The Role of Accountant in Managing and Liquidating Distressed Banks

THE ROLE OF ACCOUNTANT IN MANAGING AND LIQUIDATING DISTRESSED BANKS

 The issue of failure/distress in banks has became a major source of concern to the government, the regulation of financial institution and to the general public because of the genitives role the banking industry plays in the determination of an economy, its present state quarries the government and people of Nigeria.

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There are some factors leveled out to  be the causes of distress in our banks, which may include management related factors such as portfolio and the like, ownership related factor as lack of adequate knowledge, political consideration, inadequate catalyzing, over depending on banks and the like, are also noticeable causes of distress in banks.

There are some corrective measures/remedies that could be adopted to prevent bank distress.  These measure include instituting active and informed boards having competence management teams, enduring improved loan recovery strategies having effective internal audit among others.

However, the accountant has some management and liquidating role to play in a distressed bank.  This function will be looked into as we proceed in the study.

• THE ORIGIN OF MODERN BANKING

Banking and its rudimentary nature has been in existence from ancient times to establish this points, Anyanwa Okoro (1996:6) observed that “in the memory chargers I the temple of Jerusalem mention was also made of silver coins that had the linage of Caesar which was presented to Jesus Christ” concerning this coin Jesus said give to Caesar what belongs to Caesar.

In the parable of ten talents Jesus Christ explained how the master of a lazy servant rebuked the servants for no banking his money.  He specifically asked that servant “why didn’t you deposit the money in the bank so that I could at least get some interest on it! (Luke 19 verse 23).

From the above statement of Jesus Christ whom we can regard as the first lecturer of banking, it can be established that as at the time he made that statement about 2000 years ago, the following factor were true:

1. There was a body that regulated the issue of currency since coin had the image of Caesar, there was a rudimentary central bank
2. Banks were receiving money on deposit from customers
3. Banks by then already paying interest on deposits
4. Banks were already paying using their customers deposit for loan and other investment otherwise they wouldn’t be able to pay interest on other depositors
5. Banks (money excahnger0 in the temple of Jerusalem helped to exchange money. This was a rudimentary form of foreign exchange service of banks.

The foregoing truths about the origin of banking business not withstanding, many authorities believe that modern banking originated from ancient goldsmiths of London.  Although the London was not among the known world in bible times, we will still discuss that version because its present to us the basic principles guiding the operation of modern banking.

According to the London Goldsmiths version modern banking began when gold was being used as money.  In those days, goldsmiths had strong vaults because of the nature of their business people therefore found it safe to keep (deposit) their money with the goldsmiths.  Goldsmiths were initially paid for such service.  They issued gold receipts to their depositors, which were used to reclaim their money.

Later on, people found it convenient to transfer those gold receipts by endorsing it as a means of payment with time, goldsmiths began to issue receipts without specifying the owners name and in various denomination.

This helped the gold receipt to circulate freely as paper money.  Not may people came back to claim their gold since they could by whether they wanted with those receipts.

This left the goldsmith  with much idle funds.

Since only few people came for a refund of their gold deposit, the goldsmiths learnt from experience to keep only a fraction of those deposits and give out rest of the money loans.  This is the origin of modern fractional reserve banking.  According to Samuelson (1982:274 – 286) this was possible because as long as public confidence was retained by the particular goldsmith, it became clear by experience that at no time would their customer came at the same time to withdraw all their funds.  This brings out the importance of public confidence in banking.

The goldsmiths went into lending, they discovered that they made more profits from their lending business than the commissions they received for safekeeping of gold and their smiting business they, therefore, turned round and began to pay those depositors interest on the deposits, and in cent to encourage them to continue to deposits, gold with them, this they were paying interest as means of buying their major raw material for banking business that is money.  This marked the beginning of lending activities of banks.  When those goldsmiths discovered that lending was very profitable they abandoned deposits collection and lending.  That was how modern banking originated.

• NATURE OF BANKING

There are certain distinctive features of banking business,

which make banking more challenging than any other business.  The firs is high level of leverage financing, banking is a highly leverage industry. Leverage financing refers to the use of borrowed money (other people’s money) in financing a business.  A greater percentage of the funds used in running a bank come from custom deposit.  This means that the equity capital o bank is usually small compared to bank asset. On the average, only about eight percent of bank asset is financed by the others (shareholder).

