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

CHAPTER ONE: INTRODUCTION

1.1 Background of Study

The role of external auditors and bank inspectors in detecting, preventing, and mitigating bank distress is one of the most critical yet contested issues in financial regulation and corporate governance. Banks, as special financial institutions that accept deposits from the public and provide credit to the economy, occupy a unique position in the financial system due to their role in maturity transformation, liquidity provision, and payment services. The failure of a bank can have systemic consequences, including loss of depositor funds, disruption of credit to the economy, contagion to other banks, and potential financial crisis. Given the high social costs of bank failure, prudential regulation and supervision require that banks be subject to both external audits (by independent accounting firms) and bank inspections (by regulatory authorities such as the Central Bank). The effectiveness of these assurance and monitoring mechanisms in preventing bank distress is therefore of paramount importance for financial stability (Santomero, 1995; Goodhart, 2011; Kane, 2000).

Bank distress refers to a situation where a bank experiences significant financial difficulties that threaten its viability, including capital inadequacy, liquidity shortages, deteriorating asset quality, poor management, earnings problems, and sensitivity to market risk (the CAMELS framework). Distressed banks may exhibit warning signs: high non-performing loans, declining profitability, capital ratios below regulatory minimums, excessive reliance on volatile funding, rapid asset growth without corresponding capital, and weaknesses in internal controls. The role of external auditors is to provide an independent opinion on the truth and fairness of the bank’s financial statements, detecting material misstatements (whether due to error or fraud) that could indicate distress. The role of bank inspectors (prudential examiners) is to assess the bank’s overall safety and soundness, including compliance with regulations, risk management, internal controls, and capital adequacy. Both external auditors and bank inspectors serve as “early warning” mechanisms that should alert stakeholders (shareholders, depositors, regulators) to emerging problems before they escalate into full-blown distress (CBN, 2010; Sanusi, 2010; Basel Committee, 2002).

The Nigerian banking sector has experienced several episodes of distress that have raised fundamental questions about the effectiveness of external auditors and bank inspectors. The first major banking crisis occurred in the early 1990s, resulting in the liquidation of 31 terminally distressed banks. The crisis was attributed to multiple factors: poor management, insider abuse, inadequate capital, weak internal controls, and supervisory failures. The role of external auditors was questioned because many distressed banks had received clean (unqualified) audit opinions shortly before failure. The role of bank inspectors was questioned because many distress signals were not identified or acted upon in a timely manner. The crisis led to the strengthening of the regulatory framework, including the establishment of the Nigerian Deposit Insurance Corporation (NDIC) in 1988 (which had been established earlier but gained prominence during the crisis) and enhanced supervisory powers for the Central Bank of Nigeria (CBN) (NDIC, 1995; CBN, 2000; Uche, 2001).

The banking consolidation of 2004-2005, which reduced the number of banks from 89 to 25, was intended to create stronger, better-capitalised banks that would be less prone to distress. However, the global financial crisis of 2008-2009 and the subsequent Nigerian banking crisis of 2009-2011 revealed persistent weaknesses. Despite having received clean audit opinions from external auditors, several of the consolidated banks were found to be in severe distress, requiring regulatory intervention. The CBN intervened in eight systemically important banks, sacking and prosecuting their chief executive officers, injecting capital, and establishing the Asset Management Corporation of Nigeria (AMCON) to absorb bad debts. The crisis exposed significant failures in both external audit and bank inspection: auditors had failed to detect material misstatements (including hidden non-performing loans, related party transactions, and off-balance-sheet exposures); inspectors had failed to identify deteriorating conditions or take timely corrective action (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

The statutory framework for external audit of banks in Nigeria is established by the Banks and Other Financial Institutions Act (BOFIA) and the Companies and Allied Matters Act (CAMA). Banks are required to appoint external auditors approved by the CBN, who must audit the bank’s financial statements and report to the shareholders and the CBN. The external auditors’ responsibilities include expressing an opinion on whether the financial statements present a true and fair view, in accordance with accounting standards, and whether the bank has maintained adequate internal controls. The external auditors are also required to report to the CBN any matters that may affect the bank’s safety and soundness, including suspected fraud, violations of regulations, and weaknesses in internal controls. However, the effectiveness of external auditors in detecting distress signals has been questioned, particularly given the audit failures that accompanied the 2009 crisis (Federal Republic of Nigeria, 1990; Federal Republic of Nigeria, 1991; CBN, 2010).

The statutory framework for bank inspection in Nigeria is established by the Central Bank of Nigeria Act and BOFIA, which empower the CBN to conduct regular examinations (inspections) of banks to assess their safety and soundness. The CBN’s Banking Supervision Department conducts on-site examinations (typically annual or biennial) and off-site surveillance (continuous monitoring of financial reports). The inspectors assess the bank’s capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk (CAMELS). They also review compliance with regulations, internal controls, risk management, and corporate governance. The inspectors are expected to identify emerging problems and require corrective action through supervisory letters, enforcement actions, or sanctions. However, the 2009 crisis revealed significant gaps in bank inspection: inspectors had missed or downplayed warning signs, and supervisory actions were delayed or inadequate (CBN, 1991; CBN, 2000; Sanusi, 2010).

The relationship between external auditors and bank inspectors is complementary but not fully integrated. External auditors focus on the accuracy of financial statements (historical information) and internal controls; bank inspectors focus on safety and soundness (forward-looking assessment) and compliance. External auditors report to shareholders and the CBN; bank inspectors report to the CBN and, in cases of severe distress, to other regulatory authorities (NDIC, National Assembly). External auditors are private sector professionals engaged by the bank; bank inspectors are public sector employees of the CBN. These differences create potential for coordination failures: auditors may assume inspectors will catch what they miss, and inspectors may assume auditors will catch what they miss. The 2009 crisis demonstrated that both auditors and inspectors failed to prevent distress, raising questions about the effectiveness of the overall monitoring framework (Basel Committee, 2002; CBN, 2010; Okonjo-Iweala, 2012).

