DRIVERS OF AUDIT FAILURE AND FRAUDULENT FINANCIAL REPORTING: EVIDENCE FROM NIGERIAN DISTRESSED BANKS

Abstract

This study examined the drivers (prime facilitators and the motivations) of fraudulent financial reporting and audit failures in distressed Nigerian distressed banks. The study carried out an analytical review of literature that includes previous empirical studies, reports of investigations of the Nigerian Banks by Financial Regulatory Agencies and content analysis of the audited financial statements of the distressed banks. The major findings of this study are that the Audit failures that featured in the distressed banks were driven by the overwhelming influence of the board over their auditors. The board through the purchase of their ‘desired’ poor audit quality’ at high cost, exposed the auditors to economic bonding which compromised their independence and facilitated the issuance of favourable/unqualified audit opinion on the board’s fraudulent financial statements that covered up the boards unethical management practices and material irregularities that undermined the going concern prospects of the banks. The auditors favourable opinions were proved to be untrue, thus resulting in Audit failures. The policy implications of the inferences from this study is that the Nigerian legal and corporate accounting and auditing framework require the fundamental re-engineering of its rules and structure so as to shield auditors from the undue influence of the boards, checkmate the excesses of the executive directors through the upward review of the proportion of non-executive directors on boards, while also providing adequate control over the periodic upward review of audit fees.