The next distinctive feature of banking is the high voluntary of bank liabilities and assets Lucett (1984 – 89) observed I the regarded that most of the liabilities of banks are people’s money but also these other people can come for their money any business day.  Most assets of a bank are also volatile ad interest sensitive loan and advances, which constitute the major assets of the bank, are subject to the risk of non-repayment.  This risk of not on demand.  The assets liabilities of other businesses are not as volatile as those of banks.

• HISTORY AND DEVELOPMENT OF BANKING IN NIGERIA

According to “Element of banking” a textbook by Dr. John Orijh, modern banking in Nigeria dates back to the early colonial period.  The decline in barter system of trade and the rise in financial transactions of the colonial government required as institution in the form of a commercial transaction of the colonial government required an institution in the form of a commercial bank for the safety and easy transaction of funds, it was for this purpose that African banking corporation based in South African was invited in 1892 to open a branch office in Lagos.  The African banking Corporation was therefore the first modern commercial bank to open branch office in Lagos but its existence was made precious by the trade depression, which hit Lagos in that year.

I the year 1894 its operation was taken over by the bank of British West Africa.  In 1899; the bank of Nigeria and exercised monopoly over banking in Nigeria.  In the year 1925 the Ber-days bank stated operation in Nigeria, other colonial banks joined in the later years.

Umole Joe .A. in his text titled “Monetary 4^th September 1960:  This was followed by the Nigeria acceptance, on 25^th November 1960 between 1960 and 1961 there two banks operated in Nigeria.

Again banks are also the most regulated of all financial instance.  The high of regular distinguishes banking form other financial institutions.  Almost all aspect of banking is regulated.  Banks do not have free hand to decide what amount of capital to start business with, how to invest its funds, who to give credit and to what extent, when to pay divided and how much among other regulated as much.

The obligation of profitability and liquidity are said to be conflicting because those assets of a bank that provide maximum profitability such as loan and advance are the most liquid assets will the asset that provide maximum liquidity (the cash balance) do not yield and profit.  This creates a dilemma for banks allocating bank fund.  If a bank decided to please the interceptor by intestine, all the fund in a loan and advance, the depositors will be offended.  This will mean satisfying high quality at alter of profit ability.  If on the other hand it decides to leave all its funds as idle cash balances so as to please depositors, investor will pick offense because profitability is being scarified at the alter of high quality.

There is always a relationship between profitability and liquidity.  An increase in one leads to a decrease in the other as the only license merchant bank.  In the year 1969, the two bank merge to form the Nigeria.  Acceptance limited (NAL merchant bank limited) the merge was restarted as a result of limited activities for he individual banks NAL merchant bank in Nigeria until 1973,   trust bank Limited which was licensed in fully 1973 and later changed it name to UDI limited having been licensed as merchant abk in April 1^st 1974.

In “the review of Central bank is under developed money merchant” by SENSN, it started that with the introduction of international trade and the expansion in the scope of internal trade, there because the need fort monetary control authority in Nigeria.  Following the recommendations of Emmot Committee, the West African currency Board (WACM) was set up in the year 1912 to issue currency for four British West Africa Colonials the board issued money called the West Africa pound, which was used, in the following countries, Nigeria, Ghana, the Gambia and Sierra Leon.

The quality of service rendered by the West Africa Currency Board was not satisfactory to Nigerians especially the nationalist who wanted indigenous Central bank of Nigeria.

According to Dr. John Orijh in “Element of Banking”, the disadvantages of West Africa currency board coupled with the bank failure of the 1950’s prompted the nationalist to request for the establishment of central bank in Nigeria.

a term of the world bank came out in investigation in the year 1955 and recommendations were not implanted.

It was the 1957 report of J.B Cyons of the bank of England that poved way for the establishment of the Central bank of Nigeria.

The Central Bank of Nigerian Act was passed on 15^th May, 1958 and became operational on 1^st July 1959 with an authorized capital of million of which N1.25 million was paid up.

 

• HOW NIGERIA BANKING SYSTEM OPERATES

Sen .S.N. in his work “Capital Central Bank in under

developed money market “defined Central Bank as the APOC financial institution, which is charged with the responsibility of managing the cost, volume availability and direction of money nd credit in an economy with a view to achieving some deserved economy objective.

Doctor John Orjih in “Element of Banking” stated that there become the need for a monetary Central authority in Nigeria with the introduction of international and expiration of internal trade.

However, it should be noted that as the Apex financial institution, Central Bank in Nigeria according to the Guardian “volume 14 August 1997” issues guidelines on banking operations.

These guidelines are a sort of control impose by Central Bank through the use of the following bank rate.

