This study was conducted to ascertain the role of accountants and auditors in checking distress in Nigeria banks. To achieve this objective, the following Nigerian banks were used as study areas before their acquisition by more viable banks- Intercontinental bank, Oceanic bank, Afribank and Bank PHB. Primary data were collected by using validated questionnaires and secondary data collection was by oral interviews and examination of some bank documents. Two hundred and fifty questionnaires were distributed among staff of the aforementioned banks in Enugu State and thereafter, two hundred and  thirty-five of the returned questionnaires were valid and were subsequently subjected to descriptive statistical analysis to ascertain the roles and involvement of auditors in distress in Nigerian banks in line with the elements of the questionnaires. Analytical statistical tools such as means, standard deviations and percentages were used for the analysis. Chi-square and Student t-test were used as the major statistical tools for testing the hypotheses and comparing mean values. Result of the study indicated that there were collusion between accountants/auditors and management and there is aiding and abetting of management by external auditors to commit fraud. It was also found that there is gross negligence and improper performance on the jobs by accountant/auditors and in some instances, accountants/auditors are gagged by management and directors. Experience of accountants/auditors was also found to play a significant role in the quality of report submitted.

The major conclusion of this study is that auditor’s reports presented for distressed and failed banks fulfilled only the letter of the law. It is thus recommended that the law should be amended to make auditors criminally liable for negligent performance of duty in addition to the current civil liability.



1.0 Background of the study

The need for external auditors may be seen as a response to the agency problem and the audit functions as a mechanism to attest to the accountability and stewardship of company management to reduce the possibility of innocent mistakes and deliberate misstatements such as fraud and management manipulation (Stirbu et al., 2009). Over the years, the role of auditors become increasingly important especially in a capitalist economy as the process of wealth creation and political stability depends heavily upon confidence in processes of accountability and how well the expected roles are being fulfilled (Stirbu et al., 2009). This gives rise to research interest on ‘expectations gap’, the differences between what the public expects from an audit and what the auditing profession prefers the audit objectives to be (Stirbu et al., 2009). Are auditors responsible for detecting fraud in the companies they inspect? Most people think they are. This gap between the expectations of auditors and everyone else has existed for a long time. 

That an auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing, and has been one of the most frequently debated areas amongst auditors, politicians, media, regulators and the public (Gay et al. 1997). This debate has been especially highlighted by the collapse of big corporations including Enron and Worldcom worldwide and recently some banks in Nigeria. The unanticipated fall of Enron and WorldCom traumatised the world as both of these companies received clean bills of health from their auditors immediately prior to their bankruptcy.

According to Godsell (1992), there is a common belief that the stakeholders in a company should be able to rely on its audited accounts as a guarantee of its solvency, propriety and business viability. Therefore, if it transpires, without any warning that the company is in serious financial difficulty, it is widely believed that auditors should be made accountable for these financial disasters.

1.1 Auditors’ responsibilities in fraud detection

Fraud detection has been considered a major purpose of auditing for very long time. Gupta and Ray (1992) noted that internal auditing showed fraud discovery to have been central in both medieval an early modern times. Flesher et al. (2005), in their review of American auditing since the earliest colonial days, described an activity suffused with the intent to detect financial misconduct. The role of auditors has not been well defined from inception (Alleyne and Howard 2005). Porter (1997) reviewed the historical development of the auditors’ duty to detect and report fraud over the centuries. Her study shows that there is an evaluation of auditing practices and shift in auditing paradigm through a number of stages. Porter’s study revealed that the primary objective of an audit in the pre-1920’s phase was to uncover fraud. However, by the 1930’s, the primary objective of an audit had changed to verification of accounts. This is most likely due to the increase in size and volume of companies’ transactions which in turn made it unlikely that auditors could examine all transactions. During this period, the auditing profession began to claim that the responsibilities of fraud detection rested with the management. In addition, management should also have implemented appropriate internal control systems to prevent fraud in their companies. 

