Advances in Accounting 57 (2022) 100596

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Advances in Accounting
journal homepage: www.elsevier.com/locate/adiac

Audit committee characteristics and compliance by Islamic banks with

AAOIFI accounting standards
Yosra MNIF a, *, Marwa TAHARI b
a
University of Sfax, High Institute of Business Administration, GFC Laboratory (Gouvernance, Finance et Comptabilité), Sfax, Tunisia
b
University of Sfax, Faculty of Economics and Management, GFC Laboratory (Gouvernance, Finance et Comptabilité), Sfax, Tunisia

A R T I C L E I N F O A B S T R A C T

Keywords: This study examines the effect of audit committee characteristics (size, independence, and expertise) on
Compliance compliance with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI’s)
AAOIFI Financial Accounting Standards (FASs). Our sample consists of 372 bank-year observations from 2009 to 2015.
Financial accounting standards
Using panel regressions, our results provide evidence that compliance with AAOIFI’s FASs is positively influ­
Audit committee
Culture expertise
enced by audit committee size. However, audit committee independence does not affect the compliance level.
Islamic banks With respect to audit committee expertise, we find a positive and significant association between compliance
with AAOIFI’s FASs and accounting financial expertise. Moreover, our results reveal that audit committee
members with accounting financial and culture expertise are positively and significantly associated with the level
of compliance with AAOIFI’s FASs. Interestingly, our finding suggests that an audit committee member with a
combination of culture expertise (expertise in Islamic banking) and accounting financial expertise better im­
proves the compliance level than an audit committee member with only accounting financial expertise.

1. Introduction Islamic banking industry. In addition, some countries have sought to

The global rise of the Islamic banking industry created the need for a
standard-setting agency specifically for Islamic finance. On the initiative
of several Islamic banks (IBs) and regulatory authorities, the Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI)
was created in 1991 in Bahrain to address this need. The AAOIFI’s
standards are required, permitted, or used as guidelines in the majority
of the Middle East and North Africa (MENA) countries. According to the
AAOIFI, its Financial Accounting Standards have been included in
mandatory regulatory requirements in Bahrain, Qatar, Jordan, Syria,
Sudan, Oman, and Yemen. Moreover, all the Palestinian Islamic banks
use AAOIFI’s standards (AAOIFI, 2022).
The AAOIFI was established to support the Islamic financial sector
and strengthen its financial reporting environment through the pro­
mulgation of financial accounting standards (FASs). AAOIFI is currently
one of the trusted standard-setting bodies for Islamic financial in­
stitutions. Nevertheless, the formal adoption of AAOIFI’s FASs does not
automatically imply that Islamic banks are fully compliant with these
standards. Indeed, banks may claim to adopt AAOIFI’s standards to
signal to the market that they are following specific standards for the
copy AAOIFI’s standards without a careful appreciation of the specificity
of their national accounting needs. They may follow the regulatory
framework of other countries to avoid the reputational risks of deviating
from the mainstream.
According to the AAOIFI, Islamic banks’ annual reports should
disclose all information necessary to inform society about their opera­
tions. Society also might drive IBs to ameliorate their transparency and
demonstrate a higher level of support to their stakeholders by improving
their ethical behaviour (AAOIFI, 2015). Moreover, from an Islamic
perspective, one of the key objectives of accounting and reporting is to
confirm that the business is accountable and adheres to Shariah rules.
Therefore, IBs should disclose more information to ensure that they have
attained the level of Shariah compliance desired by stakeholders
(Elgattani, 2018).
Moreover, considering legitimacy theory, the Islamic bank managers
are required to provide relevant information in order to change the
perceptions of outside users regarding their IBs. Research suggests
mandatory disclosures increase legitimation (Marsidi, Annuar, & Rah­
man, 2017). Therefore, based on legitimacy theory, compliance with
AAOIFI FASs by the IBs is perceived as not only discharging their

* Corresponding author at: Department of Accounting Taxation and Law, High Institute of Business Administration of Sfax, Road to the airport km 4, BP 1013,
3018, Sfax University, Tunisia.
E-mail addresses: yosra.mnif.sellami.isaas@gmail.com, yosramnif@yahoo.fr (Y. MNIF), marwa.tahari.bouzouitina@gmail.com (M. TAHARI).

