I'm no expert by any stretch but, from what I've gathered after having experienced a couple of sound failures myself, is that the speakers I've found that are suitable for custom N scale loco installs....say 8x12mm or 9x16mm (8 ohm) ones...are typically rated at .5W (.7W max) or .7W (1W max). Sound decoders, on the other hand and if I understand it correctly, often provide more than these speakers are rated when at full volume and can over-drive them, leading to sound distortion or a complete failure of the speaker and/or the decoder's amp. With the failures I've encountered, it began with increasing distortion and crackling as you described. I have since learned to turn the volume down quite a bit before firing up an install for the first time.
On my LokSound installs, when I'm using a 1W max, 8 ohm speaker, I now start with the master volume setting at around 120 (as opposed to the default setting of 192...which according to my LokProgrammer is 150% volume) and will then run up the prime mover for a few minutes with the bell and horn sounding frequently to check for any signs of distortion, crackling or excessive heating. I may bump the volume up or down from there some, depending on the outcome, but a master volume setting starting around 120 (or 93.75% volume per the LokProgrammer) has been working pretty well for me and sounds pretty good (your mileage may vary). I'll also turn some of the individual sound volumes in addition to the master volume, as I find the bell, random comressor or spitters are typically set way too high. I think there's a few different factors that can have a bearing on where volumes can be set, including the sound recordings themselves, making each install unique. All this said, I don't know what the S2's speaker is rated at or what the default master volume setting is.