The concept of audit quality is central to understanding the role of external auditors in preventing bank distress. Audit quality is defined as the probability that an auditor will both discover (detect) a material misstatement and report (correct) that misstatement. High-quality audits require auditor independence (freedom from client pressure), technical competence (knowledge of accounting standards, auditing standards, banking operations), professional scepticism (critical attitude, questioning mind), and adequate audit procedures (sufficient appropriate evidence). In the Nigerian banking context, audit quality has been questioned: auditors were criticised for lacking independence (due to long tenure, provision of non-audit services, fear of losing the client), lacking banking expertise (inadequate understanding of banking risks), and lacking professional scepticism (accepting management representations without sufficient evidence). These quality deficiencies contributed to audit failures (DeAngelo, 1981; Carcello, Hermanson, and Huss, 1995; CBN, 2010; Sanusi, 2010).

The concept of supervisory quality is central to understanding the role of bank inspectors in preventing bank distress. Supervisory quality requires inspector independence (freedom from political or industry pressure), technical competence (knowledge of banking, risk management, accounting), timeliness (prompt identification and action), and effectiveness (corrective actions that actually address problems). In the Nigerian banking context, supervisory quality has been questioned: inspectors were criticised for lacking independence (potential capture by the banks they supervise), lacking competence (inadequate training, high staff turnover), lacking timeliness (delays in conducting examinations, delays in taking action), and lacking effectiveness (weak enforcement, tolerance of non-compliance). These quality deficiencies contributed to supervisory failures (CBN, 2000; Sanusi, 2010; Okonjo-Iweala, 2012).

The incentives facing external auditors may affect their role in preventing bank distress. Auditors are paid by the banks they audit, creating a potential conflict of interest: auditors may be reluctant to qualify an opinion or report problems that could lead to the bank’s distress, because that would risk losing the client (and the audit fees). The provision of non-audit services (consulting, tax, advisory) to the same bank creates additional conflicts, as auditors may be reluctant to challenge management that also hires them for lucrative consulting work. Auditor tenure (the length of the auditor-client relationship) can also create familiarity threats, where auditors become too comfortable with management and less sceptical. In Nigeria, many of the distressed banks had long-standing relationships with their auditors (some exceeding 20 years) and had also purchased non-audit services, raising questions about independence (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

The incentives facing bank inspectors may also affect their role in preventing bank distress. Inspectors are public sector employees, subject to civil service constraints: lower pay than the private sector may lead to corruption (accepting bribes to overlook problems), limited career advancement may reduce motivation, and political interference may affect independence. Inspectors may also face pressure from senior CBN management to avoid publicising problems that could cause loss of confidence in the banking system (the “regulatory forbearance” problem). Inspectors may also suffer from “regulatory capture,” where they become too sympathetic to the banks they supervise and less willing to take tough actions. The 2009 crisis revealed these incentive problems: some inspectors were implicated in corruption (accepting bribes to falsify examination reports), and there was evidence of regulatory forbearance (not taking timely action against distressed banks to avoid triggering panic) (Kane, 2000; CBN, 2010; Sanusi, 2010).

The information asymmetry between bank management, external auditors, and bank inspectors is a fundamental challenge. Bank management has the most information about the bank’s financial condition, risk exposures, and internal controls. External auditors have less information but can gather evidence through audit procedures. Bank inspectors have access to supervisory information (including examination reports, financial reports, and other data) but may not have the same access as auditors. Management may deliberately conceal problems (through creative accounting, off-balance-sheet structures, related party transactions) or may not fully understand the risks themselves. Both auditors and inspectors rely on management representations and documentation, which may be incomplete or misleading. The 2009 crisis revealed that management in several distressed banks had engaged in extensive creative accounting and concealment, and that both auditors and inspectors had been misled (Healy and Palepu, 2001; CBN, 2010; Sanusi, 2010).

The role of internal controls in preventing bank distress is also relevant to external auditors and bank inspectors. Weak internal controls create opportunities for fraud and error, increase the risk of distress, and reduce the reliability of financial information that auditors and inspectors rely upon. External auditors are required to assess internal controls as part of their audit procedures; bank inspectors also assess internal controls as part of safety and soundness examinations. In the distressed Nigerian banks, internal controls were often weak or non-existent: lack of segregation of duties, inadequate approval processes, poor documentation, and management override of controls. Auditors and inspectors had identified some of these weaknesses but had not always insisted on remediation, and in some cases, their assessments of control effectiveness were inaccurate (COSO, 2013; CBN, 2010; Sanusi, 2010).

The role of the audit committee of the board of directors is also relevant to preventing bank distress. The audit committee, composed of independent non-executive directors, is responsible for overseeing the financial reporting process, the external audit, and internal controls. The audit committee should provide a channel for external auditors to raise concerns without management interference. In the distressed Nigerian banks, audit committees were often ineffective: members lacked financial expertise, were not truly independent (some were relatives of management or had business relationships with the bank), and did not provide effective oversight. Auditors may have raised concerns to the audit committee, but these concerns were not acted upon (CBN, 2006; SEC, 2019; Okonjo-Iweala, 2012).

The legal and professional consequences for external auditors who fail to detect distress are limited in Nigeria. Auditors may face civil liability (lawsuits by shareholders or depositors), criminal prosecution (if gross negligence or fraud can be proven), and professional discipline (by the Institute of Chartered Accountants of Nigeria, ICAN). However, the threat of litigation is low in Nigeria due to high costs, long delays, and low success rates. Professional discipline has been rare, and criminal prosecutions even rarer. In the aftermath of the 2009 crisis, no external auditors were successfully prosecuted for audit failures (though some faced professional inquiries). The lack of consequences reduces incentives for high-quality audits (Okike, 2007; CBN, 2010; Okonjo-Iweala, 2012).

