The Role of Auditors in the Nigerian Banking Crisis
In societies marked by divisions of expert labour, external auditing is promoted as a trust engendering technology with the capacity to promote a certain kind of social order (Power, 1999). Accountants, as auditors, have cemented their status and privileges on the basis of claims that their expertise enables them to mediate uncertainty and construct independent, objective, true and fair accounts of corporate affairs (Sikka, 2009). It has been argued, however, that such claims are not good indicators of corporate performance, because capitalist economies are inherently prone to crises (O’Connor, 1987; Sikka, 2009). Furthermore, the claims of expertise are frequently affected by unexpected corporate collapses, fraud, financial crime and the general crisis of capitalism (Baker, 2007; Sikka, 2009; Sikka et al, 2009)
Since 2007, major Western economies have been experiencing a deepening banking and financial crisis arising from subprime lending practices by banks, which in turn has restricted the availability of credit and has led to what has been described as the ‘credit crunch’ (Sikka et al, 2009). Some commentators have attributed this economic crisis to the unethical practices of corporate bank managers and to the inability of auditors to expose such anti-social practices from previous audits (Broad Street Journal, 21 October 2009; Sikka, 2009). Some auditors may have failed to comply with expected standards. If a company fails shortly after being audited, the auditors may be blamed for conducting an inferior audit (Dopuch, 1988). Thus, whenever there is a financial scandal, it must be questioned whether the auditors carried out their duties and obligations with due care and diligence.
In Nigeria the spate of corporate failures witnessed in the financial sector in the early 1990s brought auditors into sharp focus and caused the Nigerian public to question the role of accountants and auditors (Okike, 2004; Bakre, 2007; Ajibolade, 2008). Furthermore, the investigations launched by the regulators and other stakeholders into the cases of distress and disclosure revealed that accountants and auditors were implicated (NDIC, 1995). With the recent banking crisis in Nigeria members of the auditing profession in Nigeria are once again in the limelight, as the banking crisis and the revelation of unethical practices by bank executives and board members has raised many questions about the ethical standards of the accounting profession and about the integrity of financial reports issued by professional accountants (ThisDay, 9 December 2009). The question has been raised as a result of the failure on the part of accountants and auditors to alert regulators when they have discovered fraud and other irregularities in company records (Bakre, 2007; Ajibolade, 2008; Okike, 2009; Neu et al, 2010).
In respect of the banking crisis, attention has focused on the role of accountants and auditors who have been involved. Accountants and auditors may be expected to report financial irregularities in company accounts by enhancing transparency and accountability and by developing techniques for fraud detection. However, an emerging body of literature argues that accounting professionals have increasingly used their expertise to conceal and promote anti-social practices (Sikka, 2008a; US Senate Permanent SubCommittee on Investigations, 2005; Bakre 2007). For example, Akintola Williams and Deloitte (AWD) was indicted for facilitating the falsification of the accounts of Afribank Plc and for deliberately overstating the profits of Cadbury Nigeria Plc. It has been reported that between 1990 and 1994 the Nigerian economy lost more than N6 billion ($42.9 million) to fraud within the banking sector alone (Bakre, 2007).
The social cost of the banking crisis is difficult to estimate, but huge amounts of public money are being used to bail out distressed banks (Sikka, 2009). In 2008, almost every Reserve Bank across the globe, in collaboration with finance ministries, was forced to adopt extraordinary measures to stave off the collapse of the financial institutions and to restore confidence in the banking system. Some countries, such as the UK, took direct stakes in their banks as a temporary measure in order to ensure that they kept lending. The German and French governments offered to guarantee inter-bank deposits to achieve the same purpose, while the US government rolled out the Emergency Economic stabilization Act authorizing the US Treasury
Department to spend up to $700 billion to purchase distressed assets from sick banks and to make a direct capital injection into those institutions (The Guardian, 30 August 2009).
While the global recession was biting hard on advanced economies, the governors of the Central Bank of Nigeria (CBN) had stated that ‘what the rest of the world is now trying to do as the bailout option was what Nigeria did about four years ago, through a pro-active initiative, the result of which we are celebrating today’ (ThisDay, 16 October 2008). Less than a year later, however, Nigerians were awoken to the reality that the Nigerian banks were not so stable after all (The Guardian, 21 August 2009). The audit conducted by the CBN into the activities of the 24 registered banks in 2009 revealed that they were experiencing huge financial difficulties in their operations. As a consequence, in August 2009, CBN injected N420 billion ($2.8 billion) into the first five banks (Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank) which had failed the CBN audit. Two months later, an additional N200 billion ($1.33 billion) was injected to stimulate the liquidity of four other banks (Bank PHB, Equitorial Trust Bank, Spring Bank and Wema Bank) (Nigerian Tribune, 8 December 2009; ThisDay, 12 December 2009). This injection of money was done in order to stabilize the banks and to ensure that they remained going concerns after their former managers had been sacked for reckless lending and for lax corporate governance which had rendered the institutions undercapitalized (Nigerian Tribune, 17 August 2009; ThisDay, 12 December 2009).
Although the global financial and banking crises have attracted the attention of policy-makers (TI, 2009) and scholars (Njanike et al, 2009; Sikka, 2009; Sikka et al, 2009), comparatively little scholarly attention has focussed on the role of auditing firms in facilitating the mismanagement of bank assets, liabilities and depositors’ funds in developing countries. This paper therefore provides evidence on the inadequacy of audit reports for disclosing nonperforming loans and the mismanagement of banking assets. Such evidence can help understand the auditing practices which have been adopted, but which are in direct conflict with the express claims of auditors and accountants to be acting in an ethical and socially responsible way. This paper contributes to the on-going debate on the usefulness of auditing and the need for accounting professionals to ensure that they continue to play a leading role in providing credibility to published financial statements and in maintaining the confidence of depositors in banks and investors in the capital market.
The paper is organized as follows. Part II examines the literature on the role of auditing in corporate collapse, particularly in respect of banking failures. Part III considers the theoretical framework of professionalism and the pursuit of profits. It is argued that, despite the regulatory framework governing the professional activities of auditors and accountants, the pursuit of profits and systemic pressure to increase corporate performance have been prioritized. Part IV describes the auditing environment in Nigeria in order to provide an understanding of the socio-political and economic contexts within which such accounting and auditing practices are embedded. Part V provides empirical evidence on the role of auditors in bank failures and the recent banking crisis in Nigeria by way of case-studies. Part VI concludes the paper by providing a summary and discussion of the issues raised and offers suggestions for reform.