Prior to the recent bank consolidation in Nigeria, twenty-five banks met the criteria outlined by the Central Bank of Nigeria (CBN). because of certain circumstances including fraud, some of the banks went bankrupt. The following Nigerian banks initially met 25 billion naira recapitalization: 

1. Access Bank 

2. Afribank 

3. Diamond Bank 

4. EcoBank 

5. Equitorial Trust Bank 

6. First City Monument Bank 

7. Fidelity Bank 

8. First Bank Plc 

9. First Inland Bank 

10. Guaranty Trust Bank 

11. IBTC-Chartered Bank 

12. Intercontinental Bank 

13. Nigeria International Bank 

14. Oceanic Bank 

15. Platinum Bank 

16. Skye Bank 

17. Spring Bank 

18. Stanbic Bank 

19. Standard Chartered Bank 

20. United Bank of Africa 

21. Sterling Bank 

22. Union Bank 

23. Unity Bank 

24. Wema Bank 

25. Zenith Bank Plc

1.2 Capital requirements

Generally, the central bank do grant short term facilities to banks in order to enable them adjust their asset positions when necessary because of certain developments that may affect their operations such as the sudden withdrawal of deposits or seasonal requirements for credits beyond the immediate financial capacity of the bank. However, an expanded discount window becomes increasingly necessary in very unusual situations and exceptional circumstances. 

The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see Risk-weighted asset).  Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's banking capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Accord. This framework has been replaced by a significantly more complex capital adequacy framework commonly known as Basel II. After 2012 it will be replaced by Basel III. While Basel II significantly alters the calculation of the risk weights, it leaves alone the calculation of the capital.  The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord.

Presently, the list of commercial banks in Nigeria is as shown below. The initial twenty-five (25) banks listed above underwent some further scrutiny by the apex bank- CBN and it was found that certain operational procedures were not healthy that culminated in some banks taking over of some banks (acquisition). 

1. Access Bank - Acquired Intercontinental Bank

2. Citibank

3. Diamond Bank

4. Ecobank Nigeria - Acquired Oceanic Bank

5. Enterprise Bank Limited - Formerly Spring Bank

6. Fidelity Bank Nigeria

7. First Bank of Nigeria

8. First City Monument Bank - Acquired 8. FinBank

9. Keystone Bank Limited - Formerly Bank PHB

10. Guaranty Trust Bank

11. Mainstreet Bank Limited - Formerly Afribank

12. Savannah Bank 

13. Skye Bank

14. Stanbic IBTC Bank Nigeria Limited

15. Standard Chartered Bank

16. Sterling Bank - Acquired Equitorial Trust Bank

17. Union Bank of Nigeria - Owned By African Capital Alliance Consortium

18. United Bank for Africa

19. Unity Bank Plc.

20. Wema Bank

21. Zenith Bank

1.3 Auditing

Auditing is synonymous with independent examination. Records of transactions are always thoroughly and routinely examined by auditors- internal and external.

1.3.1 Nature and development

The word “audit” comes from the Latin word audire which means “to hear” because, in the middle Ages, accounts or revenue and expenditure were “heard” by the auditor. Statutory audits (i.e. carried out in accordance with statutory provisions) become mandatory for companies in 1900. At this time the purpose of an audit was to detect fraud, technical errors and errors of principle. However, the recognition in case law that it is unreasonable to expect auditors to detect all aspects of fraud, even though they exercised reasonable skill and care, means that this is not now a primary purpose.  Over the last 20 years or so the auditing profession has sought to broaden its role (e.g. with value for money, operational audits, etc.).

Internal auditors verify the effectiveness of their organization's internal controls and check for mismanagement, waste, or fraud. They examine and evaluate their firms' financial and information systems, management procedures, and internal controls to ensure that records are accurate and controls are adequate. They also review company operations, evaluating their efficiency, effectiveness, and compliance with corporate policies and government regulations. Because computer systems commonly automate transactions and make information readily available, internal auditors may also help management evaluate the effectiveness of their controls based on real-time data, rather than personal observation. They may recommend and review controls for their organization's computer systems, to ensure their reliability and integrity of the data. Internal auditors may also have specialty titles, such as information technology auditors, environmental auditors, and compliance auditors. 