https://doi.org/10.1016/j.adiac.2022.100596
Received 22 January 2020; Received in revised form 13 March 2022; Accepted 15 March 2022
Available online 26 March 2022
0882-6110/© 2022 Elsevier Ltd. All rights reserved.
Y. MNIF and M. TAHARI
responsibilities but also acquiring legitimacy. Consequently, compliance
with the AAOIFI’s FAS disclosure requirements can serve as a control
mechanism by IB stakeholders, as well as a mechanism of legitimacy for
managers.
With respect to the mandatory disclosure literature, many prior
studies find that the formal adoption of AAOIFI’s standards does not
guarantee compliance with their requirements (Ahmad & Daw, 2015;
Ahmad & Khatun, 2013; Ajili & Bouri, 2017; Al-Sulaiti, Ousama, &
Hamammi, 2018; Amyulianthy, Azizah, & Satria, 2020; Ehsan, Saeed,
Shahzad, & Iqbal, 2019; El-Halaby & Hussainey, 2016; Kadri & Ibrahim,
2018; Sarea, 2012; Sarea & MohdHanefah, 2013; Sellami & Tahari,
2017; Shatnawi & Al-Bataineh, 2013; Srairi, 2018; Vinnicombe, 2010;
Vinnicombe, 2012).
The application of AAOIFI standards requires robust corporate
governance and financial reporting practices. As a corporate governance
mechanism, the audit committee plays an important role in influencing
the disclosure practices of Islamic banks (Abdullah, Percy, & Stewart,
2015; Harun, 2016; Sellami & Tahari, 2017).The responsibilities of the
audit committee include recommending the appointment of the external
auditor, overseeing the audit, and assuring the credibility of the bank’s
financial reporting (Abdullah et al., 2015). In addition, Harun (2016)
states that the audit committee is responsible for monitoring the integ­
rity of the IB’s financial statements and reviewing the IB’s internal
financial control system, as well as improving the bank’s corporate in­
formation disclosures. Sellami and Tahari (2017) reports that the audit
committee is commonly perceived as an important component of the
IB’s overall governance structure, mainly with the responsibility to
ensure the integrity of the bank’s financial reports. The results in Sellami
and Tahari (2017) show that the presence of an audit committee is an
important determinant of the level of mandatory disclosure of IBs.
Therefore, the audit committee is an important mechanism for
providing shareholders assurance that the IBs comply with mandatory
disclosure requirements. Moreover, an effective audit committee can
reduce the information asymmetry between management and stake­
holders through the improvement of the bank’s disclosure practices.In
addition, as a corporate governance mechanism, the audit committee
has considerable influence on the IB manager’s incentives to comply
with mandatory disclosures.
According to the AAOIFI, the importance of the audit committee for
IBs emanates from its roles in enhancing greater transparency and
disclosure in financial reporting and providing additional assurance on
the reliability of financial information presented by IBs. An important
responsibility of the audit committee is to ensure compliance with all of
the AAOIFI FASs (AAOIFI, 2015). As a consequence, it is relevant to
investigate whether audit committee characteristics improve compli­
ance with AAOIFI FAS disclosure requirements.
Our results show that compliance with AAOIFI FASs is positively
influenced by audit committee size. However, AC independence does
not affect compliance. With respect to AC expertise, we find a positive
and significant association between compliance with AAOIFI FASs and
the accounting financial expertise of AC members. Moreover, our results
reveal that AC members with both accounting financial expertise and
culture expertise are positively and significantly associated with the
level of compliance with AAOIFI FASs. Interestingly, our findings sug­
gest that an AC member with a combination of culture expertise
(expertise in Islamic banking) and accounting financial expertise im­
proves compliance relative to an AC member with only accounting
financial expertise.
Our study contributes to the disclosure literature relating to the Is­
lamic banking industry. While the majority of previous disclosure
studies (Harahap, 2002; Maali, Casson, & Napier, 2006; Haniffa &
Hudaib, 2007; Aribi & Gao, 2011; Darmadi, 2013; Amran et al., 2017;
Grassa, Chakroun, & Hussainey, 2018; and Grassa, 2018) have focused
on voluntary disclosure, little attention has been given to mandatory
disclosures. Moreover, the only papers of which we are aware that study
IB compliance with mandatory disclosures are El-Halaby and Hussainey
2
Advances in Accounting 57 (2022) 100596
(2016), Sellami and Tahari (2017), and Ajili and Bouri (2017).
The effect of audit committee characteristics on compliance with
International Accounting Standards Board (IASB) standards has been
explored (Abdullah et al., 2015; Bepari & Mollik, 2015). However, the
effect of ACcharacteristics on compliance with AAOIFI FASs has not
previously been examined. Thus, this study extends the compliance
literature by providing empirical evidence of AC characteristics in an
Islamic banking context. Most importantly, we provide evidence on the
effectiveness of an audit committee member who combines culture
expertise with accounting financial expertise in enhancing the Islamic
bank’s compliance with AAOIFI FASs.
The remainder of this paper is organized as follows. Section 2 de­
scribes the financial reporting environment for AAOIFI standards
adopters. Section 3 presents the literature review and hypotheses
development. The research methodology is presented in section 4. The
results are presented in Section 5. Section 6 provides our conclusions.
2. Financial reporting environment for AAOIFI standards
adopters
Islamic banks show some variation in financial reporting practices,
since IBs adopt different accounting treatments for their Islamic finan­
cial contracts. Indeed, in some countries including Kuwait, the financial
statements of IBs are prepared in accordance with International Finan­
cial Reporting Standards (IFRSs). In other countries, such as Iran,
financial statements are prepared in accordance with generally accepted
accounting principles accompanied by some modifications to comply
with the principles of Shariah. Another option used in some countries
including Malaysia, is to adopt IFRS but at the same time to develop
relevant technical releases serving as guiding principles that consider
the specificities of Islamic Financial Institutions (IFIs) in their respective
countries. These variations in practice imply that IBs’ financial state­
ments are not always comparable. As a consequence, there is a need for
IBs to agree on a set of generally accepted international accounting
standards (Rahman, 2009).
To meet this need, the AAOIFI was established to promulgate ac­
counting standards for IFIs on the international level. AAOIFI standards
are required, permitted, or used as guidelines for the majority of the
MENA countries. All IBs in Bahrain, Qatar, Jordan, Sudan, Syria, Oman,
Palestine, and Yemen use AAOIFI FASs to prepare their financial state­
ments. We have limited our research to these jurisdictions.
In Bahrain, Ministerial Decision no. 6 of 1998 made it mandatory for
IFIs to comply with the accounting and auditing standards issued by the
AAOIFI. The AAOIFI sets standards for all IFIs licensed in Bahrain based
on Islamic Shariah rules and principles and International Accounting
Standards (IASs/IFRSs) (Central Bank of Bahrain, 2022; AAOIFI, 2022).
In Jordan, IBs comply with AAOIFIFASs and use IFRS for matters that
are not yet addressed by AAOIFI. Jordan mandated Islamic banks to
follow the AAOIFI’s standards starting from the fiscal year 2002 (Al-
Baluchi, 2006; AAOIFI, 2022).
According to the Islamic banking Regulatory Framework (2012) in
Oman, full-fledged IBs must follow AAOIFI’s FASs, and in accordance
with the requirements of AAOIFI, for matters where no AAOIFI stan­
dards exist, the licensees can use the relevant IFRSs. Moreover, Islamic
windows and Islamic branches of foreign banks in Oman must also apply
AAOIFI’s accounting and auditing standards. The parent Conventional
Bank (CB) shall consolidate the financial statements according to IFRS.
Disclosures with regard to consolidation shall be covered in the notes to
accounts (AOSSG, 2015).
In Qatar, IBs are subject to the laws applicable to all banks. Indeed,
there is no separate law for IBs (Safieddine, 2009). Qatar mandated IBs
to follow the AAOIFI’s standards starting from 2002 (Al-Baluchi, 2006).
The Qatari Central Bank, through its instructions to banks, requires IBs
to apply AAOIFI’s FASs. Qatari IBs should implement the accounting
standards issued by the AAOIFI, as relevant to the accounting policies
and treatments, preparing the financial statements and the related
Y. MNIF and M. TAHARI
disclosures. Circular No. 93/2012, Consolidated Financial Statements
for IBs, provided illustrative AAOIFI-compliant consolidated financial
statements that all IBs had to follow during 2012. In addition, IFIs listed
on the Qatari Exchange were allowed to file financial statements pre­
pared under the FASs issued by the AAOIFI, and IFRS where AAOIFI
guidance is not available (AOSSG, 2015).
In Sudan, IBs follow AAOIFI’s standards. In 1983, the central bank of
Sudan required all banks and other similar financial institutions to
abolish interest on all types of business transactions and to comply with
alternative Islamic modes of finance (Mustafa, 2003). Moreover, Sudan
is the only country with both state-owned and privately owned banks in
which all banks operate according to Islamic Shariah rules and princi­
ples. The central bank of Sudan required IBs to follow the AAOIFI’s
standards starting from fiscal year 1998 (Mustafa, 2003; Al-Baluchi,
2006; AAOIFI, 2022).
In Syria, IBs are subject to the rules set forth by articles 105, 106 and
107 of Law 23/2002 as to the submission of financial statements to the
Central Bank of Syria. These rules can be modified with the Central
Bank’s approval to conform to the accounting criteria issued by the
AAOIFI (Central Bank of Bahrain, 2022).The two IBs in Palestine apply
AAOIFI FASs and their audits are conducted in accordance with stan­
dards issued by the AAOIFI (ROSC, 2010).
In Yemen, the AOSSG study noted that the financial statements of the
Yemeni IB differed from IFRS in several respects (AOSSG, 2015). Ac­
cording to the AAOIFI, AAOIFI’s accounting standards have been used
voluntarily for IBs in Yemen (AAOIFI, 2022). However, since 2013, the
Yemeni IBs have adopted the AAOIFI’s standards as required by the
central bank of Yemen in its banks’ governance guide (2013) which
contains additional requirements for IBs.
Fig. 1 summarizes the accounting standards used by IBs for the
majority of the MENA countries.
3. Literature review and hypotheses development
Many studies document the benefits of complying with financial
reporting standards. For instance, Hodgdon, Tondkar, Harless, and
Adhikari (2008) examines the relationship between analyst earnings
forecast errors and the company’s compliance with IFRS disclosure re­
quirements. The study finds that complying with IFRS reduces infor­
mation asymmetry and improves the ability of financial analysts to
Basis of developing
Mandatory
national standards
•Indonesia
•Pakistan
• Palestine
Fig. 1. The adoption status of AAOIFI Financial Accounting Standards.
Advances in Accounting 57 (2022) 100596
provide more accurate forecasts. Tsalavoutas and Dionysiou (2014)
explores whether compliance levels are value relevant, and finds that
the value relevance of net income is higher for high-compliance com­
panies. Alfraih and Alanezi (2015) explores the association between the
extent of compliance with IFRS and the value relevance of accounting
information to market participants. The authors report that there is a
positive association between compliance levels and the value relevance
of earnings and book value. André, Dionysiou, and Tsalavoutas (2018)
examines whether compliance with the mandated disclosures of IAS 36
and IAS 38 is value relevant and affects analyst forecasts. The study
reports that the level of compliance with IAS 36 and IAS 38 is positively
associated with the company’s market value. Krismiaji and Surifah
(2020) investigates the effect of compliance with mandatory disclosures
on the quality of accounting information, and finds that the extent of
compliance is positively linked to the firm’s share price and value
relevance of earnings and book value of equity.
Concerning the Islamic banking industry, Albarrak and El-Halaby
(2019) examines the influence of Shariah disclosure on the financial
performance of Islamic banks, and finds that disclosure has a positive
impact on financial performance. Tabash (2019) examines the associa­
tion between AAOIFI disclosures and the performance of IBs in the UAE.
The study finds that IBs with higher disclosure levels experience higher
operating performance. However, Elgattani and Hussainey (2020)
shows an insignificant association between AAOIFI disclosures and
financial performance.
Given the benefits of compliance discussed above (reduced infor­
mation asymmetry; improved financial analyst forecasting ability;
improved quality of accounting information, financial performance, and
market value), it seems worthwhile to analyse the determinants of
compliance.
Many prior compliance studies have explored the relationship be­
tween the level of compliance and corporate governance characteristics.
These studies find that the audit committee is an important factor that
influences the level of mandatory disclosure. The audit committee is a
crucial part of corporate governance as it assists the board of directors
(BOD) in discharging its responsibilities in overseeing corporate man­
agement. The audit committee plays a key role in monitoring manage­
ment disclosure practices and internal control (Al-Akra, Eddie, & Ali,
2010; Carcello, Hollingsworth, & Neal, 2006; Cohen, Hoitash, Krishna­
moorthy, & Wright, 2013; Dhaliwal, Li, Tsang, & Yang, 2011).
Recommended
•Bahrain •Kuwait
• Qatar •Maldives
•Jordan
•Sudan
•Syria
•Yemen
•Libya
•Oman
3
Y. MNIF and M. TAHARI
With respect to mandatory disclosure studies, a few studies have
examined the effect of audit committee characteristics on compliance
with IFRS disclosure requirements. Bepari and Mollik (2015) finds that
audit committee expertise is positively associated with compliance
levels in Australia. Sellami and Fendri (2017) shows that compliance
with IAS24 is positively influenced by audit committee independence
and expertise in South Africa. However, Juhmani (2017) finds that audit
