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

ABSTRACT

Over the years the Nigerian banks have been ravaged by the phenomenon called bank distress. The role of bank Inspectors and External auditors in this regard cannot be over emphasized. when it became apparent that the distress was leading to total; doom, the federal Government stepped in this intervention led to liquidation of banks of curb and menace of distress on our banks. Banks  were  liquidated due  to  poor  capital base,  insider abuse  are mismanagement. More  also  other  problems  ravaging banks  are  forgeries, frauds and financial indiscipline etc. this posed gran challenges to management. Here the work of the auditors set in; The primary duty of the auditor is to report on truth and fairness of the financial statement. The project took a look at the auditor’s and inspectors reviving the true banking culture. Auditors are given the constitutional powers to control frauds and forgeries. But the reverse is the case, in the sense that we have management-aided fraud. One management is supposed to check fraud, financial indiscipline, and corruption in the bank’s management, vis-à-vis, the auditor’s shares the responsibilities of promoting, maintaining financial discipline, deterring frauds and forgeries, thereby curbing the menace in the banking industry. The regulatory bodies, the NDIC and CBN saddled with the task of monitoring financial institutions, over worked with the job of sanitizing the banking sector and instilling public confidence in it. Adhering strictly to the laid down policies, procedures with compliance through the monitoring role of bank inspectors and external auditors aided by management, will go along way to remove bottlenecks in banks in general. It is understandable that the banks inspectors and external auditors put more efforts in other to revive banks. The services of bank auditors are nor relegated to the background.

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 Production.  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;

(i)      Scope- The extent of work undertaken by the management, whereas that of the external auditor arises from the responsibilities placed on him by statute.

(ii)     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.

(iii)  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.

1.4     OBJECTIVE OF THE STUDY

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

(1)     The study is meant to examine the role of these auditors and their relationship towards achievements of organizational goal.

(2)    The research is also meant to determine the effectiveness and ineffectiveness, efficiency or inefficiency of these auditors in performance of their roles.

(3)     To determine the various laws that gibes legal status to the option of the auditor.

(4)     To ascertain the  various ways through which banks address and redress their operational policies as highlighted by Auditors in the course of their responsibilities.

(5)     Examine  the  reasons  why  banks  find   themselves  in  distress conditions.

(6)     To   relate   those   reasons   to   the   various   roles,   duties   and responsibilities  of  auditors/bank  Inspectors  as  to  apportion  or remove blame.

(7)     To examine and proffer remedies in order to bring sanity to and trust in the banking industry.

(8)     To determine if the banks adhere to the practice and the use of Accounting/Auditing standards.

1.5     SIGNIFICANCE OF THE STUDY

Auditing as a discipline is meant to ensure compliance to financial rules and  regulations  as  stipulated  by  management  in  order  to  avoid  waste,

inefficiency and exposure of malpractices and crimes that may be detrimental to fund or resource utilization.

The banking industry in this regard engages Auditors of various categories including Internal and External Auditors.

The study will highlight the consequences of ignoring the monetary role of  Bank  inspectors and  the  professional report  of  external auditors.  It  is important to the hesitation of the viability of Banks because the above listed objectives are capable of exposing culprits whose activities are detrimental to the growth and progress envisaged in the Banking industry, given the preparedness and ability of management to deal decisively with such situation when they are identified. Thus study will also make it clear that Banks who chose to use their inspectorate divisional mere rubber stamp or to complete a supposed organogram will be so doing at their own risk. The publics who bear the risk when Banks are distressed will be enlightened on the essential roles

Auditing as a discipline is meant to ensure compliance to financial rules and regulations as stipulated by management in order to avoid waste, inefficiency and exposure of malpractices and crimes that may be detrimental to fund or resource utilization.

The banking industry in this regard engages Auditors of various categories including Internal and External Auditors.

The essence and the use of the persons or professionals is to enforce compliance to the stipulated rules and regulations that guides the financial conduct, particularly as it affects depositors funds and other assets etc. In this instance, the role of auditors becomes indispensable.

Thus inquiring their roles may be detrimental and consequential to goal of the organization. The management had continued to make extensive use of the  auditors  in order  to  appraise performance and  enforce compliance to policies. It  is  also  used  by  management to  fish out  the  bad eggs  in  the personnel who had through their egocentric nature involved in malpractice and crimes etc.

More so, the shareholders had continued to depend on the auditor’s reports in ascertaining the true financial position of the banks, particularly on how resources or funds are disbursed.

The tedious nature of these tasks make the auditor to be diligent and approach the various problems encountered during the course of duty with professional  conduct.  The   essence  of   this   is   to   aid   management  of shareholders from termination and eventual dismissal of the appointments.

In this regards, good, effective and efficient system in the banks is deemed necessary and beneficial to users of these reports (information, which includes shareholders, directors, customers, creditors and debtors) including others particularly those on  goodwill or  mutual interest professionals and external auditors.