Technology is rapidly changing the nature of the work of most accountants and auditors. With the aid of special software packages, accountants summarize transactions in the standard formats of financial records and organize data in special formats employed in financial analysis. These accounting packages greatly reduce the tedious work associated with data management and recordkeeping. Computers enable accountants and auditors to be more mobile and to use their clients' computer systems to extract information from databases and the Internet. As a result, a growing number of accountants and auditors with extensive computer skills specialize in correcting problems with software or in developing software to meet unique data management and analytical needs. Accountants also are beginning to perform more technical duties, such as implementing, controlling, and auditing computer systems and networks and developing technology plans.

1.3.2 Concepts Stewardship

Directors or other managers of an enterprise have the responsibility of stewardship for the property of that enterprise. Responsibilities, which may be duties embodied in statute, may include:

1. Keeping books of accounts and proper accounting records;

2. Producing a balance sheet and income statement that show a true and fair view;

3. Producing a directors’ report which is consistent with the financial statements and contains certain specified information. Agency

A director can be described as an agent having a fiduciary relationship with a principal (i.e. the company that employs him).  In meeting their responsibilities of stewardship, managers have fiduciary duties to safeguard assets and implement and operate an adequate accounting and internal control system. Accountability

Auditors act in the interest of the primary stakeholders whilst having regard to the wider public interest. The identity of the primary stakeholders in determined by reference to the statute of agreement requiring an audit. For companies, the primary stakeholder is the general body of shareholders.

1.3.3 Objective and general principles governing an audit of financial statements

The objective of an audit is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. It is management’s responsibility to prepare the financial statements. Whilst the auditor’s opinion adds credibility to the financial statements. It is no guarantee of future viability not of management’s efficiency or effectiveness.

A degree of imprecision is inevitable due to inherent uncertainties and use of judgment. Only reasonable assurance is given . The amount of audit work is determined by: 

1. Judgement

2. Requirements of professional bodies and legislation 

3. Agreed terms of the engagement

4. The need to exercise professional skepticism 

The ability to reduce audit risk is limited by:

1. The necessity to sample 

2. Inherent limitations in any accounting and control systems

3. Possible fraudulent collusion

4. Certain evidence will be persuasive not conclusive

1.3.4 General principles governing the auditor Ethical principles

‘The auditor should comply with the International Federation of Accountants’ (IFAC) “Code of Ethics for Professional Accountants”.

1. Independence integrity

2. Objectivity

3. Professional competence and due care

4. Confidentiality

5. Professional behaviour

6. Technical standards. Adherence to standards on auditing 

An audit should be conducted in accordance with ISAs. ISAs provide: Standards (i.e. basic principles and essential procedures); and Related guidance (i.e. explanatory and other material).  Professional skepticism 

An audit should be planned and performed (“conducted”) with an attitude of “professional skepticism” recognizing circumstances that may bring about material misstatement in the financial statements.

 An auditor should assume neither dishonesty nor unquestioned honesty.

1.4 Duties of an auditor

The statutory duties of the auditor basically entail the following:

1. Duty to make certain inquiries

2. Duty to make a report to the company on the accounts examined by him

3. Duty to make a statement in terms of the provisions prescribed.

The auditor has a duty to inquire into certain matters and seek any information required for the audit, from the company. This could be in relation to security on loans and advances made by the company, any transactions entered into by the company and whether they are prejudicial to the interests of the company, whether personal expenses are recorded and charged to proper accounts, any transaction with respect to sale of shares and whether the position depicted in the books and balance sheet is correct, honest and proper.

If there are any suspicious circumstances or unusual transactions like unavailability of original documents, or sudden increase or decrease in shareholdings or debt, employees given the liberty to access unauthorized documents etc., then the auditor is under a clear duty to “probe into these transactions” and ensure that they are proper and legal. At all times, auditor has to act with care and skill of a professional of reasonable competence. The degree of care and skill required however, varies from case to case.