committee size and independence are not associated with the level of
corporate compliance with IFRS disclosure in Bahrain.
Regarding the Islamic banking disclosure literature, Abdullah et al.
(2015) finds a significant positive association between voluntary
corporate governance disclosure and audit committee characteristics.
With respect to mandatory disclosure for Islamic banks, Sellami and
Tahari (2017) provides evidence that the presence of an audit committee
positively influences compliance with the disclosure requirements con­
tained in the accounting standards. However, the authors did not
examine the effect of audit committee characteristics on compliance
levels. In our study, we focus on the audit committee characteristics of
size, independence and expertise.
3.1. Audit committee size
Based on resource dependency theory, larger audit committees are
willing to devote greater resources and authority to effectively carry out
their responsibilities. The complexity of accounting issues requires audit
committees to have enough members to achieve their legal re­
sponsibilities. In addition, if the audit committee includes members with
a broad range of expertise and experience that allows them to undertake
different tasks in monitoring financial reporting practices, the commit­
tee can be more effective. Therefore, larger audit committees could lead
to higher levels of transparency and disclosure (Anderson, Mansi, &
Reeb, 2004).
Furthermore, based on agency theory, prior studies suggest that a
higher number of members on the audit committee is more likely to
decrease managerial opportunism and thus, minimize agency costs
(Albitar, 2015; Juhmani, 2017; Kent & Stewart, 2008). According to
Mangena and Pike (2005), a larger audit committee gives rise to more
effective monitoring because it is more likely to possess the essential
expertise. In addition, the larger the AC, the more responsibility that can
be delegated to the committee and therefore, larger ACs can provide
stronger monitoring, leading to a higher level of mandatory disclosure
(Abdullah et al., 2015).
With respect to the Islamic banking disclosure literature, Harun
(2016) finds that a larger audit committee has higher board-monitoring
capabilities and thus positively influences disclosure level practices in
Islamic banks. Harun (2016) reports a significant positive association
between audit committee size and the disclosure practice for Islamic
banks in the Gulf Cooperation Council (GCC) countries. Moreover,
Abdullah et al. (2015) finds that AC size is positively associated with
corporate governance disclosures of IBs in the Southeast Asian and GCC
regions.
Therefore, based on the results of previous studies, the following
hypothesis is formulated:
H1. Audit committee size is positively associated with the level of compli­
ance with AAOIFI accounting standards.
3.2. Audit committee independence
Based on agency theory, the inclusion of independent directors on
the audit committee decreases the opportunities of management to hide
information for its own benefit. Audit committee independence in­
fluences the effectiveness of the committee in monitoring financial
reporting and affects the ability of the board of directors to effectively
monitor the financial reporting of the company (Allegrini and Greco,
2013).
4
Advances in Accounting 57 (2022) 100596
Regarding the disclosure literature, Haniffa and Cooke (2002) argues
that effective monitoring by independent directors on the audit com­
mittee motivates management to provide accurate and additional in­
formation promptly. Moreover, Patelli and Prencipe (2007) and Madi,
Ishak, and Abdul Manaf (2014) find that AC independence is associated
with higher levels of voluntary disclosure.
In the compliance literature, few empirical studies have investigated
the relationship between audit committee independence and mandatory
disclosures (Abdullah et al., 2015; Juhmani, 2017). Ba-Abbad and Wan-
Hussin (2011) finds that AC independence is not associated with the
level of compliance with IFRS disclosures. However, Sellami and Fendri
(2017) finds that compliance with IFRS for related party disclosures is
positively influenced by AC independence in South Africa. Likewise,
Mnif and Znazen (2020) suggests that an independent audit committee
tends to enforce compliance with mandatory disclosures since it is better
able to protect shareholders’ interests. The results in that study reveal
that the independence of AC members promotes their objectivity to­
wards the issue of mandatory disclosure and ameliorates compliance
with IFRS 7 disclosure requirements.
For the Islamic banking context, Abdullah et al. (2015) finds that
audit committee independence is positively associated with voluntary
corporate governance disclosures of Islamic banks in Southeast Asia and
the GCC regions.
Based on the results of previous studies, the following hypothesis is
formulated:
H2. Audit committee independence is positively associated with the level of
compliance with AAOIFI accounting standards.
3.3. Audit committee expertise
In order to effectively monitor the financial reporting process and the
financial statements of the company, the audit committee should have
the financial knowledge required to understand the financial affairs of
the company (Davidson, Stewart, & Kent, 2005). Experience in ac­
counting, internal control, and auditing is therefore considered funda­
mental to enable the audit committee to understand and oversee the
financial reporting system of the firm (DeZoort, Hermanson, Arch­
ambeault, & Reed, 2002).
In the corporate governance literature, prior studies provide evi­
dence that AC expertise positively influences financial reporting quality
(Carcello, Neal, Palmrose, & Scholz, 2011; Cohen et al., 2013; Emmer­
ich, Racz, & Unger, 2005; Naiker & Sharma, 2009). According to
Emmerich et al. (2005), sufficient knowledge and understanding of ac­
counting and corporate finance is needed for the audit committee to
ensure the integrity of the financial reporting process and financial
statements.
With respect to the compliance literature, an audit committee with
financial expertise is more likely to understand the capital market im­
plications of non-compliance with mandatory disclosures. Such an un­
derstanding by the AC should lead to a higher level of compliance with
mandatory disclosures (Ba-Abbad & Wan-Hussin, 2011). In addition,
Sellami and Fendri (2017) finds a positive and significant association
between accounting financial expertise and compliance with IAS 24.
Moreover, Mnif and Znazen (2020) reports that the high accounting
financial expertise of the AC members can help resolve the problem of
accounting standards complexity and thus improve compliance with
IFRS 7.
According to Cohen et al. (2013), the application of many standards
requires industry knowledge. Thus, industry-expert AC members will
further increase the ability of the audit committee to enhance reporting
quality. Moreover, industry experts on the AC are likely to be better
situated to understand the nature and extent of industry-specific audit
effort required to provide assurance on the quality of the financial
reports.
Inthe Islamic banking context, AC cultural expertise is also an
Y. MNIF and M. TAHARI
important criterion for improving compliance. When AC members have
cultural expertise, they have been exposed to many discussions about
the application of Shariah rulings in Islamic banking, and this expertise
enables them to compare best practices among Islamic banks. As a
consequence, these members are able to understand the best corporate
reporting practices.
Therefore, due to the unique characteristics of Islamic banks, audit
committee members should have a sound knowledge of the IB’s business
environment and industry in order to fulfil the AC’s responsibility and
therefore improve compliance with AAOIFI standards.
Based on these arguments, we construct a general hypothesis on the
association between audit committee expertise and compliance with
AAOIFI FASs. The AC experts are classified into accounting financial
experts, industry experts, and accounting financial experts who are also
culture experts. This research design helps explore the effect of different
types of expertise on compliance with AAOIFI FASs.
H3. AC expertise is positively associated with the level of compliance with
AAOIFI accounting standards.
H3a. AC members with only accounting financial expertise are positively
associated with the level of compliance with AAOIFI accounting standards.
H3b. AC members with only industry expertise are positively associated
with the level of compliance with AAOIFI accounting standards.
H3c. AC members with both accounting financial and culture expertise are
positively associated with the level of compliance with AAOIFI accounting
standards.
4. Research methodology
4.1. Sample selection
To identify the jurisdictions that adoptedAAOIFI standards, we
reviewed the Bankscope database, the AAOIFI website, and IBs’ annual
reports. The jurisdictions identified were Bahrain, Yemen, Qatar, Syria,
Palestine, Sudan, Oman, Jordan, and Libya. In addition, we examined
the independent auditors’ reports for all Islamic banks in these countries
to ensure that the financial statements had been prepared under AAOIFI
standards.
However, from these countries we excluded Libya because the
annual reports of its IBs were unavailable. As a consequence, our final
sample consists of IBs in Bahrain, Yemen, Qatar, Syria, Palestine, Sudan,
Oman, and Jordan.
We used the database of the national central banks to determine the
number of IBs operating in these countries, which provided a potential
sample of 483 bank-year observations during the period 2009 to 2015.
2015 was the last year for which the IBs’ annual reports were filed and
accessible at the time of our data collection. We excluded foreign Islamic
branches (14 observations), IBs with annual reports unavailable in
either Arabic or English (28 observations), and IBs with missing data (69
observations). As a consequence, the final sample consists of 372 bank-
year observations during the 2009–2015 period. The English or Arabic
annual reports were then hand-collected for a period of 7 years. Table 1
shows the sample selection method and Table 2 presents the sample
distribution by country and year.
Table 1
The sample selection.
Selection criteria Bank year observations
Initial sample 483
Foreign Islamic branches (14)
Unavailable Annual reports (28)
IBs with missing data (69)
Final sample 372
5
Advances in Accounting 57 (2022) 100596
4.2. The dependant variable
In order to formulate our compliance checklist, we draw on the
literature relating to mandatory disclosures (Al-Shammari, Brown, &
Tarca, 2008; Appiah, Awunyo-Vitor, Mireku, & Ahiagbah, 2016; El-
Halaby & Hussainey, 2016; Fakhfakh, Shabou, & Pigé, 2018; Glaum,
Schmidt, Street, & Vogel, 2013; Street & Gray, 2002; Tsalavoutas, 2011;
Vinnicombe, 2012). Thus, our checklist is constructed according to these
studies and it is based on the text of the standards issued by the AAOIFI.
In order to formulate this checklist, mandatory disclosure items are
collected from the AAOIFI FASs. Each standard contains a list of items
required to be disclosed in the annual report by each Islamic bank.
From a list of 26 AAOIFI FASs, we selected only standards relevant to
Islamic Banks. We excluded standards that are applicable only to in­
surance companies or investments funds.1 Moreover, since our research
focuses on only AAOIFI FAS-required disclosures, standards covering
only presentation/measurement aspects are excluded from our sample
(FAS 7 is also excluded2). In addition, we excluded accounting standards
issued after 2009 (FASs 23–26). Therefore, our compliance checklist
covers 16 AAOIFI’s FASs.3 Table 3 presents the number of items and the
mean compliance level by standard. As shown by this table, a checklist
of 207 disclosure items was used.4
In order to measure the extent of each IB’s compliance, we draw on
the literature relating to IAS/IFRS compliance (Ahmad & Khatun, 2013;
El-Halaby & Hussainey, 2015; El-Halaby & Hussainey, 2016; Sakib,
2015; Vinnicombe, 2010; Vinnicombe, 2012). The number of disclosure
items required by different standards varies considerably. For instance,
FAS 1 requires 102 items to be disclosed and FAS 2 requires only one
item. To create an index that does not give disproportionate weight to
standards with more disclosure requirements, we employ the (Partial
Compliance) PC “unweighted method” used by the majority of IAS/IFRS
studies:
∑
Tit
ACIjt = i=1
Mjt
Where ACIjt is the accounting compliance index for each IBj during
yeart, which ranges from 0 to 1. Tit is the level of compliance with each
AAOIFI FAS mandatory disclosure. Mjt is the total number of AAOIFI
FASs applicable to IBj during year t. This means that we first compute
the compliance with each AAOIFI FAS separately. Subsequently, the sum
of these compliance indices (T) is divided by the total number of
applicable AAOIFI FASs for each IBj during yeart.
As reported in Table 3, a great variation of compliance levels is
documented between countries. Moreover, our results illustrate sub­
stantial non-compliance across the sampled IBs with the selected FASs,
allowing for the conclusion that although IBs are expected to comply
with mandated disclosures, they rarely do so in full.The low compliance
level can be explained by the complexity of some standards and IBs may
face several problems regarding these standards. Indeed, non-
compliance may arise if the AAOIFI FASs are misunderstood or are
ambiguous. In addition, IBs may consider some items immaterial, and
IBs’ managers may intentionally fail to comply with AAOIFI FAS
disclosure requirements. Moreover, the type of information required by
some standards may be more complex, and therefore prove more diffi­
cult to comply with, and IBs may not have adequate experience with the
requirements of these standards.
For instance, most IBs in our sample have some difficulty complying
1
The excluded standards are FAS 12, FAS 13, FAS 14, FAS 15 and FAS19.
2
This standard addresses only the accounting rules of Salam financing and
parallel Salam.
3
To ensure the content validity of our checklist, two other researchers
reviewed it independently. After receiving their comments and suggestions,
remaining ambiguities were discussed with an accounting expert.
4
The compliance checklist is available from the authors upon request.
Y. MNIF and M. TAHARI Advances in Accounting 57 (2022) 100596

