CHECKING DISTRESS IN THE NIGERIAN BANKING SECTOR: THE ROLE OF ACCOUNTANTS AND AUDITORS

CHAPTER ONE

BACKGROUND TO THE STUDY

1.1  INTRODUCTION

Distress in the Nigerian banking sectors is a problem that bank has in this recent time.  This seems as if the regulatory authorities appeared to be fighting a losing battle to sanitize the system. Ebtiodaghe (1996) observed that banking distress occurs when customers were unable the loss of their deposits and consequent breakdown of their contractual obligation.  The central bank fails to meet its capitalization requirements, has a weak deposit base and is afflicted by mismanagement.  Aderiu (1997) said that distress in banks I based on the banks examination rating system with the word “CAMEL” that is C=capital adequate, A = Asset quality, Management competence, E = earning strength, L = Liquidity sufficiency. The above mentioned is the aggregate areas that really qualifies a bank to be branded “ healthy or sick”. A bank is considered healthy by the CBN if it maintains six criteria for instance capital paid up capital, sound management i.e bank meeting up with CBN rules, satisfy customers and shareholders interest, minimum liquidity of 30% not less than 10% of its liquid assets to be in treasury bill and certificates.  In a situation where a bank defaults in one or few of the above criteria and fails to rectify its default position within a month, it is indeed qualified to be classified as distressed. Where banks is unable to service its fixed costs, meet it debts obligations to its stakeholders has a net cash greater than its capital and can no longer operate profitably, the bank is deemed to have failed. Thus a failed banks is a bank which is unable to meet its obligations to its stakeholders as at when due arising from weakness in its financial, operational and managerial conditions. The failed bank decree also defined “failed bank” as a bank whose license has been taken over by the CBN.  Due to the inability of the regulatory authorities to bring back some of these distressed bank which failed eventually,  the only way left in order to sustain public confidence and stability of the system is to revoke their licensed put them on  liquidation. Regrettably this has been the fate of some distressed banks in the country.  Almost 36 banks are on distress.

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