1.5 Auditor’s report

Under Section 227 of the Companies Act, the auditor is supposed to report to the beneficiaries of the company i.e. the shareholders in the general meeting, about the books and accounts of the company, the balance sheet and profit and loss account on the basis of their assessment. They have to give their opinion on the financial position of the company and also make sure that it has been fairly, truly and honestly depicted. As per Section 227 of the Companies Act, the report should also state:

1. That the auditor has obtained all information and explanations, which are to the best of his knowledge and belief necessary for his purpose;

2. Whether in his opinion, all the books of accounts and requisite documents necessary for the audit have been furnished by the company;

3. Whether the balance sheet and profit and loss account comply with the books of accounts; and

4. Any observation and comments on the functioning of the company, especially, which may have an adverse effect on the company.

He is thus required to report not merely on the balance sheet but on the accounts he examines, and he also has to express his opinion whether the company has properly kept all the books as per law and whether the balance sheet and profit and loss account are in accordance with the accounting standards and procedures prescribed by the ICAI. The report should be complete, concise, clear and unambiguous and the auditor should be careful about the language used, as the readers of the report are all laymen. 

Auditor’s opinion can be qualified or unqualified. A qualified opinion is an opinion subject to certain reservations. That means that the auditor is unable to satisfy himself that the accounts present a true and fair view of the company’s financial position.

As per Section 227(4) of the Companies Act, the nature and reasons of qualification should also be clearly stated, instead of merely stating grounds for suspicion. For the purpose of drawing up the report, the auditor is given the right to inspect and examine the books and accounts, balance sheets and vouchers or any other requisite documents necessary for the purpose of the audit. These documents can be accessed by the auditor at all times, irrespective of where they are kept. The auditor can also ask for any information and explanation from the officers of the company, and the officer would be under a duty to furnish the information and explanation so needed.

1.6 Detection and prevention of fraud

The term ‘fraud’ is defined as:

An intentional perversion of the truth, for the purpose of inducing another in reliance upon it, to part with some valuable thing belonging to him, or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury... A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated6. Fraud basically falls into the following three categories:

⦁ Management fraud - when the senior management is involved and they are manipulating the financial statements and misrepresenting the real picture, or theft or improper use of company resources;

⦁ Employee fraud, which involves non-senior employee theft or improper use of company resources and carrying out of practices and transactions under the table; and

⦁ External fraud, which involves theft or improper use of resources by people who are neither management, nor employees of the firm7.

Internal audit staff and external auditors have to perform an essential function of fraud prevention and deterrence as they are up to speed, experienced and trained in the same and can see to it that the loopholes in the system and the risk areas are identified and investigated. Once they are identified, quick action has to be taken to address and rectify them. The internal processes and programs have to be tested at regular intervals to test their effectiveness.

1.7 Liabilities of an auditor

The auditor has a fiduciary relationship vis-à-vis the shareholders of a company, therefore he has a moral obligation to see that ensuring that the statements issued are made with the utmost skill safeguards their interests and care and depict the true and fair state of affairs of the company. Section 233 of the Companies Act imposes a penalty for on the auditors for noncompliance of Sections 227 and 229 with payment of fine if there is wilful negligence and default. The auditor may have to compensate the members or shareholders of the company who have suffered losses attributable to the negligence in performance of the auditor’s duties. The auditor may be held liable in tort for fraud and if there is negligence in detection of errors that may cause loss to the company. In order to hold the auditor liable for fraud, the following conditions must be


1. that the statement signed by the auditor is untrue and false;

2. that he knew it to be untrue either or did not apply reasonable care and skill;

3. that he intended the report to be relied on by others; and

4. that the parties on relying upon the report suffered loss.

The Companies Act, 1956 imposes a Criminal liability under Section 628 on any person who makes a false or untrue statement through any document like balance sheet, profit and loss account, return, prospectus, intentionally, thereby causing a loss to the people who rely on such documents. The auditor who knowingly doesn’t make a fair and honest report of the company’s financial position in any report, certificate, return, prospectus or other documents, and makes false statements therein is liable.