Table 2
The sample composition by country.
Country/Year 2009 2010 2011 2012 2013 2014 2015 Total

Bahrain 17 18 19 19 19 19 19 130
Qatar 4 5 6 6 6 6 6 39
Jordan 2 3 3 3 3 3 3 20
Syria 2 2 3 3 3 3 3 19
Sudan 15 16 16 16 16 16 14 109
Palestine 2 2 2 2 2 2 2 14
Yemen 3 3 3 3 3 3 3 21
Oman 0 0 0 0 6 7 7 20
Total 45 49 52 52 58 59 57 372

Table 3
The mean compliance level by standard.
Standard Effective year Number of items Bahrain Qatar Jordan Syria Oman Yemen Palestine Sudan

FAS 1 1996 102 0.904 0.846 0.861 0.892 0.886 0.834 0.852 0.665
FAS 2 1998 1 0.789 0.684 0.650 1 0.824 0.462 NA 0.280
FAS 3 1998 1 1 0.667 NA1 NA 1 1 NA 0.800
FAS 4 1998 1 1 1 1 1 0.750 1 NA 0.721
FAS 5 1998 14 0.565 0.450 0.678 0.637 0.595 0.273 0.325 0.211
FAS 6 1999 3 0.919 0.475 1 0.807 0.850 0.217 0.583 0.579
FAS 8 1999 6 0.916 0.387 1 0.625 1 1 0.500 0.217
FAS 9 1999 6 0.733 0.354 0.333 0.789 0.388 0.217 0.357 0.131
FAS 10 1999 9 0.929 0.487 NA 0.600 NA 0.617 0.333 0.433
FAS11 1999 8 0.901 0.440 0.600 0.747 0.800 0.465 0.450 0.324
FAS 16 2001 10 0.993 0.921 0.821 0.906 0.783 1 0.944 0.442
FAS 17 2002 13 0.500 0.289 0.505 0.431 0.514 0.494 0.127 0.234
FAS 18 2003 5 NA NA NA NA 0.329 NA NA NA
FAS 20 2004 4 1 1 1 0.877 1 1 1 0.626
FAS 21 2005 11 NA NA 1 NA NA NA NA NA
FAS 22 2005 13 0.803 0.682 0.750 0.733 0.554 NA 0.429 0

Notes: Standards not applicable to every IB are noted as “Not Applicable” (NA).
1
All IBs in Jordan noted in their annual reports that they did not apply a Mudaraba financing transactions (FAS 3). These banks are not obliged to disclose in­
formation about FAS 3 and therefore items in this category were scored as “NA”. In effect, IBs were not penalized for not applying a standard if that standard was not
applied by any IBs in the country.

with FAS 5 regarding disclosure of bases for profit allocation between
owners ‘equity and investment accounts holders. According to Sellami
and Tahari (2017), it is difficult for an IB to determine how much of the
invested money is its own, and how much belongs to the holders of in­
vestment accounts. In addition, it is difficult for an IB determine the
actual profit of every holder of an investment account when its money is
invested in various projects. Some of these projects, which may be
completed before the end of the financial year, have a known profit,
while others do not. The IB cannot determine the profits from these
uncompleted projects. The AAOIFI addresses these problems without
offering guidelines or standardized solutions. Furthermore, the table
indicates that compliance with FAS 9, relating to Zakah, is problematic.
Surprisingly, a low mean level of mandatory disclosure is provided by
the majority of IBs in the sampled countries where the majority of the
population is Muslim. Despite the expectation that all IBs have similar
motivations to disclose, it seems that different jurisdictions place a
different emphasis on Zakah disclosure. Moreover, all the countries
confront major problems in the enforcement of FAS 17 relating to in­
vestments. In fact, a category-by-category overview shows that non-
compliance is noted in the category of investment in securities. The
majority of IBs failed to provide information about the major activity of
the institutions where the IBs invested the securities.
non-executive AC members as a proxy for AC independence (ACIND).
Finally, audit committee expertise is measured by the proportion of
experts on the committee.
We use the detailed biographies of the AC members available in the
annual report or on the IB’s website to obtain their qualifications. This
information allows us to identify the accounting financial expertise of
the AC members. We code this variable depending on whether the AC
member has a qualification or certification in accounting or finance.
Next, we rely on AC members’ employment history and note the bank in
which they are/were employed in order to identify industry expertise
and culture expertise. An AC industry expert is an ACmember who was
employed by another conventional bank, and an AC culture expert is an
AC member who was employed by another Islamic bank. Following
prior research on AC expertise, we construct the following three
variables5:
- ACAFE: AC members who are accounting financial experts, but are
not industry experts, where AC members are accounting financial
experts if their biographies indicate at least one accounting qualifi­
cation or certification such as certified public accountant, auditor or
chartered accountant.
- ACIE: AC members who are only industry experts and not accounting
financial experts. AC members are considered industry experts if

4.3. The independent variables

In our study, data is manually collected from IBs’ annual reports and 5
These variables are constructed following Cohen et al. (2013) and Sellami
websites for the period 2009 to 2015. The definition and measurement and Fendri (2017).
of each independent variable are discussed below.
Concerning audit committee characteristics, we measure AC size
(ACS) by the number of members. We use the proportion of independent

