Audit quality indicators in Islamic banks : a comparative study among selected muslim majority countries

Abstract

Corporate scandals, fraud and the credibility of firms’ financial statements depend on the level of audit quality provided by the audit firm. The financial statements are a tool in discharging management’s responsibility towards the principal. However, there exists a possible conflict of interest between management and shareholders. Therefore, the auditing process is needed to verify that the financial statements are in conformity with accounting standards and also reflect the economic reality of company’s transactions and financial performance. Auditors are responsible for the quality of individual audits, and should aim to ensure that quality audits are consistently performed. Therefore, it is important that the highest possible level of audit quality is maintained, especially in Islamic banks. However, it is difficult to measure audit quality. Therefore, many studies measure audit quality using proxies or indicators. This study used audit quality indicators (AQI) which are available in audited financial statements of Islamic banks. Moreover, Islamic banks up hold the principle of Islamic accountability to all activities. These banks have to be accountable to more stakeholders, and ultimately to God. Thus, Islamic banks must be more transparent about their activities and performance. This study expects that the level of audit quality in Islamic banks to improve each year. Therefore, the objectives of this study are to determine the availability of audit quality indicators of Islamic banks, to investigate the differences of audit quality in Islamic banks and to investigate the improvement of audit quality in Islamic banks from 2007 to 2011 in Indonesia, Malaysia, Pakistan, Bahrain, Qatar, Saudi Arabia, and United Arab Emirates (UAE). In addition, this study used agency theory and the concept of Islamic accountability as the theoretical framework. This research used annual reports and the population of 23 full-fledged Islamic commercial banks from 2007 to 2011 in Indonesia, Malaysia, Pakistan, Bahrain, Qatar, Saudi Arabia, and United Arab Emirates (UAE) in order to meet the research objectives. The findings of this research indicate that there is a slight statistically significant difference in AQI of Islamic banks in the different countries. However, in general, there is no statistically significant improvement in the overall AQIs between 2007 and 2011. Even though the overall results indicate no improvement, Islamic banks in different countries had improved in terms of their specific AQIs over the 5 year period.