The shareholders interests are dependent on the degree of care and skill applied by the auditor to draw up an accurate and honest report of a company’s state of affairs. Therefore, the auditors should employ utmost good faith, care and vigilance in the carrying out of their duties. If there is the slightest bit of suspicion of the legality and integrity of a record or transaction, the auditor is under a duty to investigate and report it, before he certifies it to be true.

1.8 Auditor’s report on financial statements

It is important to note that auditor's reports on financial statements are neither evaluations nor any other similar determination used to evaluate entities in order to make a decision. The report is only an opinion on whether the information presented is correct and free from material misstatements, whereas all other determinations are left for the user to decide. There are four common types of auditor’s reports, each one presenting a different situation encountered during the auditor’s work. The four reports are as follows:

1.8.1 Unqualified opinion report

The most frequent type of report is referred to as the Unqualified Opinion, and is regarded by many as the equivalent of a “clean bill of health” to a patient, which has led many to call it the ‘Clean Opinion’, but in reality it is not a clean bill of health. This type of report is issued by an auditor when the financial statements presented are free of material misstatements and are represented fairly in accordance with the Generally Accepted Accounting Principles (GAAP), which in other words means that the company’s financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor.

The report consists of a title and header, a main body, the auditor’s signature and address, and the report’s issuance date. US auditing standards require that the title includes "independent" to convey to the user that the report was unbiased in all respects. Traditionally, the main body of the unqualified report consists of three main paragraphs, each with distinct standard wording and individual purpose, however certain auditors have since modified the arrangement of the main body (but not the wording) in order to differentiate themselves from other audit firms.

The first paragraph (commonly referred to as the introductory paragraph) states the audit work performed and identifies the responsibilities of the auditor and the auditee in relation to the financial statements. The second paragraph (commonly referred to as the scope paragraph) details the scope of audit work, provides a general description of the nature of the work, examples of procedures performed, and any limitations the audit faced based on the nature of the work. This paragraph also states that the audit was performed in accordance with the country’s prevailing generally accepted auditing standards and regulations. The third paragraph (commonly referred to as the opinion paragraph) simply states the auditor’s opinion on the financial statements and whether they are in accordance with generally accepted accounting principles. 

1.8.2 Qualified opinion report

A qualified opinion report is issued when the auditor encountered one of two types of situations which do not comply with generally accepted accounting principles, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or “clean opinion”, but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated. The two types of situations which would cause an auditor to issue this opinion over the Unqualified opinion are:

⦁ Single deviation from GAAP – this type of qualification occurs when one or more areas of the financial statements do not conform with GAAP (e.g. are misstated), but do not affect the rest of the financial statements from being fairly presented when taken as a whole. Examples of this include a company dedicated to a retail business that did not correctly calculate the depreciation expense of its building. Even if this expense is considered material, since the rest of the financial statements do conform with GAAP, then the auditor qualifies the opinion by describing the depreciation misstatement in the report and continues to issue a clean opinion on the rest of the financial statements.

⦁ Limitation of scope - this type of qualification occurs when the auditor could not audit one or more areas of the financial statements, and although they could not be verified, the rest of the financial statements were audited and they conform GAAP. Examples of this include an auditor not being able to observe and test a company’s inventory of goods. If the auditor audited the rest of the financial statements and is reasonably sure that they conform with GAAP, then the auditor simply states that the financial statements are fairly presented, with the exception of the inventory which could not be audited.

1.8.3 Adverse opinion report

An adverse opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and, when considered as a whole, do not conform with GAAP. It is considered the opposite of an unqualified or clean opinion, essentially stating that the information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee’s financial position and results of operations. Investors, lending institutions, and governments very rarely accept an auditee’s financial statements if the auditor issued an adverse opinion, and usually request the auditee to correct the financial statements and obtain another audit report. Generally, an adverse opinion is only given if the financial statements pervasively differ from GAAP. An example of such a situation would be failure of a company to consolidate a material subsidiary.