6
Y. MNIF and M. TAHARI Advances in Accounting 57 (2022) 100596

their biographies indicate that they were employed by a conven­ SIZE is the IB size,
tional bank. PROF is IB profitability,
- ACBE: AC members who are accounting financial experts and also ACCSTAND is the other set of accounting standards used,
culture experts.6AC members are considered culture experts if their εjt is the random error term.
biographies indicate that they were employed by another Islamic In order to test whether there is a panel effect and more precisely to
bank. decide between a fixed effects regression and a simple Ordinary Least
Squares (OLS) regression, a Fisher test was performed. The null hy­
Regarding control variables, we draw on prior mandatory disclosure pothesis was not confirmed. The test was significant at the 1% level (F =
studies to identify other variables that could influence the level of 234.82). As a consequence, a panel data analysis is appropriate.
compliance. For the board of directors, first, board size (BS) is measured Furthermore, a Breusch–Pagan Lagrange multiplier test was used to test
as the total number of directors on the board. Second, the independence whether there is a panel effect and more precisely, to help decide be­
of the board (BI) is measured by the ratio of independent non-executive tween a random effects regression and a simple OLS regression. The null
members on the board to the total number of directors. Finally, we hypothesis is that the variance across entities is zero (i.e., no panel
identify the duality in position (CEOD), which is measured as an indi­ affect). The result was significant at the 1% level (Chibar2 = 916.42).
cator variable equal to 1 if the IB’s Chief Executive Officerserves as The null hypothesis was not confirmed, indicating that a panel data
Board Chairman and 0 otherwise. analysis is more appropriate. In addition, our multiple regression anal­
In addition, we control for auditor’s industry specialization (AUDIS), ysis indicates heteroscedasticity and also serial and contemporaneous
which is measured by the number of clients in the industry. We also correlations. To address these problems, we estimate our regression
control for the ownership structure. First, we identify the ownership using the Generalized Least-Squares (GLS) method.
concentration (CONC) measured as the percentage of shares held by
investors having 5% or more of the IB’s shares. Second, we control for 5. Empirical results
institutional investors (INST) measured as the percentage of shares held
by institutional investors. Finally, we measure government ownership 5.1. Descriptive statistics
(GOV) as the percentage of IB’s shares owned by the government.
Furthermore, we take into account the IB’s size (SIZE) measured by the
Table 4
natural log of total assets, profitability (PROF) measured by return on Descriptive statistics.
equity (ROE) and the other set of accounting standards used as a basis
Variable Mean Min Max Median S⋅D
for preparing financial statements (ACCSTAND), which is measured as
an indicator variable equalling 1 if the IB refers to the use of IFRSs (for The dependent variable
ACI 0.649 0.102 0.950 0.701 0.216
matters not covered by FASs) and 0 otherwise. See variable definitions in
The independent continuous variables
Appendix 2. ACS 3.381 3 5 3 0.618
ACIND 0.550 0 1 0.666 0.445
ACAFE 0.396 0 1 0.333 0.370
4.4. Research model ACIE 0.377 0 1 0.250 0.402
ACBE 0.129 0 1 0 0.244
In order to examine the effect of audit committee characteristics on BS 8.752 5 13 9 1.943
compliance with AAOIFI FASs, we examine the following model: BI 0.700 0 1 0.750 0.315
CONC 0.665 0 1 0.757 0.311
ACI jt = α0 + α1 ACSjt + α2 ACINDjt + α3 ACAFEjt + α4 ACIEjt + α5 ACBEjt INST 0.338 0 1 0.170 0.340
GOV 0.155 0 1 0 0.280
+ α6 BSjt + α7 BI jt + α8 CEODjt + α9 AUDISjt + α10 CONCjt + α11 INST jt SIZE 13.073 9 16.906 13.043 1.805
+ α12 GOV jt + α13 SIZEjt + α14 PROF jt + α15 ACCSTANDjt PROF 0.071 − 0.041 0.228 0.053 0.084
Frequencies for dummy variables
+ < YEAR CONTROLS > + < COUNTRY CONTROLS > + εjt
N Frequency Percentage
0 1 0 1
Where: CEOD 372 329 43 88.44% 11.56%
ACI is the accounting compliance index, AUDIS 372 224 148 60.22% 39.78%
ACS is the audit committee size, ACCSTAND 372 128 244 34.41% 65.59%
ACAFE (D) 372 154 218 41.40% 58.60%
ACIND is audit committee independence,
ACIE (D) 372 157 215 42.20% 57.80%
ACAFE is the proportion of AC members with only accounting ACBE (D) 372 238 134 63.98% 36.02%
financial expertise, AC SIZE (%)
ACIE is the proportion of AC members with only industry expertise, N 3 4 5
AC SIZE 372 69% 23.74% 7.26%
ACBE is the proportion of AC members with both accounting
financial and culture expertise, Notes: ACI is the accounting compliance index, ACS is audit committee size,
BS is board size, ACIND is audit committee independence, ACAFE is the proportion of AC
BI is board independence, members with only accounting financial expertise, ACIE is the proportion of AC
CEOD is board duality, members with only industry expertise, ACBE is the proportion of AC members
AUDIS is auditor industry specialization, with both accounting financial and culture expertise, BS is board size, BI is the
proportion of independent directors, CEOD is board duality, AUDIS is auditor
CONC is ownership concentration,
industry specialization, CONC is ownership concentration, INST is the per­
INST is percentage of institutional ownership,
centage of institutional ownership, GOV is the percentage of government
GOV is percentage of government ownership, ownership, SIZE is the IB’s size, PROF is the IB’s profitability, and ACCSTAND
is the other set of accounting standards used. The AC SIZE is the percentage of
audit committee with 3, 4 or 5 members.
6
In our sample, no AC member has only culture expertise. However, our
sampled IBs’ ACs have members with both accounting financial and culture
Table 4 presents descriptive statistics of the dependent and
expertise. For this reason, it is not possible to separate the effect of culture
expertise on compliance level. Therefore, we have investigated the effect of
culture expertise combined with accounting financial expertise on compliance
level with AAOIFI FASs.

7
Y. MNIF and M. TAHARI Advances in Accounting 57 (2022) 100596

independent variables.7 For the dependent variable, the results show

Notes: *, **, *** denote significance at the 10%, 5% and 1% level respectively, using one-tailed tests.ACS is audit committee size, ACIND is audit committee independence, ACAFE is the proportion of AC members with

the proportion of independent directors, CEOD is board duality, AUDIS is auditor industry specialization, CONC is ownership concentration, INST in the percentage of institutional ownership, GOV is the percentage of
only accounting financial expertise, ACIE is the proportion of AC members with only industry expertise, ACBE is the proportion of AC members with both accounting financial and culture expertise, BS is board size, BI is
1.43
1.43
2.29
2.18
1.87
1.41
1.42
1.75
2.09
2.38
2.01
1.79
1.40
1.53
3.10
that the level of compliance with AAOIFI FAS disclosures ranges from a

VIF
minimum of 10.2% to a maximum of 95%, with an average of 64.9%.
Regarding audit committee characteristics, AC size ranges from 3 to 5

ACCSTAND
members. The proportion of independent and non-executive AC mem­
bers ranges from 0 to 100%. Concerning AC expertise, the means for the
percentage of audit committee members with our three categories of

1
expertise are as follows: 39.6% accounting financial expertise with no

− 0.349***
industry expertise, 37.7% who have only industry expertise, and 12.9%

PROF
accounting financial experts who also have culture expertise.

1
5.2. Regression results

0.157***
0.217***
SIZE
In order to identify potential problems of multicollinearity among

1
our independent variables, we examined a correlation matrix and

− 0.146***
calculated the Variance Inflation Factor (VIF). Table 5 shows that all the

0.554***
0.123**
correlation coefficients are below 0.816. The highest VIF value is 3.10.

AUDS
This value is below 10, the threshold at which multicollinearity would

1
be a concern. Hence, multicollinearity does not appear to be a problem.

− 0.345***

− 0.568***
Our regression results are presented in Table 6. Model 1 (a,b,c,d and

0.157***
e) focuses on the association between each independent variable of in­

0.041
GOV
terest by itself and compliance with AAOIFI FASs, while model 1 (f)

1
examines the association between all of the identified AC characteristics

− 0.404***
and compliance with AAOIFI FASs (the full model). As robustness tests,

0.213***

0.290***
AC expertise is measured as the number of experts on the audit com­

government ownership, SIZE is the IB’s size, PROF is the IB’s profitability and ACCSTAND is the other set of accounting standards used.
0.069
0.075
INST
mittee in Model 2, and in Model 3, it is measured using a dummy var­

1
iable equal to one if the audit committee has at least one expert.