The legal and professional consequences for bank inspectors who fail to detect distress are also limited. Inspectors may face administrative sanctions (demotion, dismissal), civil liability (if depositors or shareholders can prove negligence), or criminal prosecution (if corruption or criminal negligence can be proven). In the aftermath of the 2009 crisis, some CBN officials were dismissed or retired, but no criminal prosecutions of inspectors were successful. The lack of consequences reduces incentives for high-quality supervision (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

1.2 Statement of Problems

Despite the existence of external audit and bank inspection mechanisms in Nigeria, bank distress has persisted, culminating in the systemic banking crisis of 2009-2011 that required substantial regulatory intervention and public funds for resolution. The crisis revealed significant failures in both external audit (auditors issued clean opinions on banks that were subsequently found to be in severe distress) and bank inspection (inspectors failed to identify or act upon warning signs). The question of why external auditors and bank inspectors failed in their roles, and what can be done to improve their effectiveness in preventing bank distress, remains inadequately answered. The gap between the intended role of these assurance providers (detecting and preventing distress) and their actual performance (failing to prevent distress) constitutes the central problem addressed by this study (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

The first critical problem concerns the quality of external audits of Nigerian banks. Many distressed banks received unqualified (clean) audit opinions in the years leading up to their failure, despite having significant financial problems (high non-performing loans, inadequate provisions, related party exposures, off-balance-sheet obligations). The audit failures raise questions about auditor independence (were auditors too close to management?), competence (did auditors understand banking risks?), professional scepticism (did auditors accept management representations without sufficient evidence?), and audit procedures (were audits sufficiently rigorous?). The problem is that without understanding the specific audit quality deficiencies that contributed to bank distress, remedial actions (improved auditing standards, enhanced independence requirements, increased regulatory oversight of auditors) may not be targeted effectively (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

The second critical problem concerns the quality of bank inspections by the Central Bank of Nigeria. The distressed banks had been subject to regular on-site examinations and off-site surveillance, yet the inspectors did not identify the severity of the problems or did not take timely corrective action. The supervisory failures raise questions about inspector independence (were inspectors too close to the banks?), competence (did inspectors understand the complex financial structures used by banks?), timeliness (were examinations frequent enough?), and effectiveness (were enforcement actions taken and were they sufficient?). The problem is that without understanding the specific supervisory quality deficiencies that contributed to bank distress, remedial actions (enhanced training, increased examination frequency, strengthened enforcement powers) may not be effective (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

The third critical problem concerns the coordination between external auditors and bank inspectors. The CBN requires external auditors to report matters that could affect bank safety and soundness, and inspectors have access to audit reports and working papers. However, the 2009 crisis revealed gaps in coordination: auditors did not share all relevant information with inspectors, inspectors did not follow up on audit findings, and there was no systematic mechanism for sharing information or coordinating actions. The problem is that without effective coordination, the two monitoring mechanisms may operate in silos, each assuming the other is catching problems that are actually being missed (Basel Committee, 2002; CBN, 2010; Sanusi, 2010).

The fourth critical problem concerns the incentives facing external auditors and bank inspectors. Auditors are paid by the banks they audit, creating a conflict of interest: the auditor may be reluctant to report problems that could lead to bank distress (and loss of the client). Inspectors are public sector employees with potential for capture (through bribery, career concerns, or regulatory forbearance). The problem is that the current incentive structures may not align the interests of auditors and inspectors with the public interest in preventing bank distress. Without incentive reform (e.g., auditor rotation, prohibition of non-audit services, enhanced liability for audit failure, protection for whistleblower inspectors, performance-based pay for supervisors), the effectiveness of these monitoring mechanisms may remain limited (Kane, 2000; CBN, 2010; Sanusi, 2010).

The fifth critical problem concerns the consequences for external auditors and bank inspectors who fail in their roles. After the 2009 crisis, no external auditors were successfully prosecuted for audit failures, and few faced professional discipline. Some CBN inspectors were dismissed or retired, but no criminal prosecutions were successful. The lack of meaningful consequences reduces deterrence: if there are no significant penalties for failure, auditors and inspectors have less incentive to perform effectively. The problem is that without credible sanctions for poor performance (enhanced liability, professional discipline, criminal sanctions where appropriate), the quality of external audit and bank inspection may remain inadequate (Okike, 2007; CBN, 2010; Sanusi, 2010).

1.3 Aim of the Study

The specific aim of this research work is to critically examine the role of external auditors and bank inspectors in the distress condition of banks in Nigeria, with a particular focus on identifying the audit and supervisory failures that contributed to bank distress, analysing the quality of external audit and bank inspection in the period leading up to the 2009 banking crisis, evaluating the coordination between auditors and inspectors, assessing the incentive structures affecting auditor and inspector behaviour, and developing recommendations for improving the effectiveness of external audit and bank inspection in preventing future bank distress.

1.4 Objectives of the Study

1. To identify the specific audit failures (independence, competence, scepticism, procedures) that contributed to bank distress in Nigeria, focusing on the period leading up to the 2009 banking crisis.

2. To identify the specific supervisory failures (independence, competence, timeliness, effectiveness) that contributed to bank distress in Nigeria, focusing on the period leading up to the 2009 banking crisis.

3. To examine the coordination (or lack thereof) between external auditors and bank inspectors in Nigeria, including information sharing, joint assessments, and coordinated actions.

4. To analyse the incentive structures affecting external auditor behaviour (auditor tenure, non-audit services, liability exposure, regulatory oversight) and bank inspector behaviour (compensation, career advancement, political interference, regulatory forbearance) in Nigeria.

5. To develop recommendations for improving the effectiveness of external auditors and bank inspectors in preventing bank distress, including reforms to audit regulation, supervision, coordination mechanisms, and incentive structures.

1.5 Research Questions

1. What were the specific audit failures (independence, competence, scepticism, procedures) that contributed to bank distress in Nigeria, particularly in the period leading up to the 2009 banking crisis?

2. What were the specific supervisory failures (independence, competence, timeliness, effectiveness) that contributed to bank distress in Nigeria?

3. How effective was the coordination between external auditors and bank inspectors in Nigeria, and did coordination failures contribute to the bank distress?

4. How did the incentive structures for external auditors and bank inspectors affect their performance in detecting and preventing bank distress in Nigeria?

5. What recommendations can be developed to improve the effectiveness of external auditors and bank inspectors in preventing future bank distress in Nigeria?

1.6 Research Hypotheses

Hypothesis 1

H0₁: External audit failures (independence, competence, scepticism, procedures) did not significantly contribute to bank distress in Nigeria.

H1₁: External audit failures (independence, competence, scepticism, procedures) significantly contributed to bank distress in Nigeria.

Hypothesis 2

H0₂: Bank inspection failures (independence, competence, timeliness, effectiveness) did not significantly contribute to bank distress in Nigeria.

H1₂: Bank inspection failures (independence, competence, timeliness, effectiveness) significantly contributed to bank distress in Nigeria.