More so, the study exposes the various problems of indicators of financial distress and ways of overcoming these problems as to have banking system devoid  of  distress, thereby enhancing the  mobilization of  savings deposits leading to capital formation and development.

1.6     LIMITATIONS AND DELIMITATIONS OF THE STUDY

The motivating force behind the study was the researcher’s desire to find out the role of auditing particularly as it affects the distress of Banking Institutions in Nigeria; reflecting on the various roles, duties, functions and responsibility of auditors to banks; assessing how they have lived up to these roles, the consequences and attendant problems encountered coupled with proffered solutions to restore sanity in the banking industry.

Naturally, a study like this should provide an in depth knowledge to the various  groups  that  require  such  information  including  Scholars, Professionals, Business men, Academicians and Investors etc.

In a nutshell, the study did not do that much. These were due to the fact that the researcher is unable to reach a predetermined goal i.e. she is limited to various other factors of human endeavour, amongst which include:

                     Time

                     Resources

                     Secrecy of Information

                     Technology

                     Inadequate infrastructure

Time: This factor is a constant factor that seeks to limit all activities of human endeavor including this study. Though two semesters were allowed for one to accomplish this task but it is not enough, due to disturbances from external shocks in the economy, like fuel crises, strikes of labour union and ASUU. These disturbances hampered this research as banks and other offices were locked and could not function properly.  Not until these authorities (FGN and NLC) after series of meetings were able to call off the strike.

Resources: This has to do with human and material resources (money). In this course most pressure came from material resource i.e. money. Money is a lubricant or the blood of the economy. Hence, without money nothing could be possible to do as the economy is monetized. Money is required for transportation, typing of the  manuscript, textbooks and other publications including collection of materials etc. There was insufficient money available for the researcher to carry out what this study required. Thus she was able to manage efficiently the little at her disposal to accomplish this purpose.

SECRECY OF INFORMATION: Banking industry is one of the industries that maintain official secrecy and so many information are deemed confidential i.e. to only members of staff while others are top secret to only management group.  Because of this,  the  researcher could  not  get  all  the required information she needed for the purpose of this research. During the course of the interview certain question were not attended to by the officers concerned. Most times they dodge some of these question on what they call “professional ethics.

Technology: Most banks visited are using computers in their operations i.e. Online and Internet banking. They make extensive use of the network. These computers can only be used by few dedicated and approved staff who could not allow external hands to tap, operate or make use of facilities. In this regards, the computer sections is most times out of bounds to all and sundry.

INADEQUATE INFRASTRUCTURE: This factor is of general application. The nature of infrastructure in Nigeria is very bad and highly dilapidated. The economic  activities  had  been  seriously  affected  by  poor  road  network, epileptic power supply including inadequate information and communication facilities etc. without efficient infrastructural facilities, it will be very difficult to undertake programmes and projects on Research and Development (R&D).

DEFINITION OF TERMS

Certain words or terms were used in the course of this study whose meanings may be a bit different or too close to the dictionary but whose meaning are only limited to the scope of this study. Among which include.

Bank Inspectors: These are officials of the Bank of enforce compliance to the rules and regulations issued by the management as it affects disbursement of depositors’ fund etc.      They play the role of Internal Auditor in other organizations.

Auditors:  Is  an  independent  person  whose  responsibility  to  Audit  the accounts and to enforce compliance of stated rules and regulations issued by management in order to guide against waste, inefficiency and other crimes in the course of disbursing depositors’ fund. They are supposed to be Chattered Accountants.

Malpractice:  This  is  anomaly  to  do  or  perform  outside  the  normal  or regulated course of action

Fraud: Is an act or deception deliberately practiced to gain unlawful advantage. Such deception is directed to the detriment of the other party or parties involved.

Forgery: Act or deliberate manipulation of illegal printing and use of documents including falsification of document, such documents and instruments intended to defraud another for selfish interest.

Bank: A financial institution whose major role include acceptance of deposit from customer and  payment therefore including other  facilities  like  loan, overdraft, Asset management and security management etc.

Computer: An electronic device that accepts data in one form; processes and stores data to yield information.

Internet: Is the network of all networks. It is the Interconnections of all computers to the net for the purpose of exchange of information resources.

Management: The  highest ranked officers of the  bank whose duty is  to determine  and  direct  policies-  rules  and  regulations,  goals  and  general administration of the organization. They include here directors, managers and Auditors etc.

Resources: Here it means money, equipment and personnel.

Corruption: Act of using office opportunity of influence to achieve selfish gain by breaching the laws, rules and regulations that guides conduct.

Indiscipline: Act of being disorderly. Not complying or adhering to a given ethical and professional conduct.

Internal Control: The recommendation Institute of Chartered Accountants of England and Wales (U4, Internal control issued in 1964) defined Internal Control as follows: By Internal Control we mean not only internal check and internal audit but the whole system of controls, financial and otherwise established by management in order to carry out the business of the company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records.

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