− 0.196***
− 0.363***

− 0.352***
With respect to the audit committee characteristics, the empirical

0.200***
0.144***
evidence derived from models 1 and 3 indicate that audit committee size CONC

0.027
is positively associated with compliance with AAOIFI FAS disclosure

1
requirements at the 10% level or better; hence, Hypothesis 1 is sup­

− 0.154***

− 0.205***
− 0.155***
− 0.104**
ported. Furthermore, this hypothesis is supported when examining AC

0.122**

− 0.074
CEOD

size by itself with all control variables (Model 1a). This result is

0.035
consistent with agency theory, resource dependency theory, and previ­

1
ous studies relating to voluntary disclosure by Islamic banks (Harun,
− 0.271***
− 0.178***

− 0.231***

− 0.134***
2016, in the GCC region, and Abdullah et al., 2015, in Southeast Asia

0.274***

0.210***
0.222***

0.436***
and the GCC regions). These results suggest a larger audit committee has
BI

a positive influence on the overall compliance level. Thus, a higher

1

number of audit committee members is likely to help the committee

− 0.268***
− 0.303***

− 0.177***
uncover and resolve potential issues relating to Islamic banking
0.156***
0.111**
− 0.005
0.045

0.013

0.004
mandatory disclosures.
BS

Concerning audit committee expertise, our results indicate that there

1

is a significant positive relationship between ACAFE and compliance

− 0.290***
− 0.122**

with AAOIFI FAS disclosure requirements at the 10% level in Models 1

0.366***

0.144***

0.259***
0.124**
− 0.048

− 0.061

− 0.038
0.078
ACBE

and 3 and at the 5% level in Model 2, which supports Hypothesis 3a. This
hypothesis has marginal support when examining AC accounting
1

financial expertise by itself with all control variables (model 1c). This
− 0.295***

− 0.361***

− 0.393***

− 0.243***

− 0.421***
− 0.124**
0.215***

0.308***
0.213***

0.160***

result supports the perspective of resource dependency theory. This

0.063

finding is consistent with Bepari and Mollik (2015) and Sellami and
ACIE

Fendri (2017) regarding compliance with IAS/IFRS, and is also in line

1

with Abdullah et al. (2015), which shows that AC accounting financial

− 0.510***

− 0.138***

− 0.251***

− 0.231***
− 0.335***

− 0.213***
0.184***

0.252***

0.494***

expertise is positively associated with voluntary corporate governance

− 0.099*

0.312**
− 0.066
ACAFE

disclosures of IBs. In fact, this result suggests that AC members with

accounting financial expertise are more likely to identify non-
1

compliance with mandatory disclosures.

− 0.207***

− 0.212***
0.227***
0.178***

Interestingly, our results reveal that AC members with accounting

0.113**

0.111**
− 0.071

− 0.076

− 0.037
0.0839
ACIND

0.816

0.046

0.000

financial and culture expertise (ACBE) are positively and significantly

associated with the level of compliance with AAOIFI FAS disclosure
1
Correlation matrix and VIF.

requirements in the three regression models, at the 1% level. Thus,

− 0.132**

− 0.124**

− 0.111**
0.192***
0.289***

0.206***

0.219***

0.406***
0.211***

0.295***
− 0.095*

Hypothesis 3c is supported. This hypothesis is also supported when

− 0.038
0.062
0.005
ACS

examining AC accounting financial and culture expertise by itself with

1

all control variables (Model 1(e)).

ACCSTAND
ACAFE
ACIND

AUDIS
Table 5

CONC
CEOD

PROF
ACBE
ACIE

INST
GOV

SIZE

7
In order to address outliers, all continuous variables are winsorized at the
ACS

BS
BI

1st and 99th percentiles.

8
Y. MNIF and M. TAHARI Advances in Accounting 57 (2022) 100596

Table 6
Multivariate regression results.
Model 1 (Proportion of experts) Model 2 Model 3 (At Model 4 (the
(Number of least one overall effect
Model 1 Model 1 Model 1 (c) Model 1 Model 1 Model 1 (f)
experts) expert) of AC)
(a) (b) (d) (e)

Independent Predicted Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
variables sign (Z (Z (Z (Z (Z (Z –statistic) (Z –statistic) (Z –statistic)
–statistic) –statistic) –statistic) –statistic) –statistic)

0.009** 0.007* 0.004 0.012***

ACS +
(2.56) (1.80) (0.88) (2.60)
0.001 − 0.000 − 0.002 0.000
ACIND +
(0.25) (− 0.13) (− 0.34) (0.09)
0.007* 0.010* 0.003** 0.016*
ACAFE +
(1.72) (1.85) (2.03) (1.98)
− 0.013 − 0.011 − 0.002 0.010
ACIE +
(− 1.53) (− 1.25) (− 0.67) (1.11)
0.021*** 0.025*** 0.008*** 0.045***
ACBE +
(3.66) (3.75) (3.74) (5.88)
0.017**
ACEFFEC +
(2.14)
− 0.000 − 0.000 − 0.000 − 0.000 − 0.000 − 0.001 − 0.001 − 0.001 − 0.000
BS +
(− 0.63) (− 0.59) (− 1.04) (− 0.81) (− 0.99) (− 1.44) (− 1.23) (− 1.19) (− 0.92)
0.122*** 0.106*** 0.108*** 0.100*** 0.105*** 0.114*** 0.106*** 0.107*** 0.107***
BI +
(11.40) (10.56) (12.70) (9.79) (11.56) (8.72) (7.63) (7.41) (13.95)
− 0.039*** − 0.043*** − 0.045*** − 0.045*** − 0.046*** − 0.040*** − 0.042*** − 0.043*** 0.002
CEOD −
(− 3.22) (− 3.61) (− 3.76) (− 3.55) (− 3.74) (− 3.14) (− 3.21) (− 3.27) (0.34)
0.012*** 0.012*** 0.012*** 0.013*** 0.017*** 0.015*** 0.013*** 0.012*** 0.013***
AUDIS +
(3.03) (2.93) (3.00) (3.06) (4.18) (3.35) (2.88) (2.72) (3.58)
− 0.02** − 0.031*** − 0.038*** − 0.037*** − 0.038*** -0.040*** − 0.033** -0.025** -0.041***
CONC −
(− 2.13) (− 2.81) (− 3.34) (− 3.09) (− 3.40) (− 2.75) (− 2.49) (− 1.98) (− 3.94)
0.000 0.007 0.007 0.006 0.007 -0.03 0.007 0.014 0.010
INST +
(0.06) (0.93) (0.98) (0.75) (0.90) (− 0.38) (0.69) (1.48) (1.26)
− 0.015 − 0.014 − 0.022* − 0.026* − 0.009 − 0.010 0.000 − 0.008 − 0.008
GOV +
(− 1.02) (− 1.06) (− 1.73) (− 1.91) (− 0.62) (− 0.65) (0.00) (− 0.97) (− 1.07)
0.006*** 0.006*** 0.006*** 0.006*** 0.008*** 0.007*** 0.007*** 0.006*** 0.006***
SIZE +
(4.32) (4.14) (4.12) (4.05) (4.48) (4.85) (4.13) (3.87) (4.37)
0.038*** 0.032*** 0.041*** 0.042*** 0.036*** 0.029** 0.031** 0.045*** 0.024***
PROF +
(4.02) (3.32) (4.76) (4.35) (3.09) (2.10) (2.11) (3.14) (2.75)
0.059*** 0.056*** 0.049*** 0.050*** 0.054*** 0.053*** 0.063*** 0.065** 0.027
ACCSTAND +
(3.26) (3.04) (2.81) (2.74) (3.05) (2.65) (2.95) (2.43) (0.64)
0.582*** 0.632*** 0.642*** 0.653*** 0.605*** 0.583*** 0.594*** 0.514*** 0.650***
Constant
(16.32) (20.93) (21.92) (20.32) (20.16) (14.08) (13.60) (11.41) (13.52)
Wald Chi2 9301.73 8585.23 12,023.16 8946.23 9240.93 5754.67 5343.59 6625.22 9326.58
Prob > Chi2 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Year controls Included Included Included Included Included Included Included Included Included
Country
Included Included Included Included Included Included Included Included Included
controls
Coefficient Coefficient Coefficient
Relevant Wald
(Chi2- (Chi2- (Chi2-
Tests
statistic) statistic) statistic)
ACAFE versus 0.015** (0.005)** 0.029**
ACBE (4.31) (4.88) (6.00)

Notes:*, **, *** denote significance at the 10%, 5% and 1% level respectively, using one-tailed tests.
ACI is the accounting compliance index, ACS is audit committee size, ACIND is audit committee independence, ACAFE is the proportion of AC members with only
accounting financial expertise, ACIE is the proportion of AC members with only industry expertise, ACBE is the proportion of AC members with both accounting
financial and culture expertise, BS is board size, BI is the proportion of independent directors, CEOD is board duality, AUDIS is auditor industry specialization, CONC
is ownership concentration, INST in the percentage of institutional ownership, GOV is the percentage of government ownership, SIZE is the IB’s size, PROF is the IB’s
profitability and ACCSTAND is the other set of accounting standards used.
Model 1 (a,b,c,d and e) focus on the association between each independent variable of interest by itself and compliance with AAOIFI FASs, while model 1(f) examines
the association between all AC characteristics taken together and compliance with AAOIFI FASs (the full model). Model 2 presents regression results where expertise is
measured as the number of experts who serve on the AC. Model 3 presents regression results where expertise is measured using a dummy variable equal to one if the AC
has at least one expert. Model 4 reports regression results of AC effectiveness and compliance levels.