Hypothesis 3

H0₃: The lack of coordination between external auditors and bank inspectors did not significantly contribute to bank distress in Nigeria.

H1₃: The lack of coordination between external auditors and bank inspectors significantly contributed to bank distress in Nigeria.

Hypothesis 4

H0₄: The existing incentive structures for external auditors and bank inspectors in Nigeria did not significantly impair their effectiveness in preventing bank distress.

H1₄: The existing incentive structures for external auditors and bank inspectors in Nigeria significantly impaired their effectiveness in preventing bank distress.

Hypothesis 5

H0₅: There is no significant relationship between the quality of external audit and bank inspection and the incidence of bank distress in Nigeria.

H1₅: There is a significant relationship between the quality of external audit and bank inspection and the incidence of bank distress in Nigeria.

1.7 Justification of the Study

This study is justified by the critical importance of preventing bank distress for financial stability, depositor protection, and economic development in Nigeria. The banking crisis of 2009-2011 imposed substantial costs on the Nigerian economy: over N600 billion was injected into distressed banks, the Asset Management Corporation of Nigeria (AMCON) was established to absorb bad debts, the capital market crashed, credit to the private sector contracted, and economic growth slowed. Understanding the role of external auditors and bank inspectors in preventing (or failing to prevent) this distress is essential for reforming the audit and supervisory framework to prevent future crises. The study is further justified by the limited empirical research on the effectiveness of external audit and bank inspection in Nigeria, particularly research that combines analysis of both mechanisms and their interaction. Most existing studies have focused on either audit failures or supervisory failures in isolation, without examining how the two mechanisms interact and how coordination failures contribute to distress. This study addresses this gap by providing a comprehensive analysis of the role of both external auditors and bank inspectors in bank distress (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

1.8 Significance of the Study

This study makes significant contributions to multiple stakeholder groups with interests in banking sector stability and regulation in Nigeria. For the Central Bank of Nigeria (CBN), the study provides empirical evidence on the specific audit and supervisory failures that contributed to bank distress, informing reforms to bank inspection processes, examiner training, enforcement actions, and early warning systems. For external audit firms, the study provides insights into audit quality deficiencies that led to audit failures, informing improvements in audit procedures, independence safeguards, professional scepticism, and banking industry expertise. For the Financial Reporting Council of Nigeria (FRCN) and the Institute of Chartered Accountants of Nigeria (ICAN), the study provides evidence on regulatory and professional weaknesses that allowed audit failures, informing reforms to audit regulation, quality assurance reviews, and professional discipline. For the Nigerian Deposit Insurance Corporation (NDIC), the study provides insights into the role of deposit insurance in bank distress and the importance of coordinating with auditors and inspectors. For the National Assembly and oversight committees, the study provides an evidence base for legislative reforms to banking, audit, and corporate governance laws. For academic researchers, the study contributes to the literature on audit quality, bank supervision, and financial stability in developing economies. For international development partners (IMF, World Bank, Basel Committee), the study provides country-specific evidence to inform technical assistance and policy advice on banking supervision and audit regulation (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012; Basel Committee, 2002).

1.9 Scope of the Study

The scope of this study is delimited to an examination of the role of external auditors and bank inspectors in the distress condition of banks in Nigeria. The study focuses specifically on the period leading up to and including the 2009 banking crisis, as this was the most significant episode of bank distress in Nigerian history and provided the most evidence of audit and supervisory failures. The study examines external audit failures (independence, competence, scepticism, procedures) and bank inspection failures (independence, competence, timeliness, effectiveness). The study examines coordination between auditors and inspectors. The study examines the incentive structures affecting auditor and inspector behaviour. The study does not include other causes of bank distress (macroeconomic factors, management fraud, regulatory gaps) except as they relate to audit and supervisory failures. The study does not include other financial institutions (microfinance banks, development finance institutions, mortgage banks) except as they inform analysis of commercial banks. The study is limited to Nigeria and does not include cross-country comparative analysis, although findings may have applicability to other developing economies.

1.10 Definition of Terms

Bank Distress: A situation where a bank experiences significant financial difficulties that threaten its viability, including capital inadequacy, liquidity shortages, deteriorating asset quality, poor management, earnings problems, and sensitivity to market risk, potentially leading to insolvency, failure, or regulatory intervention (CBN, 2010; Sanusi, 2010).

External Auditor: An independent accounting firm engaged by a bank to audit its financial statements and express an opinion on whether the statements present a true and fair view in accordance with applicable accounting standards and regulatory requirements (DeAngelo, 1981; Federal Republic of Nigeria, 1990).

Bank Inspector (Bank Examiner) : An employee of the Central Bank of Nigeria responsible for conducting on-site examinations and off-site surveillance of banks to assess their safety and soundness, compliance with regulations, internal controls, risk management, and capital adequacy (CBN, 1991; CBN, 2000).

Audit Failure: The situation where an auditor issues an unqualified (clean) opinion on financial statements that are subsequently found to be materially misstated, either due to the auditor failing to detect the misstatement (technical failure) or failing to report it (independence failure) (DeAngelo, 1981; CBN, 2010).

Supervisory Failure: The situation where a bank inspector or supervisor fails to identify emerging problems, fails to take timely corrective action, or fails to enforce compliance with regulations, contributing to bank distress (Kane, 2000; CBN, 2010).

Audit Quality: The probability that an auditor will both discover (detect) a material misstatement and report (correct) that misstatement, determined by auditor independence, technical competence, professional scepticism, and adequacy of audit procedures (DeAngelo, 1981).

Professional Scepticism: An attitude that includes a questioning mind, alertness to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence, including management representations (IAASB, 2018).

CAMELS Rating: A supervisory rating system used by bank inspectors to assess the safety and soundness of banks across six dimensions: Capital adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk (CBN, 2000; CBN, 2010).

Regulatory Forbearance: The practice of regulators (bank inspectors) refraining from taking corrective action against a distressed bank, often due to concerns about triggering a panic, political pressure, or capture, even though the bank may be insolvent or likely to become insolvent (Kane, 2000).

Asset Management Corporation of Nigeria (AMCON) : A government agency established in 2010 to absorb the non-performing loans (bad debts) of distressed Nigerian banks following the 2009 banking crisis, and to manage and dispose of these assets over time (AMCON, 2015).