The wording of the adverse report is similar to the qualified report. The scope paragraph is modified accordingly and an explanatory paragraph is added to explain the reason for the adverse opinion after the scope paragraph but before the opinion paragraph. However, the most significant change in the adverse report from the qualified report is in the opinion paragraph, where the auditor clearly states that the financial statements are not in accordance with GAAP, which means that they, as a whole, are unreliable, inaccurate, and do not present a fair view of the auditee’s position and operations.

“In our opinion, because of the situations mentioned above (in the explanatory paragraph), the financial statements referred to in the first paragraph do not present fairly, in all material respects, the financial position of…”

1.8.4 Disclaimer of opinion report

A disclaimer of opinion, commonly referred to simply as a disclaimer, is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements. This type of report is issued when the auditor tried to audit an entity but could not complete the work due to various reasons and does not issue an opinion. The disclaimer of opinion report can be traced back to 1949, when the Statement on Auditing Procedure No. 23: Recommendation Made To Clarify Accountant’s Representations When Opinion Is Not Expressed was published in order to provide guidance to auditors in presenting a disclaimer. 

Statements on Auditing Standards (SAS) provide certain situations where a disclaimer of opinion may be appropriate:

⦁ A lack of independence, or material conflict(s) of interest, exist between the auditor and the auditee (SAS No. 26)

⦁ There are significant scope limitations, whether intentional or not, which hinder the auditor’s work in obtaining evidence and performing procedures (SAS No. 58);

⦁ There is a substantial doubt about the auditee’s ability to continue as a going concern or, in other words, continue operating (SAS No. 59)

⦁ There are significant uncertainties within the auditee (SAS No. 79).

Although this type of opinion is rarely used,  the most common examples where disclaimers are issued include audits where the auditee willfully hides or refuses to provide evidence and information to the auditor in significant areas of the financial statements, where the auditee is facing significant legal and litigation issues in which the outcome is uncertain (usually government investigations), and where the auditee has going concern issues (the auditee may not continue operating in the near future). Investors, lending institutions, and governments typically reject an auditee’s financial statements if the auditor disclaimed an opinion, and will request the auditee to correct the situations the auditor mentioned and obtain another audit report.

1.9 Auditor’s report on internal controls of public companies

Following the enactment of the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) was established in order to monitor, regulate, inspect, and discipline audit and public accounting firms of public companies. The PCAOB Auditing Standards No. 2 now requires auditors of public companies to include an additional disclosures in the opinion report regarding the auditee’s internal controls, and to opine about the company’s and auditor’s assessment on the company’s internal controls over financial reporting. These new requirements are commonly referred to as the COSO opinion.

The auditor’s report is modified to include all necessary disclosures by either presenting the report subsequent to the report on the financial statements, or combining both reports into one auditor’s report. The following is an example of the former version of adding a separate report immediately after the auditor’s report on financial statements.

1.9.1 Internal control over financial reporting

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Auditor’s responsibility is to express an opinion on management’s assessment and on the effectiveness of the company’s internal control over financial reporting based on our audit. Audits are conducted in accordance with the laid down standards. Those standards require that the auditing is planned and performed to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. The audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

1.9.2 Going concern

Going concern is a term  which means that an entity will continue to operate in the near future which is generally more than next 12 months, so long as it generates or obtains enough resources to operate. If the auditee is not a going concern, it means that it is either dissolved, bankrupt, shutdown, etc. Auditors are required to consider the going concern of an auditee before issuing a report. If the auditee is a going concern, the auditor does not modify his/her report in any way. However, if the auditor considers that the auditee is not a going concern, or will not be a going concern in the near future, then the auditor is required to include an explanatory paragraph before the opinion paragraph or following the opinion paragraph, in the audit report explaining the situation, which is commonly referred to as the going concern disclosure. Such as opinion is called an "unqualified modified opinion".

