For a recap, the NDIC Decree No 22 of 1988 provides the reporting requirements of external auditors of all insured banks in Section 38 as follows:
(1) No duty to which an auditor of an insured bank or a person appointed under Section 19 of the Banking Act 1969 is subject, shall be contravened by reason of his communicating in good faith to the Corporation whether or not in response to a request made by it, any information or opinion on a matter to which this section applies and which is relevant to safe and sound banking practice.
(2) An auditor of an insured bank shall recognise the Corporation’s responsibility for the protection of the interest of depositors and shall bring to the notice of the Corporation:
(a) any extreme situation such as evidence of imminent financial collapse;
(b) evidence of an occurrence which has led or is likely to lead to a material dimishing of the insured bank’s net asset;
(c) evidence that there has been a significant weakness in the accounting and other records or the internal control system of the insured bank,
(d) evidence that the management of the insured bank has reported financial information to the Corporation which is misleading in a material particular;
(e) where he believes that a fraud or other misappropriation had been committed by the directors or the management of the insured bank or has evidence of the intention of directors or senior management to commit such fraud or misappropriation; or
(f) where there has been an occurrence which causes the auditor to no longer have confidence in the competence of the directors or the senior management to conduct the business of the insured bank in a prudent or safe and sound manner so as to protect the interest of the depositors such as acting in an irresponsible or reckless manner in respect of the affairs of the insured bank.
(3) Any auditor of an insured bank who acts in contravention of or fails deliberately or negligently to comply with any of the provisions of subsection (2) of this section shall be guilty of an offence and liable on a fine of not less than N50,000.
Banking Act of 1969
The Banking Act of 1969 provides for the appointment and duties of auditors in Section 19 as follows:
(I) every licensed bank shall appoint annually, a person approved by the Commissioner in this section referred as ‘the approved auditor’ whose duties shall be to make to the shareholders, a report upon the annual balance sheet and profit and loss account of the bank and every such report shall contain statement as to the matters mentioned in the third, fourth and fifth Schedules to this Decree.
(2) No person:
(a) having an interest in a licensed bank otherwise than a depositor; or
(b) who is a director, officer or agent of a licensed bank; or
(c) which is a firm in which a director or a licensed bank is interested as partner or director, shall be eligible for appointment as the approved auditor for any licensed bank, and any person appointed as such auditor:
(i) who subsequently acquired such interest;
(ii) or becomes a director, officer or agent of that bank or;
(iii) subsequently becomes a partner in a firm in which a director
or a licensed bank is interested as partner or director shall cease to be such auditor,
(3) If any licensed bank:
(a) fails to appoint an approved auditor under subsection (I) of this section: or
(b) at any time fails to fill a vacancy for such person, (the commissioner shall after consultation with) the Central Bank appoint’ the approved auditor and shall fix the remuneration to be paid by the bank to such auditor.
(4) Every auditor of a licensed bank shall have a right of access at all times to the books and accounts and vouchers of the banks, and shall be entitled to require from the directors and officers of the bank such information and explanation as he thinks necessary for the performance of his duties.
(5) The report of the approved auditor shall be read together with the report of the board of management at the annual general meeting of the shareholders and two copies of each report together with the auditor’s analysis of doubtful advances on the form provided in the fifth schedule to this Decree shall be sent to the Central Bank (who shall transmit a copy of such each report to the commissioner).
(6) For the purpose of this section, the approved auditor shall be an auditor who is a member of one of the professional bodies for the time being declared by the commissioner by notice in the Federal Gazette to be approved for such purposes.
(7) No auditor shall be approved for the purpose of this section unless:
(a) he is resident in Nigeria:
(b) he is carrying on in Nigeria, full-time professional practice as a public accountant and auditor.
1991 Monetary and Credit Policy Guidelines
In the case of the Monetary and Credit Policy Guidelines for 1991 fiscal year, the responsibility/obligation of banks’ external auditors to supervisory authorities are provided as follows:
“Given the need for increased surveillance on the activities of licensed banks, each bank is required to ensure that its auditors forward to the Central Bank, copies of domestic reports on its activities not later than three months after the completion of such audit. Furthermore, each bank shall communicate promptly to the Central Bank, the appointment, termination and resignation of the Bank’s external auditor, stating reasons for such action.”