–        open market operation

–        Legal reserve ratio

–        Liquidity ratio

–        Special deposits

–        Directives and

–        Moral suasion

 

in as much as the central bank in Nigeria has issued guideline are obligated to function as accordance with this guideline.  Failure on their will result to contravention of central bank of Nigeria act of 1988.

Commercial and other banks render some functions to the public such as:

Deposit acceptance

Granting of loan

Overdraft facilities

Agency services

Safe custody facilities

Cash credit facilities

Providing status report

Rendering investment advice foreign exchange facilities

Executor function

Buying and selling of share to customer loan syndication

Securities under writing

Private placing of securities

Investment advice

Portfolio management

Mergers and acquisition

Equipment leasing

Acceptance of banking

Medium and long term loan

Feasibility studies

Export promotion scheme and find hire purchase

Hire purchase

• DISTRESS IN BANK

ICAN News volume 2 1992 reports that inadequately, distress is a function of banking behaviour it shows that bank, like national human beings can also show signs of ill health and would head the services of a medial turn of management specialists, financial and investment analysis.

Accountants, mentioning specialist, technocrats and human resources psychologist and humans.

Going by the assessment report of NDIC, banks seen to became distressed on daily basis for instance, between much and December, 1994 16 banks were distressed another remarkable failure is the ration of non-per forming loans advances and losses, which is 62.5%.

WARNING SIGNS OR SYMPTOMS OF DISTRESS BANKS

This most reliable technical/professional perimeter or rating that can serve as warning signs or the symptoms that is in distresses are as follows:

1. LIQUIDITY PROBLEM SIGN

          When a bank is always liquid, it is a warning sign that the bank is getting distressed such a always borrow at high inter bank rates.  It will rest of the time, also desperately recall its loan sometimes before maturity. To say the least, persistent liquidity for a long time is a conclusive signal that the bank is distressed fro a layman, a situation when he gives to his bank and he is told either to come the next day or give part payment a promise for full payment the next day is an in ex that bank is tending towards insolvency.

2        CAPITAL INADEQUATE SIGNS

           Broadly speaking the capital of a bank is defined as the shareholders fund plus all long-term funds at the disposal of the bank for business.  From the narrow perspective, capital of the bank is the shareholders fund that is all equity funds of the banks.

In this context of capital indecency we must confine ourselves to eh narrow definition of capital indency that can become evident in the following ways:

1. Shareholder and equity fund are increasing decreeing as a result of losses they are fund
2. There is a study decline in retained earning relative to equity
3. There is a increasing decrease inequity capital relative to total assets
4. There is a decrease in capital base relative to risk assets is loan and a don. There are the total risk exposures of the bank
5. There is a decrees in reserves relative to total loan

3. ASSET QUALITY SIGNS

This symptom is otherwise refund to as the unmability signs because it exposes the bank of failure.  The symptoms are show by increase in bad debt.

Other evidence of bad asset quality sign are:

1. There is an increase in loan losses
2. There is a high decrease in interest earning assets
3. There is usually an increase provision for bad debt
4. There is usually an increased speculative of leading of venture capital exposures.

Also a bank can be declared distressed when it is not able

To meant rations commonly used to measure slovenly are:

1. total capital to total profit assets
2. total capital to total loan and advance
3. dividend to profit after tax
4. equity capital to total assets
5. total capital to total assets
6. total capital to total task adjusted assets

CHARACTERISTICS OF DISTRESSED BANKS

Persistent liquidity

Disproportional operating lost

Accelerated deterioration of portfolio very

Show loan recovery rates

Desperate management

Soaring deposit rates

Rising of lending rates

Undisclosed negative net worth

• POSSIBLE CAUSES OF DISTRESS IN BANKS

The Central Bank is a circular by the director of banking

supervision, Mr. G.A. Oguneye reported that survey revealed that the industry operators had not grasped the proper understanding and uses of banks.

In analyzing the cause of distress in banks, it will be grouped under the following:

1. exogenous causes of bank distress
2. exogenous causes of failure in banks

 

EXOGENOUS CAUSES OF BANK DISTRESS

1. MACRO ECONOMIC INDUSTRY: According to Central bank of Nigeria annual report, the performance of any economy has a direct impact of the financial sector.  Since the introduction of SAP in 1985, the nation has witnessed a lot of consistent and fluent changes in macro economic policies for instance, before SAP, interest rate were fixed again in 1991 just to liberalized a year later.

 

1. DEFICIT FINANCING

The levels of fiscal deficits financial by the banking sector have the effect o “high injector of fucling the inflationary trend, exchange rate depreciation ad under pressure of domestic level and balance of payment.

