitate and revitalize, others are neutralizing the effect of other people’s honest efforts. Former President Ibrahim Babangida once declared in exasperation that Nigerian’s economy has defied all known economic theories. Little wonder why our banks no longer come back to their former status once they are distressed. The application of work ethics in the advanced economies of the world is a far cry of what obtains here while a paid worker whether in civil service or in private organization work conscientiously towards the benefit of the society and the over all welfare of the organization that engaged him despite the status of, the worker in Nigeria whether a government appointed official, a bank chief executive or a company director works only for himself, his surrogates hungers on the damages without minding what his attitude can cause to the public. Regrettably, this state of affairs seem to have become our culture to the extent that society scorns at anyone who is appointed to serve the public but leaves office without enriching himself. Such a person is often seen as a failure. All these anomalies notwithstanding, the bank Inspector and External Auditor are still looked upon as our last hope.

 

  • OBJECTIVE OF THE STUDY

The essence of this research work is to examine the role of Auditors/Bank Inspectors towards financial distress in banks.

  • The study is meant to examine the role of these auditors and their relationship towards achievements of organizational goal.
  • The research is also meant to determine the effectiveness and ineffectiveness, efficiency or inefficiency of these auditors in performance of their roles.
  • To determine the various laws that gibes legal status to the option of the auditor.
  • To ascertain the various ways through which banks address and redress their operational policies as highlighted by Auditors in the course of their responsibilities.
  • Examine the reasons why banks find themselves in distress conditions.
  • To relate those reasons to the various roles, duties and responsibilities of auditors/bank Inspectors as to apportion or remove blame.
  • To examine and proffer remedies in order to bring sanity to and trust in the banking industry.
  • To determine if the banks adhere to the practice and the use of Accounting/Auditing standards.

 

  • SIGNIFICANCE OF THE STUDY

Auditing as a discipline is meant to ensure compliance to financial rules and regulations as stipulated by mana

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