Companies and Allied Matters Decree No.1 of 1990
With regards to the Companies and Allied Matters Decree No.1 of 1990, Section 360 provides as follows:
(1) It shall be the duty of the company’s auditors, in preparing their report, to carry out such investigations as may enable them to form an opinion as to the following matters whether:
(a) proper accounting records have been kept by the company and proper returns adequate for their audit have been received from branches not visited by them;
(b) the company’s balance sheet and (if not consolidated) its profit and loss account are in agreement with the accounting records and returns.
(2) If the auditors are of the opinion that proper accounting records have not been received from branches not visited by them, or if the balance sheet and (if not consolidated) the profit and loss account are not in agreement with the accounting records and returns, the auditors shall state that fact in their report.
(3) Every auditor of a company shall have a right of access at all times to the company’s books, accounts and vouchers, and entitled to require from the company’s office such information and explanations as he thinks necessary for the performance of the auditor’s duties;
(4) lf the requirements of Parts V and VI of Schedule 3 and parts I to III of Schedule 4 to this Decree are not complied with in the accounts, it shall be the auditor’s duty to include in their report, so far as they are reasonably able to do so, a statement giving the required particulars.
(5) It shall be the auditor duty to consider whether the information given in the directors’ report for the year for which the accounts are prepared is consistent with those accounts, and if they are of opinion that it is not, they shall state that fact in their report.
Perhaps it is necessary to rate the requirements of Parts V and VI of Schedule Three and Parts I to Ill of Schedule Four of the Companies and Allied Matters Decree No of 1990 wherein auditors are required to disclose in their report the extent of compliance with the prescribed minimum share capital and nature of share for ordinary companies to the disclosure required for banks as required by the regulatory authorities.
Regulatory authorities would similarly require that external auditors should include in their report the net worth of the audited bank. The regulatory authorities would also require the external auditors to disclose if any shareholder holds more than five percent of the paid-up share capital of the bank.
While the banks’ external – auditors are expected ‘to make to the shareholders a report upon the Annual Balance Sheet and Profit and Loss Accounts of the Bank which should contain statements as to matters mentioned in the Third; Fourth and Fifth Schedules to the Banking Act of 1969, it has been observed that auditors have not in the past reported on the operations of subsidiary companies of commercial and merchant banks offering financial services and related functions. Indeed, the Central Bank Central Bank of Nigeria Monetary and Credit Policy Guidelines for 1991 fiscal year require that commercial and merchant banks with subsidiary companies offering financial services and related functions should report on the operations of such companies along with their First and Second Schedule Returns.
These requirements are in agreement with the provisions of sections 367,368 and 369 of the Companies and allied Matters Decree No 1 of 1990 in relation to auditors’ powers to obtain information from subsidiary companies, failure of which such auditors will be deemed guilty of negligence and where false statement is given to the auditors by such subsidiary companies, they are also deemed to be guilty of an offence. I shall summarise this Part by drawing attention to the Central Bank of Nigeria, Banking Supervision Department’s Circular titled, “Prudential Guidelines for Licensed Banks” Circular Letter No. BSDJDO/23/Vol. 1/11 to all licensed banks and their auditors dated November 7, 1990.
An Overview of the Responsibility of Banks’ Management
Bad management is usually associated with every bank failure. If the work of an external auditor is to identify the weaknesses observed in the operations of a bank, his responsibility would have been incomplete, if during the audit exercise he were to fail to evaluate the quality of management. Therefore, an attempt is made here in highlighting the responsibilities of banks’ management.
The primary responsibility for the conduct of the business of a bank is vested in the management, and ultimately in the Board of Directors which appoints the management. Management’s responsibility includes ensuring:
• that those entrusted with banking tasks are professionally competent and that there are sufficient experienced staff in key positions;
• that proper control systems exist and are functioning;
• that the operations of the bank are conducted with due regard to prudence, including the assurance that adequate provisions are maintained for
• that statutory and regulatory directives, including directives regarding solvency and liquidity are observed; and
• that the interest, not only of the shareholders, but also of the depositors and other creditors are adequately protected.
Management is responsible for preparing financial statements in accordance with regulatory guidelines. Such statements must give a true and fair view of the bank’s financial position and the results of its operations in accordance with generally accepted accounting principles as they apply to banks. Management also has the responsibility to provide to regulatory agencies, all information to which such agencies are entitled to obtain bylaw or regulation.