 

 

1. INFLATION

The high inflationary trend in Nigeria is a direct consequence of the huge deficit financing by the government.  It has also led to the present poverty level in Nigeria.  Other effects of inflation in the economy can be summarized as follows:

1. It destroy confidence in the economy
2. It makes the operation of financing markets

Particularly difficult by impairing the possibility of rising debt instrument mortgages and dealing in secondary market there the reducing the financial option open to companies.

3. There is a misallocation of resources with investment on protective assets rather than productive assets

 

1. UNDISCLOSED NEGATIVE NET WORTH

The distressed banks generally and in term are operating at a

loss due to change proportion of non-performing loans.  The management had taken into income interest on non-performing loans.

1. NON-DIVERSIFICATION OF PORTFOLIO

The central bank of Nigeria usually provides the guide-lines

for the distribution of bank credit facilities sectorally for even distribution and diversification of loans and advances.  Some banks get involved in high risk bearing advances at the expenses of law yielding but secured leadings.  This leads to non-diversification or portfolio.

 

ENDOGENOUS CAUSES OF FAILURE IN BANKS

1. LACK OF EXPERIENCE/ADEQUATE PERSONNEL

As the rapid expansion in the banking industry began in the mid 80’s, the expansion was not match with adequately experienced and trained personal to cope with it.

1. FRAUD FORGERIES AND INSIDER ABUSE

Frauds, forgeries and insider abuse have became very rampant in the banking sector because of the straggling volumes involved.  They have contributed in no small way in rendering the banks insolvent.

1. PASSIVE PARTICIPATION BY BOARDS

The board members of some of the distressed banks are so passive that they do not participate actively I the articulation of some strategic plans for the banks such members are rather more interested in collecting their allowance and other financial benefits that may accrue to them.

 

1. POOR LOAD ADMINISTRATION

Poor loan administrative have created the greatest internal problem for Nigeria banks.

The staggering volume of non-performing assets or bad debt recanting from poor loan administration has left many banks in precarious financial situations many directors and management staff have used their position to tend their private companies friend and relative without going through the due process of appraisals.  Some loans are granted on speculative criteria.

 

• MANAGEMENT ROLE OF ACCOUNTANTS IN DISTRESSED BANKS

The evolutionary process of accounting heated in proprietors

the need to safeguard corporate funds.  The professional accountant.  There evolves measures to eliminate wastage to step pilferage and to control fraudulent practices and unlawful diversion of properties in banks “the accounting professional dynamic business environment” a speech delivered by price Adanike Adeniran, IACN president on July 24, make if express “that important role played by the accountant in a distress bank in general scheme of business firm actively involved in wealth creation of financial institution of every description which lubricate the wealth creation process in government and other national institution which provides the needed basic in frastructure and macro.

The American Accounting Association had in the same vein in 1918 stated that “it is important to realize that accounting, if it wishes to be of maximum value to the society must not follow it is own independent course of action, but should continue to agree itself to the objectives of the socio – economic environment” however, the professional accountant is skilled as an analyst but should be more talented in conceptualizing.

 

• THE ROLE OF AN ACCOUNTANT AS A LIQUIDATOR IN DISTRESS BANK (NDIC DECREE)

Failed banks recovery of debts and financial malpractices I

banks decree No.18 1994) and stated that a professional in distressed banks, provided that he is not disqualified under 5.509 and 510 note that an accountant can also be disqualified from acting as a liquidator if he is not in position to act independently.

As a matter of fact an accountant owns general duty to maintain an impartial attitude between all those who have any interest in the asset of the distressed bank.

It is the role of accountant as a liquidator to take into his custody, or under his, control, all the property and close in action to which the bank is or appears to the entitled.

(S.423) it is also his duty to settle the list of contributories in accordance with the status.

1. To collect the assets of company and apply them in the discharge of its liabilities (S.439 (1)).
2. To distribute surplus assets among the members according to their right (S.446).

iii.      To keep proper books as required by law

1. To send to the commission, at prescribe intervals, a prescribed statement of the proceeding and position of the liquidation where it is not conclude within a year (S.516).
2. To pay into the bank liquidation accounts any money presently unclaimed or undistributed after six months of their receipts. On such payment, the liquidator will receive a certificate (S.516(4)

• To give the official receiver such information ad access to and facilities for suspecting the books and documents of the company and generally and aid required enabling him to perform his duties in relative to the liquidation (S.426).

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