1.10 Auditor’s reports for a single audit

In the United States, Single Audits are performed on various entities who receives federal aid from the U.S. federal government. Auditors who perform these Single Audits are required to emit three auditor’s reports. The first report is a report on the entity’s financial statements as discussed in the previous sections. The other two reports are compliance-oriented reports related to specific requirements of the OMB Circular A-133 and of Government Auditing Standards (otherwise known as the “Yellow Book” standards). The American Institute of Certified Public Accountants (AICPA) provides illustrative audit reports of the OMB A-133 and the Yellow Book reports for auditors who are performing Single Audits.

Distress in Nigeria banking sector is a problem that has in recent time assumed an intractable dimension. The situation is such that the regulatory authorities appear to be fighting a losing battle in their bib to sanitize the system. Ebnodagh (1996) observed that banking distress/financial distress occurs a bank or some banks in the system experience insolvency resulting in a situation where depositors fear to loss of their deposits and a consequent breakdown of their contractual obligation. The CBN gives it a broader definition by saying that it is a situation where a bank fails to meet its capitalization requirements or has a weak deposit base and is afflicted by mismanagement.

1.11 Early warning systems for banking soundness

A survey of the relevant literature suggests that leading indicators of bank distress can be grouped into three main categories. The first category consists of standard balance sheet and income statement financial ratios. This includes the ‘so-called CAMEL’ variables (where CAMEL stands for “capital, asset quality, management, earnings, and liquidity”). These variables are very popular in the “supervisory risk assessment and early warning systems” used by supervisory agencies around the world. Asset quality indicators usually play an important role in early warning models, particularly in models that focus on the medium- to long-term horizon. In the short run, profitability, liquidity, and solvency indicators provide helpful information on a bank’s financial condition (Ademu, 1997). 

 It is aggregate or composite rating of performance in the ‘CAMEL’ that really qualifies a bank to be branded ‘’healthy or sick’’. A bank is considered healthy by CBN if it maintains the following six criteria:-

1. A minimum cash reserve of 6%

2. A minimum liquidity of 30%

3. Not less than 10% of liquid assets to be in treasury bills and certificate.

4. Capital adequacy of at least 8%

5. Statutory minimum paid up capital

6. Sound management which defines the capacity of a bank’s administration to meet CBN rules and satisfy customers and shareholders interest.

In a situation where banks default in one or a few of the above criteria and fails to rectify its default position within a month, it is in deed qualified to be classified as distressed. 

Distress manifests in varying degrees in banks. Banks that are marginally distressed are referred to as unhealthy banks, while those that are persistently in distress are referred to as technically insolvent banks.

Where these technically insolvent banks remain consistently unable to serve its fixed cost or meet its debt obligation to its stakeholder and no longer operate profitably, the bank is deemed to have failed. Failed bank is a bank perceived as unable to meet its obligation to its stakeholder as at when due arising from weaknesses in its financial, operational and managerial conditions which could have rendered it either insolvent or liquid (CBN/NDIC, 1995).

The failed bank decree also defined ‘’failed bank’’ as a bank or financial institution whose license has been revoked or which has been taken over by the CBN or the NDIC. Due to the inability of the regulatory authorities to resuscitate some of these distressed banks which failed eventually, the only resolution left in order to sustain public confidence and stability of the system is to revoke their license and put them on liquidation. Hence, Bank Liquidation can be said to be the winding up of failed bank after exhausting all possible means of resolving their distress conditions.

Regrettably, this has been the fate of some distressed banks in the country. Before the current recapitalization, out of a total of 120 licensed bank 60 are distressed while 26 addition bank licenses have been revoked (as against 5 initially revoked and liquidated). This study will also highlight the main internal causes of distress, management problems and its implication on the Nigeria economy.

 1.12 Symptoms of banking distress 

The symptoms of bank distress are varied in nature but the most common and observable ones as indicated by Ogunleye (1993) include the following: 

⦁ Late submission of returns to the regulatory authorities 

⦁ Falsification of returns.