Management is responsible for the establishment and the efficient operation of the Internal Audit function of a bank. This function constitutes a separate component of internal control undertaken by specially assigned staff within the bank with the objective of determining whether, amongst other things, internal controls are well designed and properly operated. Management is responsible for ensuring that the internal audit functions is adequately staffed with persons of the appropriate skills and technical competence who are free from operating responsibilities and who report to top management, and that timely and appropriate action is taken on their findings.
Supervisors pay increasing attention to the existence of adequate policies, procedures and controls established by the Board of Directors to monitor banks’ operations and ensure that management can meet its responsibilities and objectives. Thus, there is a clear interest in assessing board and management approach and philosophy towards achieving efficient internal control system by external auditors.
Complementary Concerns and Relationship Between Bank Supervisors and External
In many respects, the supervisor and the auditor have complementary concerns regarding the same matters though the focus of their concerns may be different. For example, the supervisor is primarily concerned with the stability of the bank in order to protect the bank’s present and future viability and users financial statements to assist in assessing its developing activities. The auditor, on the other hand, is primarily concerned with reporting the financial position of the bank and the results of its operations for a period. However, in doing so, he also makes a judgement as to the bank’s continuing viability during the period immediately following the period for which the financial statements are prepared to support the “going concern” basis on which such statements are prepared.
The supervisor is concerned with the maintenance of a sound system of internal control as a basis for safe and prudent management of the bank’s business. The auditor, in most situations, is concerned with the assessment of internal control to determine the degree of reliance he can place on the system in planning and carrying out his work.
The supervisor is concerned with the existence of proper accounting system as a prerequisite of the measurement and control of risk. Similarly, the auditor is concerned with such a system to ensure that the financial statements are properly prepared.
It is therefore necessary that when a supervisor uses audited financial statements in the course of his off-site supervisory activities, he recognises that the statements have been prepared in accordance with statutory requirements which are more often than not inadequate for his purpose. In order to make up for this inherent inadequacy, external auditors are expected to strictly make up for tins with the provisions in the Third, Fourth and Fifth Schedules to the Banking Act of 1969.
In view of the increasing need for close surveillance on the activities of licensed commercial and merchant banks for improving the strength and health of the Nigerian banking system, the Central Bank of Nigeria’s Monetary and Credit Policy Guidelines for 1991 fiscal year now requires bank external auditors to forward to the regulatory authorities, copies of Domestic Report (Management Letters) on the activities of the audited banks. In view of the complementary concern between supervisory authorities and external auditors, the relationship between them should be further strengthened through exchange of information. Section 38 of the NDIC Decree No. 22 of 1988 clearly establishes this relationship. Similarly, bank external auditors can obtain useful information from the reports of routine examinations by bank supervisors This they can obtain from the audited banks. The Governor of the Central Bank of Nigeria has also promised that circulars to licensed banks relevant to bank auditors would henceforth be forwarded to them
The Independence of External Auditors
Professional accountants the world over are held in very high esteem. Their opinion on financial matters are often called for in preference to any other opinion. Such opinion expressed on any financial statement by professional accountants, particularly those who hold themselves out as auditors, are generally accepted by users of financial statements. Therefore, such auditors must be accountable for opinions expressed in any financial statements which are meant for public consumption.
The degree of independence exercised by professionally qualified auditors must not be diluted for financial gains or otherwise. A bank external auditor is expected to pass independent judgement in the interest of depositors and the banking public. This is why provisions have been made in Section 19 of the Banking Act of 1969 where an auditor may not be approved by the Federal Minister of Finance and Economic Development to audit a bank where the auditor may have conflict of interest, for example, where such auditor is a director, officer or agent of the bank.
Some external auditors are known to have failed to make adverse comments on the affairs of an audited bank where these have been observed, and also where the accounts should have been qualified, for fear of not being re appointed. I sympathise with this fear because the Companies and Allied Matters Decree No. 1 of 1990 provides in Section 362 that an auditor may be removed by ordinary resolution. However, this provision does not provide sufficient ground for bank auditors to fail to correctly report their findings and from expressing true and fair opinion of the financial statement of the audited bank. In view of the special role of banks in the economy and the need to protect the interest of depositors, the appointment of bank auditors are subject to the approval of the Federal Minister of Finance and Economic Development. The powers of the Minister to approve the appointment of an auditor also implies that the regulatory authorities will have power to intervene when a bank external auditor is arbitrarily removed for the reason only that he had reported true and fair statement of the financial condition of the bank and made observations not favourable to the bank during the course of his audit duties.