Related Party Transactions (RPTs) : Transactions between a bank and its related parties (directors, major shareholders, subsidiaries, associates), which require disclosure and may be subject to restrictions due to the risk of self-dealing, conflict of interest, or asset stripping (CBN, 2010; Sanusi, 2010).

Off-Balance-Sheet Transactions: Transactions or arrangements where a bank does not record assets or liabilities on its balance sheet, potentially concealing the true level of leverage, risk, or financial obligations from stakeholders (including auditors and inspectors) (CBN, 2010; Sanusi, 2010).

CHAPTER TWO: LITERATURE REVIEW

2.1 Theoretical Review

The theoretical foundation for examining the role of external auditors and bank inspectors in the distress condition of banks draws from multiple theoretical perspectives in auditing, banking regulation, corporate governance, and organisational behaviour. This section critically reviews the principal theories informing understanding of audit and inspection effectiveness, including agency theory, the audit expectation gap theory, the regulatory capture theory, the incentive alignment theory, the financial distress prediction theory, and the theory of bank supervision.

2.1.1 Agency Theory

Agency theory, as developed by Jensen and Meckling (1976), provides the foundational framework for understanding the role of external auditors and bank inspectors in mitigating agency problems in banking. The theory posits that in modern corporations where ownership is separated from control, principals (shareholders, depositors, and other stakeholders) delegate decision-making authority to agents (bank managers). This separation creates agency problems stemming from information asymmetry (agents possess more information about the bank’s financial condition, risk exposures, and managerial actions than principals) and diverging interests (agents may pursue their own interests—higher compensation, perquisites, risk-taking—at the expense of principals). The theory predicts that agents may have incentives to take excessive risks (moral hazard), conceal poor performance, or misappropriate assets, all of which can contribute to bank distress (Jensen and Meckling, 1976; Eisenhardt, 1989; Baiman, 1990).

External auditors serve as monitoring mechanisms that reduce information asymmetry by providing independent assurance that financial statements present a true and fair view of the bank’s financial position and performance. Bank inspectors (supervisors) serve as additional monitoring mechanisms by assessing the bank’s safety and soundness, compliance with regulations, and risk management practices. Both mechanisms are intended to constrain managerial opportunism and reduce the probability of bank distress. However, agency theory also recognises that monitors themselves are agents with their own interests and incentives. Auditors may have incentives to please bank management (to retain the audit engagement, to provide non-audit services), compromising their independence. Inspectors may have incentives to avoid conflict with bank management (to maintain cooperative relationships, to avoid political interference), compromising their effectiveness. The effectiveness of monitoring depends on the alignment of incentives between monitors and principals (Jensen and Meckling, 1976; Watts and Zimmerman, 1983; Adams, 1994).

In the banking context, agency problems are particularly acute. Banks have multiple principals with potentially conflicting interests: shareholders (who want high returns, often encouraging risk-taking), depositors (who want safety, encouraging conservative behaviour), and regulators (who want stability, encouraging compliance). Deposit insurance (through the NDIC) reduces depositors’ incentive to monitor bank risk-taking (moral hazard), shifting the monitoring burden to regulators and auditors. The opacity of bank assets (loans are not traded, their values are difficult to observe) makes it easier for managers to conceal problems (hidden non-performing loans, inadequate provisions, off-balance-sheet exposures). These characteristics make banks more susceptible to agency problems and make the role of auditors and inspectors more critical (Macey and O’Hara, 2003; Santos, 2001; CBN, 2010).

The agency theory framework explains why audit failures and supervisory failures occurred in Nigeria. Bank managers had incentives to conceal problems (to maintain their positions, bonuses, and reputation). Auditors had incentives to accept management’s representations (to retain the lucrative audit fee, to maintain relationships for non-audit services). Inspectors had incentives to avoid taking tough action (to avoid conflict, to avoid triggering a crisis). These incentive misalignments allowed distress to develop undetected and unaddressed. The theory suggests that improving the effectiveness of auditors and inspectors requires better alignment of incentives: auditor independence (limiting non-audit services, mandatory rotation), inspector independence (insulating from political pressure, protecting whistleblowers), and consequences for failure (liability, professional discipline) (Jensen and Meckling, 1976; Sanusi, 2010; Okonjo-Iweala, 2012).

2.1.2 Audit Expectation Gap Theory

The audit expectation gap theory, developed by Liggio (1974) and extensively analysed by the Commission on Auditors’ Responsibilities (Cohen Commission, 1978) and subsequent researchers, provides a framework for understanding the difference between what the public expects from auditors and what auditors actually do. The expectation gap has two components: the reasonableness gap (difference between what the public expects and what auditors can reasonably be expected to accomplish) and the performance gap (difference between what auditors can reasonably accomplish and what they actually do). In the banking context, the expectation gap is particularly significant because depositors and the public may expect auditors to detect all fraud and prevent bank failures, while auditors’ responsibilities are limited to providing reasonable assurance that financial statements are free from material misstatement (not to detect all fraud or guarantee bank viability) (Liggio, 1974; Cohen Commission, 1978; Humphrey, Moizer, and Turley, 1992).

The audit expectation gap contributed to the Nigerian banking crisis in several ways. The public (including depositors, shareholders, and regulators) may have had unrealistic expectations about what auditors could achieve (the reasonableness gap). More critically, there was a performance gap: auditors failed to meet even reasonable expectations. They did not detect material misstatements (hidden non-performing loans, related party transactions) that should have been detected with competent audit procedures. They did not report weaknesses in internal controls that were material. They did not exercise professional scepticism when management made representations that were implausible or unsupported. The performance gap was substantial, and it contributed to the distress by providing false assurance that the banks were in good health (CBN, 2010; Sanusi, 2010; Okike, 2007).

The audit expectation gap theory also highlights the importance of communication and education. If the public expects auditors to prevent bank distress, and auditors believe their role is only to audit financial statements, there is a disconnect that can lead to dissatisfaction and loss of confidence when banks fail despite clean audit opinions. The theory suggests that auditors need to better communicate the nature and limitations of their work (e.g., in engagement letters, audit reports). Regulators need to educate the public about what auditors do and do not do. Auditing standards need to clarify the auditor’s responsibilities regarding fraud, going concern, and internal controls. In Nigeria, the audit expectation gap has not been adequately addressed, contributing to the loss of public confidence in the audit profession following the 2009 crisis (Liggio, 1974; Humphrey et al., 1992; CBN, 2010).