In order to better understandif this combined expertise better im­
proves the level of compliance than accounting financial expertise alone,
we use a difference in coefficients test (Wald test). The finding reveals a
positive and significant difference (at the 1% level) between audit
committee accounting financial expertise combined with culture
expertise versus only accounting financial expertise. This result suggests
that an AC member with a combination of culture expertise (expertise in
Islamic banking) and accounting financial expertise better improves the
compliance level than an AC member with only accounting financial
expertise. This result can be explained by the fact that an expert in
Islamic banking may enable the audit committee to improve the IB’s
compliance with AAOIFI standards since the application of these stan­
dards requires such knowledge. More precisely, we find that culture
experts who are also accounting financial experts better understand
accounting issues faced by IBs than those AC members with only ac­
counting financial expertise.
However, we find a non-significant relationship between ACIND and
compliance with AAAOIFI FAS disclosure requirements in all models;
hence, Hypothesis 2 is rejected. This finding is confirmed when exam­
ining AC independence by itself with all control variables (Model 1(b)).

9
Y. MNIF and M. TAHARI
This result is not consistent with Abdullah et al. (2015) and Sellami and
Fendri (2017).
The results derived from the three models indicate that only the in­
dustry expertise variable (ACIE) does not seem to influence the
compliance level with AAOIFI’s FASs as the estimated coefficient is not
significant in all instances. Likewise, AC’s only industry expertise by
itself with all control variables is not associated with the compliance
level with AAOIFI’s FASs (model 1d). This finding reveals that having
only industry expertise without accounting financial expertise is not
sufficient to influence compliance level with AAOIFI’s FASs. This result
is consistent with Sellami and Fendri (2017).
Since our results highlight the positive effect of AC characteristics on
compliance with AAOIFI FASs, we examine the joint effect of these di­
mensions on the compliance level. We measure AC effectiveness in line
with Zaman, Hudaib, and Haniffa (2011) and Mnif and Znazen (2020).
According to these studies, to be effective, the audit committee should
be composed of at least three members, all of them should be indepen­
dent non-executive directors, and at least one AC member should have
accounting financial expertise. Thus, in order to be included in our
composite measure of AC effectiveness (ACEFFEC), continuous mea­
sures of the AC characteristics are transformed into dichotomous vari­
ables as follows:
ACEFFEC = 1 if [(ACSdic = 1) + (ACINDdic = 1) + (ACAFEdic = 1)
+ (ACIEdic = 1) + (ACBEdic = 1) ] and 0 otherwise
Where:
ACSdic = 1 if ACS ≥ 3, 0 otherwise;
ACINDdic = 1 if ACIND = 1, 0 otherwise;
ACAFEdic = 1 if ACAFE ≥1; 0 otherwise.
ACIEdic = 1 if the ACIE ≥1; 0 otherwise.
ACBEdic = 1 if the ACBE ≥1; 0 otherwise.
The results related to Model 4 reveal that compliance with AAOIFI
FASs is positively related to AC effectiveness (at the 5% level). This
finding suggests that compliance level is positively associated with IBs
that have effective audit committees. This result is consistent with Mnif
and Znazen (2020), which recommends that regulators require audit
committees to consist of at least three independent directors with at least
one possessing accounting financial expertise, in order to provide better
disclosure quality.
Regarding control variables, we find a significant positive associa­
tion at the 1% level between the AUDIS and compliance with AAOIFI
FASs in all models. Our finding supports the perspective of agency
theory and is consistent with prior studies related to financial reporting
quality (Balsam, Krishnan, & Yang, 2003; Dunn & Mayhew, 2004;
Habib, 2011). This result is also consistent with Chiang and Lin (2012),
which finds that the level of compliance with IAS 39 is high when an
industry specialist auditor audits the financial statements. Our finding
also implies that the auditor’s knowledge about the Islamic banking
industry can minimize the probability of audit failure and reduce fraud,
since the auditor has a better evidence-gathering capability. Thus, this
specialist auditor will be able to make sound professional judgments. As
a consequence, the specialist’s knowledge of the Islamic banking in­
dustry provides a greater ability to detect specific errors and, as a
consequence, minimizes non-compliance with AAOIFI standards.
Regarding the board characteristics, our findings show a significant
positive association at the 1% level between board independence (BI)
and compliance with AAOIFI FASs in all models. In addition, Models 1, 2
and 3 find a significant negative association at the 1% level between
CEOD and compliance level. However, Model 4 shows an insignificant
association.
For ownership structure, we find a significant negative relationship
(at the 5% level in Model1(a),2,and 3, and at the 1% level in the other
models) between ownership concentration (CONC) and compliance with
AAOIFI FASs. This finding implies that the managers of IBs with more
concentrated ownership are less motivated to comply with AAOIFI
10
Advances in Accounting 57 (2022) 100596
standards. This finding might be explained by the observation that in
closely-held IBs, the main shareholders can request the information they
want, so a preference for confidentiality might outweigh better financial
statement disclosure.
The findings derived from the four models show that the coefficients
on SIZE are positive and statistically significant at the 1% level in all
instances. This result is consistent with prior compliance studies, and
can be explained by the fact that larger IBs tend to have more resources
designated to accounting departments than smaller IBs and, therefore,
will be more compliant with the accounting standards.
The results indicate that PROF is positively and significantly related
to compliance with AAOIFI FASs (significant at the 5% level or better in
all models). The finding, which is in line with Bepari and Mollik (2015)
and Juhmani (2017), reveals that more profitable IBs may find it easier
or more beneficial to comply with AAOIFI FASs than less profitable ones.
Our results report that there is a significant positive association (at
the 1% level in Models 1 and 2 and the 5% level in Model 3) between the
other set of accounting standards used (ACCSTAND) and the compliance
level. This finding reveals that the level of compliance with AAOIFI FASs
depends on the other set of standards used as a basis for preparing the
financial statements (for matters not covered by FASs, Islamic banks use
either the relevant IFRSs or local accounting standards).Islamic banks
referring solely to the use of IFRS in the accounting policy note provide
more AAOIFI FAS-required disclosures than do those companies refer­
ring to local accounting standards.
The other control variables (BS, INST, and GOV) are not significant in
explaining compliance with AAOIFI FASs.
5.3. Additional analysis
We test whether our main results are robust when transforming our
dependent variable into the log of the odds ratio, in line with Cooke
(1998), Tsalavoutas (2011), Al-Shiab (2003), Abdullah et al. (2015) and
Sellami and Fendri (2017). The log of the odds ratio is calculated as
follows:
( )
Y = log
p
1− p
where Y = the transformed level of compliance and p = the ratio of IBs’
compliance computed using the method explained earlier. The results,
which were obtained by using this transformation of the dependent
variable (untabulated), confirm our previous findings.
As a robustness test, and following prior empirical studies related to
audit committee expertise, we examine the results using the number of
experts who serve on the AC (Model 2) and a dummy variable equal to
one if the AC has at least one expert and zero otherwise (Model 3). When
using these alternative measures for AC expertise (number of experts
and at least one expert), our results (presented in Table 6) largely
confirm our previous findings.
Moreover, we included additional analysis using change variables in
the model (AC size change and AC accounting financial expertise
change).We identify changes in the AC size and create a variable named
AC size change ACSCHANGE. If the number of AC members decreased,
did not change, or increased, the variable takes a value of − 1, 0, and 1,
respectively. According to Table 7(column 2), we find that changes in
the number of AC members are positively associated with the compli­
ance level with AAOIFI FASs. Additionally, we measure the changes in
accounting financial expertise as our proxy for changes in AC expertise
(ACAFECHANGE). In line with Adams and Neururer (2020), ACA­
FECHANGE takes values of either − 1 (decrease in accounting financial
expertise), 0 (no change in accounting financial expertise), or 1 (increase
in accounting financial expertise). As reported in Table 7 (column 3), we
find that changes in the number of accounting financial experts are
positively associated with the compliance level with AAOIFI FASs.
A further robustness test consists of examining the lagged impact of
Y. MNIF and M. TAHARI Advances in Accounting 57 (2022) 100596