Furthermore, the Central Bank of Nigeria Monetary and Credit Policy Guidelines for 1991 fiscal year now requires banks to report to it, termination and resignation of a bank’s external auditor and stating the reasons for such actions.
Regulatory authorities will continue to place great reliance on the judgement and opinion expressed by bank external auditors, particularly given many instances when management tampers with or waters-down the reports of internal auditors/inspectors reporting directly to the Chief Executive or to the Executive Chairman.
Summary and Conclusion
This paper has attempted to examine the role bank auditors can play in ensuring that audited banks comply with the rules and regulations laid down by regulatory authorities. The paper began by reviewing banks’ regulatory framework, powers of bank supervisors, duties of external auditors and responsibilities of bank management. It has also examined the complementary concerns/relationship between bank supervisors and auditors plus the independence expected of external auditors. The relevant sections of the NDIC Decree No. 22 of 1988, the Banking Act of 1969, the Companies and Allied Matters Decree No. 1 of 1990, the Central Bank of Nigeria Monetary and Credit Policy Guidelines for 1991 Fiscal Year as well as the Central Bank of Nigeria Banking Supervision Department’s circular letter No. BSD/ DO/23/VOL.1/11l to all licensed banks and their auditors dated November 7, 1990, have all been used to support the review.
External auditors have been reminded that it is part of their duties to make to the shareholders a report upon the annual balance sheet and profit and loss account of an audited bank and that such report should contain statements as to the matters mentioned in the Third, Fourth and Fifth Schedules of the Banking Act of 1969. An important area of interest is sections 367,368, and 369 of the Companies and Allied Matters Decree No. 1 of 1990.
In the overview of the responsibility of the banks’ management and in view of the fact that bad management is usually associated with every bank failure, I made a strong case for bank external auditors to evaluate the quality of management and to ascertain that the internal audit function is adequately staffed with people of the appropriate skills and technical competence during the course of their audit.
I noted that in many respect, bank supervisors and auditors have complementary concerns regarding the same matters, though the forms of their concerns may be different. I have pointed to those areas of mutual concern and relationship which include exchange of information.
Regarding the independence of the external auditors, I have noted the importance of the opinion of professionally qualified auditors to users of financial statements, and therefore the need for the degree of independence exercised by such auditors not to be diluted for financial gains or otherwise in the interest of depositors, the banking public and the economy. In this connection, I revisited section 19 of the Banking Act of 1969 where an auditor may .not be approved by the Federal Minister of Finance to audit a bank where he may have conflict of interest, for example, where such an auditor is a director, officer or agent of the bank.
Furthermore, while I sympathise with the fear of the external auditor because of the Companies and Allied Matters Decree No. I of 1990 provision in Section 362, that an auditor may be removed by an ordinary resolution, I quoted the Central Bank of Nigeria Monetary and Credit Policy Guidelines for 1991 fiscal year, requiring banks to report to it, termination and resignation of a bank’s external auditor and stating the reasons for such action as caveat.
An extremely important point to remember in this issue of removal of an external auditor is the power of the Federal Minister of Finance and Economic Development to approve the appointment of an auditor, which also implies that the regulatory authorities will have power to intervene when a bank external auditor is arbitrarily removed for the reason only that he had reported a true and fair statement of the financial condition of a bank and made observations not favourable to the bank during the course of his audit duties.
May I therefore conclude in the words of an anonymous author:
As through this world I rambled
I seen lots of funny men
Some will rob you with a six-gun.
some with a fountain pen
I have no doubt in my mind, that our concern in this regard is not the person who will rob the bank with a six-gun, because in that case we could do nothing; rather we should do everything and expose those who will rob with a fountain pen in the interest of the financial system and the economy of Nigeria.
BANK EXTERNAL AUDITORS AND SAFE/SOUND BANKING SYSTEM IN NIGERIA
In Nigeria, the Banks and Other financial Institutions Decree (BOFID) 1991, the Nigeria Deposit Insurance Corporation (NDIC) Decree 1988 and the Companies and Allied Mailers Decree (CAMD) 1990 set out duties and responsibilities for external auditors. Also in the course of practice and experience over the years, additional responsibilities have been given to auditors.