The expectation gap also applies to bank inspectors. The public (including depositors, shareholders, and the National Assembly) may expect bank inspectors to identify all problems and prevent all bank failures. Inspectors cannot prevent all failures; their role is to assess safety and soundness and take corrective action, but banks can fail despite supervision. However, the performance gap for Nigerian bank inspectors was substantial: they failed to identify problems that should have been identified (given competent examination procedures) and failed to take timely corrective action. The expectation gap thus contributed to criticism of the CBN after the crisis, as the public had expectations that were not met (CBN, 2010; Sanusi, 2010).

2.1.3 Regulatory Capture Theory

Regulatory capture theory, developed by Stigler (1971), Posner (1974), and others, provides a framework for understanding how regulated firms may influence regulators to act in the interest of the industry rather than the public interest. The theory posits that regulation is not always in the public interest; rather, it may be “captured” by the regulated industry through lobbying, campaign contributions, revolving-door employment (regulators moving to industry jobs), and other influence channels. Regulatory capture can lead to lax supervision, forbearance (allowing insolvent banks to continue operating), and policies that benefit incumbent banks at the expense of consumers and the broader economy. In the banking context, capture of bank inspectors by the banks they supervise can lead to supervisory failures, contributing to bank distress (Stigler, 1971; Posner, 1974; Dal Bó, 2006).

Regulatory capture theory helps explain the supervisory failures that occurred in Nigeria before the 2009 banking crisis. Inspectors may have been captured by the banks they supervised through several mechanisms: corruption (bribes to overlook problems), career concerns (hoping to obtain employment with the bank after leaving the CBN), social capture (developing close relationships with bank management), and political capture (political pressure to go easy on banks with powerful connections). Evidence from the 2009 crisis suggests that capture occurred: some inspectors were alleged to have accepted bribes to falsify examination reports; some former CBN officials subsequently worked for the banks they had supervised; and some banks with political connections received more favourable treatment (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

Regulatory capture theory also applies to the relationship between external auditors and banks. Although auditors are not regulators, they may be “captured” by their audit clients through economic dependence (the audit fee is a significant source of revenue), familiarity (long tenure leads to close relationships), and the provision of non-audit services (consulting, tax, advisory). Captured auditors are less likely to challenge management’s accounting treatments, less likely to report problems to the CBN, and more likely to issue clean opinions on misleading financial statements. The 2009 crisis revealed evidence of auditor capture: long auditor tenure (some exceeding 20 years), significant non-audit fees, and audit opinions that did not reflect the underlying problems (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

The theory suggests that preventing capture requires structural reforms. For inspectors: limits on revolving-door employment (cooling-off periods before former regulators can work for banks), enhanced ethics and anti-corruption measures, protection for whistleblowers, and political independence. For auditors: mandatory auditor rotation (limiting tenure), prohibition of non-audit services for audit clients, enhanced independence requirements, and stronger regulatory oversight of auditor independence. Nigeria has implemented some of these reforms (e.g., mandatory auditor rotation for banks, enhanced CBN oversight of auditors), but their effectiveness in preventing capture remains to be assessed (Stigler, 1971; CBN, 2010; Sanusi, 2010).

2.1.4 Incentive Alignment Theory

Incentive alignment theory, rooted in the principal-agent literature, provides a framework for understanding how the structure of compensation, career incentives, liability, and regulatory oversight affects the behaviour of external auditors and bank inspectors. The theory posits that individuals respond to incentives: they will exert effort and act in accordance with their self-interest. To align the interests of agents (auditors, inspectors) with those of principals (shareholders, depositors, regulators), incentives must be structured so that agents benefit from acting in the principal’s interest and suffer consequences from acting against the principal’s interest. In the context of bank distress, the theory predicts that auditors and inspectors will be effective only if they have appropriate incentives (Holmström, 1979; Prendergast, 1999; Baker, 2000).

The incentive structure for external auditors includes both positive incentives (audit fees, reputation, career advancement) and negative incentives (liability for audit failure, professional discipline, loss of reputation). In Nigeria, the incentive structure for auditors may be insufficient to ensure high-quality audits. Audit fees are relatively low, reducing the incentive for extensive audit procedures. The threat of liability is low due to barriers to litigation (high costs, long delays, low success rates). Professional discipline has been rare, reducing the deterrent effect. The positive incentive of retaining the client may outweigh the negative incentives for quality when the risk of detection and punishment is low. These incentive problems contributed to audit failures in the 2009 crisis (DeAngelo, 1981; Carcello, Hermanson, and Huss, 1995; CBN, 2010; Sanusi, 2010).

The incentive structure for bank inspectors includes positive incentives (compensation, career advancement, job security) and negative incentives (disciplinary action, dismissal, criminal prosecution). In Nigeria, the incentive structure for inspectors may also be insufficient. Compensation is lower than in the private sector, reducing motivation. Career advancement depends on seniority and political connections, not just performance. The threat of disciplinary action is low; few inspectors were sanctioned after the 2009 crisis. Positive incentives for forbearance (avoiding conflict, maintaining relationships) may outweigh negative incentives for rigorous enforcement. These incentive problems contributed to supervisory failures (Kane, 2000; CBN, 2010; Sanusi, 2010).

The theory suggests that improving auditor and inspector effectiveness requires reforming incentives. For auditors: enhanced liability (making it easier for stakeholders to sue auditors for audit failure), increased regulatory oversight (more frequent quality reviews), professional discipline (meaningful penalties for substandard audits), and mandatory rotation (reducing the incentive to retain the client). For inspectors: performance-based pay (rewarding effective supervision), protection for whistleblowers (encouraging reporting of problems), enhanced liability (holding inspectors accountable for gross negligence), and removal of political interference (insulating the CBN from political pressure). Nigeria has implemented some incentive reforms, but further reforms may be needed (Kane, 2000; CBN, 2010; Okonjo-Iweala, 2012).