⦁ Rapid staff turnover 

⦁ Frequent top management changes 

⦁ Inability to meet obligations as and when due 

⦁ Use of political influence 

⦁ Petitions /anonymous letters 

⦁ Persistent adverse clearing position 

⦁ Borrowing at desperate rates 

⦁ Persistent contravention of laid-down rules 

⦁ Persistent overdrawn current account position at the CBN 

1.13 Statement of the problem

There have been allegation and accusation in newspapers, journals and publication that the causes the causes of the widespread distress in Nigeria banking sector are lack of objectivity and negligence on the part of Accountants/Auditors. They have been accused of not playing an effective role in these banks and hence have not adequately protected the integrity of these institutions as well as the following problems:-

a) What role did the Accountant/Auditors play in checking of the Bank to avoid the entire distress syndrome?

b) Did the Accountants/Auditors collude with the Directors and Management in the entire process?

c) Do Auditors have are blame whatsoever where they are careless negligent or incompetent?

d) Were qualified, test and proven Accountant/auditors appointed?

e) Were the provisions of the law in CAMA, BOFID and so on observed in the choosing and appointment of Accountant or Auditor of the effected Bank?

f) Did the Accountant or Auditor discover the true states of the banks that they were in precarious position?

g) Did the Accountants/Auditors report their findings to the member directors/management?

h) Were the Accountants/Auditors right in reporting their findings to the management? What if they did so?

i) Did the Auditors issue unqualified true and fair view report in each cases of the failed banks prior to their failure or were there cases when Auditors issued qualified reports warning over the state of these bank.

j) Were the Auditors truly independent in the real sense of it or were there factors real and subterranean that ended their desire or ability to report factually?

1.14 Objectives of the study

Against the background of the foregoing discussion it is necessary to find answer to some of the more pressing research questions. In line with this development, this research will pursue the following:

1. To examine the extent to which Auditors Report on some failed Banks prior to failure fulfilled the letters of the law.

2. To determine the degree of independence enjoyed by Auditors of failed banks in Nigeria. 

3. To examine the appropriateness and legality of issuing different reports to management and members.

1.15 Significance of the study

Every research work aims among other to make contributions to various area of practical and academic enhancement. This one is not different. It is expected that the body of literature  wound have been enhance through the contribution of this work literature and material are gathered in order to define the role of auditors in the distress case. By condensing them together, they form a body/corpus that may be referred to by other researchers or users practitioner. In this way it is hoped that the work will make a significant contribution to theory and knowledge.

Furthermore, the role of auditors will be brought into more critical focus thereby enabling accountants as well as users of accounting report to be more accurately aware of their duties and expectation respectively.

1.16 Scope of the study

This study focuses attention on the checking of distress in Nigeria banks with particular reference to questionnaire respondents from Intercontinental bank plc, Spring bank, Bank PHB and Oceanic Bank. The word bank or phrase banking industry does not include development banks of the new financial intermediaries such as community banks, people’s banks. Primary mortgage institution finance commercial and merchant banks with particular reference to those that have gone liquidation. 

This research will also dwell on the role of Accountants/ Auditors in checking the distress and failure in the Nigerian banks. 

Accountants/Auditors in this sense will include only external auditors. It will examine critically their duties as it relate to their client bank. However, the remedies and solution to the distress will also be discussed. 

 1.17 Formulation of hypothesis/research question

To effectively find a situation or a useful result to the problem the following hypothesis/research question were formulated:

a) To what extent is the distress in the banking sector attributable to the negligence, incompetence, and lack of independence or other acts of omissions of the auditors to detect frauds and errors? 

b) Are the Auditors equipped by training, calling and experience to discover the real present condition of the banks?

c) Is it ethical or right for the auditor to report the true state of affairs to the bank management while issuing an unqualified opinion to the members?  

1.18 Limitation of the study

With the revocation of distressed banks licenses and the consequent take over by some more viable banks it became very difficult to obtain more information from the affected banks mostly because they were in liquidation. NDIC was unwilling to disclose some information which they termed ‘classified’ while the staff of the affected banks were denied access to the records. This development constituted a very big obstacle and posed a limitation to this research.




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