Generally, external auditors are expected to ensure that financial statements of banks are accurate and reliable. They are also required to express an independent opinion on the performance and viability of banks and the reliability of the financial records. It is in the execution of this onerous assignment that the auditors must strive to sustain public confidence.
The rest of this paper is divided into five parts. In Part I, I shall consider why banks need external auditors. The roles of external auditors in banks as provided in the CAMD, BOFID and the NDIC Decree are discussed in Part II Part III considers other roles the auditors have come to perform over the years. Part IV examines how well the auditors have performed the roles, either statutorily or otherwise assigned to them. Finally, the conclusion and recommendations are examined in part VI.
Why Banks Need External Auditors
Banks are statutorily required under Section 27 of the BOFID, to prepare and publish, not later than four months after every financial year, the balance sheet and profit and loss account, together with the report of external auditors (usually a firm of accountants) appointed by the bank in accordance with Section 29 (I) of the BOFID. External auditors ensure that the published accounts comply with the relevant laws and express an independent opinion on the state of affairs of the bank at the end of each financial year. Until a bank satisfies this requirement, its accounts may not be approved by the Central Bank Nigeria (CBN). This is strengthened by the fact that the internal auditors cannot be substituted for the external auditors as the effectiveness of their duties greatly depend on their independence, integrity, competence and qualification.
The financial statement of a bank would be relied upon more by the shareholders, prospective investors, depositors, creditors, supervisors, employees and tax authorities if the bank’s accounts were certified by external auditors. In other words, auditors give credence and instil confidence in their parties who would rely on the financial records. In addition, external auditors provide some degree of assurance to the regulatory authorities in respect of the reliability of the financial records and internal controls of banks.
The Role of External Auditors in Banks as Defined by CAMD 1990, and NDIC
The CAMD, BOFID and the NDIC Decree clearly set out the duties expected of external auditors. These laws contain provisions that clearly stipulate that every licensed bank is required to appoint annually, an external auditor who shall make a report on the balance sheet and profit and loss account of the bank to the shareholders.
Generally, by the provisions of CAMD and BOFID the external auditors are expected to perform the duties as enumerated below:
(i) It shall be the duty of the external auditors, in preparing their report to carry out such investigations as may enable them to form an opinion as to the following matters whether:
(a) proper accounting records have been kept by the bank and proper returns adequate for their audit have been received from branches not visited by them;
(b) the bank’s balance sheet and (if not consolidated), its profit and loss account are in agreement with the accounting records and returns
(ii) If the external auditors are of the opinion that proper accounting records have not been received from branches not visited by them, or if the balance sheet and (if not consolidated) the profit and loss account are not in agreement with the accounting records and returns, the auditor shall state that fact in their report.
(iii) It shall be the auditors’ duty to considerwhether the information given in the directors’ report for the year for which the accounts are prepared is consistent with the accounts; and if they are of the opinion that it is not, they shall state that fact in their report.
(iv) If an auditor appointed under these Decrees, in the course of his duties as an auditor of a bank, is satisfied that:
(a) there has been a contravention of the Decree, or that an offence under any other law has been committed by the bank or any other person; or
(b) losses have been incurred by the bank which substantially reduced its capital funds; or
(c) any irregularity which jeopardises the interest of depositors or creditors of the bank, or any other irregularity has occurred; or
(d) he is unable to confirm that the claims of depositors or creditors are covered by the assets of the bank, he shall immediately report the matter to the Central Bank of Nigeria.
(v) the external auditor shall forward to the Central Bank of Nigeria, two copies of the domestic reports on the bank’s activities not later than three months after the end of the bank’s financial year.
The NDIC provides insurance cover for all depositors of licensed banks in Nigeria subject to a maximum amount of N5O,000. The Corporation among other things has the primary responsibility of protecting the interest of depositors and ensuring the safety and soundness of the banking system. Towards the achievements of this objective, Section 38 (2) of the Decree specifically stipulates that external auditors, in recognition of the NDIC’s responsibility for the protection of the interest of depositors, should bring to the notice of the NDIC, the following when they occur in a bank:
(i) any extreme situation such as evidence of imminent financial collapse;
(ii) evidence of an occurrence which has led or is likely to lead to a material diminution in value of the insured bank’s assets;
(iii) if there has been a significant weakness in the accounting and other records or in the internal control system of the insured bank;
(iv) evidence that the management of the insured bank has reported financial information to the Corporation which is misleading in any particular material;
(v) where he believes that a fraud or other misappropriation had been committed by the directors or the management of the insured bank or has evidence of the intention of directors or senior management to commit such fraud or misappropriation; and
(vi) where there had been an occurrence which causes the auditors to no longer have confidence in the competence of the directors or the senior management to conduct the business of the insured bank in a prudent or safe and sound manner so as to protect the interest of the depositors, such as acting in an irresponsible or reckless manner in respect of the affairs of the insured bank.