2.1.5 Financial Distress Prediction Theory

Financial distress prediction theory, developed by Altman (1968), Beaver (1966), and others, provides a framework for understanding the financial ratios and warning signals that predict bank failure. The theory identifies key financial indicators that discriminate between healthy and distressed firms: profitability ratios (return on assets, return on equity), liquidity ratios (current ratio, quick ratio), leverage ratios (debt-to-equity, capital adequacy), activity ratios (asset turnover), and growth ratios (asset growth, loan growth). The theory also recognises that non-financial factors (management quality, governance, internal controls) are important predictors of distress. In the banking context, the CAMELS framework (Capital adequacy, Asset quality, Management quality, Earnings, Liquidity, Sensitivity to market risk) is the standard supervisory framework for predicting distress (Altman, 1968; Beaver, 1966; Sinkey, 1975).

Financial distress prediction theory has important implications for the role of external auditors and bank inspectors. Both should be able to identify the warning signals of distress: declining capital adequacy, increasing non-performing loans, deteriorating management quality (poor strategic decisions, weak internal controls), declining earnings, liquidity problems, and excessive sensitivity to market risk. If auditors and inspectors are competent and diligent, they should be able to identify these warning signals before the bank fails. The 2009 crisis in Nigeria revealed that auditors and inspectors failed to identify or act upon distress signals that were present in the distressed banks (CBN, 2010; Sanusi, 2010).

The theory also addresses the challenges of distress prediction. Financial ratios may be manipulated through creative accounting (the distress signals are hidden). Non-financial factors (management quality, governance) are difficult to measure objectively. Banks may have incentives to conceal distress signals. Auditors and inspectors may face time pressure, resource constraints, and management pressure that reduce their ability to identify distress signals. In Nigeria, some of the distressed banks had used creative accounting to hide non-performing loans, related party transactions, and off-balance-sheet exposures. The auditors failed to detect these manipulations, and the inspectors failed to look beyond the manipulated numbers (CBN, 2010; Sanusi, 2010).

The application of financial distress prediction theory to Nigeria suggests that auditors and inspectors need to be trained in the specific distress predictors for banks (not just general financial ratios), need to be sceptical of management representations, need to use non-financial information (customer complaints, media reports, market intelligence), and need to act promptly when distress signals are identified. The theory also suggests that early warning systems (automated surveillance of financial reports) can assist auditors and inspectors, but human judgment is still required (Altman, 1968; Sinkey, 1975; CBN, 2010).

2.1.6 Theory of Bank Supervision

The theory of bank supervision, developed by Dewatripont and Tirole (1994), Freixas and Rochet (2008), and others, provides a framework for understanding the role of bank supervisors (inspectors) in ensuring the safety and soundness of the banking system. The theory recognises that banks are special because they are subject to runs, their failures have externalities (contagion, systemic risk), and they are opaque (difficult for outsiders to assess). Bank supervision serves several functions: prudential regulation (setting capital and other requirements), monitoring (on-site examinations and off-site surveillance), enforcement (taking corrective action when problems are identified), and crisis management (resolving failed banks). The theory also recognises that supervisors face trade-offs: being too tough may reduce bank lending and economic growth; being too lenient may allow problems to accumulate and lead to crises (Dewatripont and Tirole, 1994; Freixas and Rochet, 2008; Barth, Caprio, and Levine, 2004).

The theory of bank supervision has important implications for the role of bank inspectors in Nigeria. Inspectors must have the authority to access information, the resources to conduct examinations, the expertise to assess complex banking activities, and the independence to take enforcement actions without political interference. The 2009 crisis revealed that Nigerian bank inspectors lacked some of these prerequisites: resources were insufficient (too few examiners relative to the number and size of banks), expertise was lacking (inadequate training in complex banking activities, especially off-balance-sheet exposures and derivative instruments), and independence was compromised (political pressure to forbear, capture by banks). These deficiencies contributed to supervisory failures (CBN, 2010; Sanusi, 2010; Okonjo-Iweala, 2012).

The theory also addresses the interaction between bank supervision and external audit. Supervisors can rely on external audits as a source of information, but they cannot delegate their responsibility to auditors. Auditors report on financial statements; supervisors assess safety and soundness. The two functions are complementary but not substitutable. Supervisors need to evaluate the quality of audits and use audit findings in their assessments. In Nigeria, the relationship between the CBN and external auditors was not sufficiently integrated; inspectors did not always follow up on audit findings, and auditors did not always report material matters to the CBN as required (Basel Committee, 2002; CBN, 2010).

The theory suggests that improving bank supervision in Nigeria requires enhancing the resources, expertise, and independence of the CBN’s Banking Supervision Department. It also requires strengthening the coordination between bank supervision and external audit, including regular meetings between inspectors and auditors, sharing of information (including audit working papers), and joint assessments of bank condition. The CBN has implemented some of these reforms following the 2009 crisis, including increased staffing of the Banking Supervision Department, enhanced training for examiners, and the establishment of a unit to review audit quality (Dewatripont and Tirole, 1994; Basel Committee, 2002; CBN, 2010).

2.2 Conceptual Framework

The conceptual framework for this study specifies the relationship between external auditors and bank inspectors (independent variables) and the distress condition of banks (dependent variable), with mediating and moderating variables that affect this relationship. The framework identifies the key attributes of audit quality, inspection quality, coordination quality, and the environmental factors that influence effectiveness.

2.2.1 Independent Variables

The first independent variable is external audit quality, defined as the probability that the external auditor will both discover (detect) and report (correct) material misstatements in the bank’s financial statements that could indicate or contribute to distress. Audit quality is measured across four dimensions: independence (freedom from client pressure, measured by auditor tenure, proportion of non-audit fees, audit committee effectiveness); competence (technical knowledge and skills, measured by auditor qualifications, industry expertise, continuing professional education); professional scepticism (critical attitude, measured by documented challenge of management estimates, use of independent evidence); and audit procedures (adequacy of evidence, measured by extent of testing, sample size, analytical procedures) (DeAngelo, 1981; Carcello, Hermanson, and Huss, 1995; CBN, 2010).

The second independent variable is bank inspection quality, defined as the effectiveness of the CBN’s Banking Supervision Department in identifying and addressing problems that could lead to bank distress. Inspection quality is measured across four dimensions: independence (freedom from political and industry pressure, measured by political interference, corruption allegations, revolving-door restrictions); competence (technical knowledge and skills, measured by examiner qualifications, training hours, experience); timeliness (frequency and timing of examinations, measured by examination frequency, lag between examination and report, speed of corrective action); and effectiveness (impact of corrective actions, measured by remediation rates, compliance with enforcement orders) (Kane, 2000; CBN, 2010; Sanusi, 2010).