In order to perform his duties creditably, the Decrees provide with auditor with right of access at all times to the books, accounts and other records of the bank and he is entitled to require from the directors and officers of the bank such, information and explanations as he thinks necessary for the performance of his duties.
The external auditors therefore need to ensure that the published accounts comply with the requirements of the law which emphasise that:
“every balance sheet of licensed banks should give a true and fair view of the state of affairs as at the end of every financial year of the bank, and every profit and loss account shall give a true and fair view of the profit and loss of such bank for the financial year.”
External auditors therefore serve as a means of verifying and disclosing banks’ financial condition. The effective performance of their responsibilities calls for them to have two important attributes which are:
(i) Competence – the auditor must be a qualified professional accountant; and
(ii) Independence- the auditor must disclose his interest in the interest of the bank. Any interest that compromises his independence automatically disqualifies him to be appointed as an external auditor.
Such relationships or interests that may compromise independence include:
• partner(s) or firm as shareholders or significant borrowers of the bank;
• partner(s) as director(s) of the bank or significant unsecured borrowers;
• the nature of the agreed fees to be paid the external auditor. If for example, fees are dependent on gross earnings of the bank, the independence of the auditors might be compromised.
Other Roles from Experience
In the light of our experience, new developments in other parts of the world and particularly, the current wave of bank failure and threat of failure that have engulfed the financial sector, the regulatory authorities and the general public would now expect (apart from the provisions of BOFID and other banking laws) external auditors to, in addition to their major roles perform the following functions:
(i) submit to the Central Bank of Nigeria and Nigeria Deposit Insurance Corporation, an unedited domestic report of every licensed bank. This domestic report or management letter often contains more information relevant to regulators;
(ii) promptly report contraventions (by the licensed banks) of the provisions of the BOFID, the NDIC Decree and all other related laws as well as monetary policy circulars;
(iii) vouch for proper valuation of assets and adequate provision for bad and doubtful debts and other losses;
(iv) report true capital and liquidity position; and
(v) disclose certain information that are vital and useful, not only to the bank’s management and shareholders, but also to the bank regulators and the general public. In this regard, auditors should submit ad hoe reports on their own initiatives when circumstances justify the need for such communication.
Appraisal of External Auditors’ Performance
Experience in the examination of banks have shown that some of the external auditors to these banks have not adequately observed the ethics of professionalism by their failure to produce reports that give the true and fair view of the real financial situation of the banks. In a number of cases, the affairs of the banks were misrepresented by the external auditors. Information contained in audit reports were cosmetic and often protectionist or evasive. Cases abound to prove that some auditors have failed to carry out their statutory functions as they should, for example the audit reports of Commerce Bank did not disclose the existence of bad assets that the bank was involved in trading and other non banking activities financed with depositors’ funds. However, the examination carried out by NDIC examiners confirmed a completely different picture. You would recall that five banks have been closed and are under liquidation. It was most revealing to observe that the auditors of some of the closed banks never noticed the problems if the banks until their licences were revoked. There were some transactions which should have aroused the suspicion of auditors but were never noticed. This is lack of professionalism. For example, situations where bank directors f to pay for their shares but instead manipulated the banks’ accounts to create the impression that payment was effected, for instance, with Commerce Bank and the defunct Alpha Merchant Bank.
This is not good enough and under the present dispensation, could result in auditors being arraigned at the Failed Banks’ Tribunal. Although the NDIC has not taken any action against any auditor, deliberate cosmetic audit reports are still presently being studied in order for the Corporation to adopt appropriate measures.
The Corporation requires external auditors to issue a separate report to the NDIC (for which a specific format was developed) in accordance with Section 38 of the NDIC Decree. Our experience has however shown that some auditing firms shy away from fulfilling this statutory obligation and where they do, the reports are shallow and in most cases rendered incorrectly. Some auditors have not taken this report seriously.