The third independent variable is auditor-inspector coordination, defined as the quality of information sharing, joint assessments, and coordinated actions between external auditors and bank inspectors. Coordination is measured across three dimensions: information sharing (whether audit reports, working papers, and findings are shared with inspectors; whether examination reports are shared with auditors); joint assessments (whether auditors and inspectors meet regularly, discuss bank condition, coordinate plans); and coordinated actions (whether enforcement actions and audit qualifications are aligned, whether remediation plans are coordinated) (Basel Committee, 2002; CBN, 2010).

2.2.2 Dependent Variable: Bank Distress

The dependent variable is bank distress, defined as a situation where a bank experiences significant financial difficulties that threaten its viability. Bank distress is measured using the CAMELS framework: Capital adequacy (capital-to-risk-weighted-assets ratio, Tier 1 capital ratio, leverage ratio); Asset quality (non-performing loan ratio, loan loss provision coverage, concentration risk); Management quality (management ratings from examinations, internal control weaknesses, corporate governance deficiencies); Earnings (return on assets, return on equity, net interest margin); Liquidity (liquidity ratio, loan-to-deposit ratio, reliance on volatile funding); Sensitivity to market risk (interest rate risk, foreign exchange risk, market risk capital charge). A bank is considered distressed if it meets any of the following conditions: capital ratio below regulatory minimum, NPL ratio above regulatory threshold, regulatory intervention (cease and desist order, capital injection, management change), or failure (liquidation, acquisition under duress, transfer to AMCON) (CBN, 2010; Sanusi, 2010; Sinkey, 1975).

2.2.4 Representation of the Conceptual Framework

The conceptual framework can be represented as follows:

Independent Variables

• External audit quality (independence, competence, scepticism, procedures)
• Bank inspection quality (independence, competence, timeliness, effectiveness)
• Auditor-inspector coordination (information sharing, joint assessments, coordinated actions)

Moderating Variables

• Bank complexity
• Bank governance quality
• Regulatory environment
• Economic conditions

Dependent Variable

• Bank distress (CAMELS: Capital, Asset quality, Management, Earnings, Liquidity, Sensitivity)

The framework guides the empirical investigation of the role of external auditors and bank inspectors in the distress condition of banks in Nigeria, directing attention to specific attributes of audit quality, inspection quality, coordination, and their effects on bank distress.

2.3 Summary of Literature Review in Tabular Format

Author(s) and Year	Strengths of the Study	Weaknesses of the Study	Limitations of the Study	Gaps Identified
Jensen and Meckling (1976)	Developed agency theory; foundational framework for understanding monitoring and control; explains demand for audit	Assumes rational self-interest; limited attention to ethical or trust-based governance	Theoretical framework with extensive applications but primarily in US corporate context	Application to Nigerian banking not examined; auditor independence in Nigerian context not analysed
Liggio (1974); Cohen Commission (1978)	Developed audit expectation gap theory; explains public dissatisfaction with audit; identified reasonableness and performance gaps	Focused on developed economies; may not fully capture developing economy dynamics	Theoretical and empirical development in US context; limited application to banking	Application to Nigerian banking audit expectation gap not examined; expectation gap in banking regulators not analysed
Stigler (1971); Posner (1974)	Developed regulatory capture theory; explains how regulated firms can influence regulators	Focuses on US regulatory context; may not fully capture developing economy political economy	Theoretical framework with empirical testing primarily in US	Application to Nigerian bank inspection capture not examined; capture of CBN supervisors not analysed
DeAngelo (1981)	Developed audit quality framework; defined audit quality as probability of detecting and reporting misstatements	Focused on auditor size as proxy; may not capture all dimensions of audit quality	Theoretical and empirical development in US context; limited application to banking	Application to Nigerian banking audit quality not examined; dimensions of audit quality for banks not specified
Altman (1968); Beaver (1966)	Developed financial distress prediction models; identified ratios that predict failure; widely used in practice	Based on US manufacturing firms; may not fully apply to banks or developing economies	Empirical models developed in US context; need to validate for other contexts	Application to Nigerian banking distress not examined; distress predictors for Nigerian banks not identified
Dewatripont and Tirole (1994)	Developed theory of bank supervision; explains functions of supervision and trade-offs	Theoretical framework with limited empirical testing; developed in European context	Theoretical framework with limited empirical validation	Application to Nigerian bank supervision not examined; effectiveness of CBN supervision not analysed
CBN (2010); Sanusi (2010)	Official CBN accounts of banking crisis; detailed analysis of causes and failures	Official perspective may understate CBN’s own failures; limited independent analysis	Case study with limited generalisability; Nigeria-specific	Independent analysis of audit and supervisory failures not provided; comparison with other countries not made
Basel Committee (2002)	International guidance on auditor-supervisor relationship; identifies best practices	Guidance document with limited empirical basis; not Nigeria-specific	International guidance not tailored to Nigeria	Application to Nigerian context not examined; implementation of guidance in Nigeria not assessed
Macey and O’Hara (2003)	Analysed corporate governance of banks; identified special agency problems in banking	Theoretical analysis with limited empirical testing; US focus	Theoretical framework with limited empirical validation	Application to Nigerian banking governance not examined; agency problems in Nigerian banking not analysed
Kane (2000)	Analysed regulatory forbearance and incentive problems in bank supervision	Based on US savings and loan crisis; may not fully apply to Nigeria	Case study with limited generalisability	Application to Nigerian regulatory forbearance not examined; incentive problems of Nigerian inspectors not analysed
Okike (2007)	Analysed corporate governance in Nigeria; identified weaknesses in audit and governance	Pre-crisis analysis; does not capture 2009 crisis lessons	Single-country study with limited generalisability	Post-crisis audit effectiveness not analysed; role of auditors in crisis not examined
Watts and Zimmerman (1983)	Connected agency theory to auditing; explained demand for audit services	Developed in US context; limited attention to developing economies	Theoretical framework with empirical testing in US	Application to Nigerian audit demand not examined; audit of banks not specifically addressed