The attitude of auditors as disclosed by their reports has destroyed confidence in audited accounts. The NDIC is at risk and will not take lightly anything that will affect the soundness or solvency of banks. The Corporation is aware that some banks do not disclose all their correspondent banks for dubious reasons, and the auditors are aware (or are at least suspicious) but they often fail to probe further. It has also been observed that auditors do not insist enough on the banks doing the right thing and they do not diligently follow-up on the implementation of previous recommendations.
Conclusion and Recommendations
Generally, it has been observed that although bank examiners and auditors may apply the same standards, the focus appears to be different. It is obvious that the essence of bank regulation is the clarion objective of promoting and ensuring safe and sound banking system. The role of the external auditor is very important for the effective supervision of banks. For the auditors to perform these functions satisfactorily, they require absolute independence and integrity. The auditor must not compromise his position. Although it is true that he who pays the piper dictates the tune, the auditor, who occupies an enviable position must perform the role assigned to him because he had been statutorily equipped Even now, the CBN requires banks to explain in writing where an auditor is removed and the reasons for such removal. This is to further guarantee the independence of the audit. Auditors must keep pace with current developments in the industry and should realise that they owe a duty to the public who rely on them for accurate and reliable information.
The mandatory continuing education programme run by the Institute of Chartered Accountants of Nigeria is a welcome idea. Apart from the normal training, auditors should, in addition, keep abreast with the information in the industry as this would help them perform their duties more satisfactorily. In this regard, I have always supported your Institute by sponsoring your members in the NDIC to attend your education programmes and conferences. In addition, I promise that the Corporation will include bank auditors in the mailing list of its publications.
With the level of distress in the Nigerian financial system, the regulatory authorities will have to place much reliance on the auditors to enforce the compliance by banks with banking regulations in the areas of the Prudential Guidelines, Statements of Accounting Standard on Accounting by Banks and
Non-Bank Financial Institutions, disclosure requirements (i.e., of insider abuses) and various monetary policy circulars issued by the Central Bank of Nigeria from time to time.
In this regard, both bank external auditors and bank examiners owe a duty to the public to discharge their responsibilities creditably, despite the pervasive influence of bank management. The following suggestions, if adopted, would to a great extent, enhance the work of bank auditors:
(i) auditors should do a proper review of the issues raised in banks’ responses to management letters and communicate same to the regulatory authorities;
(ii) to further guarantee the independence of bank auditors, the regulatory authorities should consider paying audit fees directly to auditors or through direct debit of the banks’ account with the Central Bank of Nigeria for the agreed fees. It is hoped that this arrangement would eliminate the timidity of some bank auditors in the discharge of their duties.
(iii) to eliminate arbitrating in terms of operating a bank in a safe and sound manner, bank regulators should be invited to meetings where domestic reports or management letters are being presented to bank management. Similarly, external auditors should also be invited to bank board meetings at which examination reports are presented. Auditors are therefore encouraged to forward their observations to the NDIC and to ask questions on any matter not clear to them. In addition, apart from the protection given to bank auditors in Section 38 of the NDIC Decree No. 22 of 1988, the auditor can obtain and send relevant information to the NDIC anonymously.
(iv) In view of rising insider abuses and related party transactions in our banks, it will be appropriate to require additional disclosures on related party transactions and control. Banks should, as a matter of statutory requirement, be required to disclose in their audited financial statements all materials related to party dealings during the year. Related party here should be defined to include:
• directors and all members of the director’s immediate and extended family;
• top management staff
• parent, subsidiary and fellow subsidiary undertakings;
• associates and joint ventures;
• an entity managing or managed by the reporting entity under a management contract; and
• directors of other banks.
(v) Under related party transactions the audited financial statement should disclose the following:
• the names of the related parties involved in the transactions and their relationship;
• a description of the transactions;
• any other element of the transactions necessary for an understanding of the financial statements.;
• the amounts due to or from related parties at the balance sheet date;
• provisions for doubtful debts;
• amounts written off and
• the parties controlling the reporting entity, and if different, that of the ultimate controlling party whether or not any transactions have taken place between them.
(vi) Currently, the bank audits only express general opinion as to the state of affairs of the banks.
In addition, the auditors should be required to express separate opinions on the audited accounts in the following areas:
• internal financial controls;
• related party transactions; and
• going concern -. ability of the hank to continue operations in the
(vii) Auditors’ domestic report or management letters should be attached as an addendum to “Auditors Report to the NDIC” whether or not the management of the bank has responded to it.