Table 7 Table 8
Change analysis. Lagged AC characteristics.
AC size change AC expertise change Independent variables Coefficient
(Z –statistic)
Independent variables Coefficient Coefficient
(Z –statistic) (Z –statistic) 0.003*
ACSjt-1
(1.72)
ACS 0.009**
0.005
(2.17) ACINDjt-1
(1.22)
0.018**
ACSCHANGE 0.012**
(2.52) ACAFEjt-1
(2.18)
− 0.002 − 0.006
ACIND 0.004
(− 0.35) (− 0.76) ACIEjt-1
(0.85)
0.011**
ACAFE 0.037***
(1.98) ACBEjt-1
(4.98)
0.006**
ACAFECHANGE − 0.000
(2.18) BS
(− 0.18)
− 0.006 − 0.009
ACIE 0.103***
(− 0.69) (− 0.99) BI
(9.13)
0.024*** 0.021**
ACBE − 0.048***
(3.65) (2.51) CEOD
(− 3.81)
− 0.001 − 0.000
BS 0.018***
(− 1.31) (− 0.21) AUDIS
(4.29)
0.105*** 0.117***
BI − 0.033**
(8.67) (8.36) CONC
(− 2.49)
− 0.051*** − 0.044***
CEOD − 0.002
(− 3.88) (− 3.36) INST
(− 0.26)
0.016*** 0.018***
AUDIS − 0.015
(3.25) (3.70) GOV
(− 1.03)
− 0.043*** − 0.038***
CONC 0.008***
(− 3.22) (− 3.06) SIZE
(5.29)
0.002 0.009
INST 0.026
(0.31) (0.88) PROF
(1.53)
− 0.017 − 0.006
GOV 0.052***
(− 1.16) (− 0.74) ACCSTAND
(2.84)
0.008*** 0.008***
SIZE 0.560***
(4.80) (4.82) Constant
(16.60)
0.032** 0.038**
PROF Wald chi2 4641.82
(2.32) (2.15)
Prob > chi2 0.0000
0.039* 0.058**
ACCSTAND Year controls Included
(1.74) (2.59)
Country controls Included
0.625*** 0.552***
Constant Coefficient
(16.34) (12.49) Relevant Wald Tests
(Chi2-statistic)
Wald chi2 6578.81 4746.21
0.025***
Prob > chi2 0.0000 0.0000 ACBE versus ACAFE
(7.72)
Year controls Included Included
Country controls Included Included Notes: *, **, *** denote significance at the 10%, 5% and 1% level
Notes: *, **, *** denote significance at the 10%, 5% and 1% level respectively, respectively, using one-tailed tests.
using one-tailed tests. ACI is the accounting compliance index, ACS is the audit com­
ACI is the accounting compliance index, ACS is the audit committee size, mittee size, ACIND is audit committee independence, ACAFE is
ACIND is audit committee independence, ACAFE is the proportion of AC the proportion of AC members with only accounting financial
members with only accounting financial expertise, ACIE is the proportion of AC expertise, ACIE is the proportion of AC members with only in­
members with only industry expertise, ACBE is the proportion of AC members dustry expertise, ACBE is the proportion of AC members with
with both accounting financial expertise and culture expertise, BS is board size, both accounting financial and culture expertise, BS is board size,
BI is board independence, CEOD is board duality, AUDIS is auditor industry BI is board independence, CEOD is board duality, AUDIS is
specialization, CONC is ownership concentration, INST in the percentage of auditor industry specialization, CONC is ownership concentra­
institutional ownership, GOV is the percentage of government ownership, SIZE tion, INST in the percentage of institutional ownership, GOV is
is the IB’s size, PROF is the IB’s profitability, ACCSTAND is the other set of the percentage of government ownership, SIZE is the IB’s size,
accounting standards used. ACSCHANGE is audit committee size change and PROF is the IB’s profitability, and ACCSTAND is the other set of
ACAFECHANGE is accounting financial expertise change. accounting standards used.
t-1: each AC characteristic is lagged by one year. The same
sample size remains unchanged.
the same AC characteristics on compliance level. According to Sultana,
Singh, and Van der Zahn (2015), this approach takes into account the
persist after excluding FAS 1. Indeed, this standard has the highest
possibility that the impact of the audit committee is not immediate but
number of items (102 items out of a total of 281) since it focuses on the
influences future accounting reports (in our study, the compliance
IBs’ general disclosure and specifies the complete set of the IBs’ financial
level). Therefore, we use a lagged variable for AC characteristics to
statements (statement of financial position, statement of income, state­
ensure that the AC member has time to provide real effects on compli­
ment of cash flows, statement of changes in owners’ equity, statement of
ance. Tests are performed using lagged data for all ACcharacteristics (e.
changes of restricted investment account holders, list of sources and uses
g., ACSjt-1asopposed to ACSjt). The results reported in Table 8 show that
of charity and Zakah fund, list of sources and uses of al Qard al Hasan
lagged AC size, lagged AC accounting financial expertise and lagged AC
fund). As reported in Table 9 (model I), the findings related to the sig­
accounting financial and culture expertise are all positive and signifi­
nificance and the sign of the variables of interest remain similar to those
cantly associated with compliance with AAOIFI FASs. Conversely, lag­
reported in Table 6(except for some control variables).
ged AC independence and lagged AC industry expertise are not
Moreover, as another additional test, we exclude Bahrain and Sudan
significantly associated with compliance with AAOIFI FASs.
since they dominate our sample (239 observations out of 372). As
As another additional check, we examine whether the main findings

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Y. MNIF and M. TAHARI Advances in Accounting 57 (2022) 100596

Table 9 significant association between compliance with AAOIFI FASs and ac­
Additional analysis. counting financial expertise. Moreover, our results reveal that the pro­
Model I (excluding FAS Model II (excluding Bahrain and portion of AC members with both accounting financial expertise and
1) Sudan) culture expertise is positively and significantly associated with the level
Independent Coefficient Coefficient of compliance.
variables (Z –statistic) (Z –statistic) In order to statistically validate whether this combined expertise
0.008* 0.022***
improves the level of compliance relative to accounting financial
ACS expertise alone, we use a difference in coefficients test (Wald test). The
(1.65) (3.39)
0.008 0.005 test confirms a positive and significant difference between the combi­
ACIND
(1.27) (0.77) nation of accounting financial expertise and culture expertise, on the
0.010** 0.018**
ACAFE one hand, and only accounting financial expertise on the other hand.
(2.09) (2.20)
− 0.012 0.010 This result might be explained by the fact that an expert in Islamic
ACIE
(− 1.20) (0.73) banking may enable the audit committee to improve the bank’s
ACBE
0.029*** 0.056*** compliance with AAOIFI FASs because the application of these stan­
(4.12) (6.57) dards requires such knowledge.
0.001 0.000
BS
(1.04) (0.26)
The results of this study have some distinctive implications. First, our
0.004 − 0.008 results report substantial non-compliance with AAOIFI FASs and indi­
BI
(0.44) (− 0.39) cate that improvements are needed regarding the level of compliance.
CEOD
-0.067*** -0.046** This finding is important for Islamic banks because better compliance
(− 5.02) (− 2.47)
with AAOIFI standards might favorably impact their image.This result
0.002 0.039***
AUDS
(0.50) (3.48) can also be useful to the Shariah Supervisory Board (SSB) of the IBs.
− 0.032** 0.012 Since the SSB has the responsibility to review and confirm that all ac­
CONC
(− 2.47) (0.87) tivities of the IB are compliant with Shariah rules, it could have the
0.004 0.003 authority to evaluate and guide the IB when necessary. Moreover, the
INST
(0.36) (0.35)
-0.061*** − 0.012
SSB should disclose this information to the public. Therefore, IBs might
GOV be obliged to highlight their compliance with AAOIFI disclosures. High
(− 4.31) (− 0.26)
0.009*** 0.005** levels of disclosure might improve the bank’s reputation, improve the
SIZE
(4.57) (2.35) faith of current clients, attract new clients based on their Shariah
0.024 0.003
PROF compliance, and result in a high level of public trust. These implications
(1.43) (0.11)
0.100*** 0.005 are supported by the results in El-Halaby, Hussainey, and Abou-El-Sood
ACCSTAND
(3.79) (0.38) (2018) and Elgattani (2018).
Constant
0.576*** 0.581*** Our results should alert senior management of the sampled IBs about
(11.48) (12.29) the problem of non-compliance with AAOIFI FAS disclosure re­
Wald chi2 3279.44 173.44
Prob > chi2 0.0000 0.0000
quirements. If the IBs’ financial statements are incomplete and poten­
Year controls Included Included tially biased, financial reporting cannot effectively reduce information
Country controls Included Included asymmetry. Investors could face uncertainties that could lead to an in­
Relevant Wald Coefficient Coefficient crease in the IB’s cost of capital. Based on our findings, there is a need for
Tests (Chi2-statistic) (Chi2-statistic)
more transparency in relation to AAOIFI standards.Moreover, our
ACBE versus 0.013*** 0.038***
ACAFE (6.82) (8.45) findings might help the managers of IBs to improve and upgrade the
quality of the information disclosed in their annual reports.
Our research should encourage the auditors of IBs to intensify their
Notes: *, **, *** denote significance at the 10%, 5% and 1% level respectively,
using one-tailed tests.
efforts in order to provide a high quality audit. Since investors cannot
ACI is the accounting compliance index, ACS is the audit committee size, directly observe the quality of auditors’ reviews of financial statements,
ACIND is audit committee independence, ACAFE is the proportion of AC they rely on the auditor’s reputation. However, when relevant AAOIFI
members with only accounting financial expertise, ACIE is the proportion of AC disclosures are omitted, the auditor’s reputation can be compromised.
members with only industry expertise, ACBE is the proportion of AC members Furthermore, our findings may be relevant to national regulators in their
with both accounting financial and culture expertise, BS is board size, BI is efforts to harmonize financial reporting. Finally, our results may be
board independence, CEOD is board duality, AUDIS is auditor industry relevant to international regulators, such as the AAOIFI.
specialization, CONC is ownership concentration, INST is the percentage of The evidence concerning the positive association between the extent
institutional ownership, GOV is the percentage of government ownership, SIZE of compliance with AAOIFI FASs and audit committee expertise may
is the IB’s size, PROF is the IB’s profitability and ACCSTANDis the other set of
assist regulators of Islamic finance as they seek to develop guidelines
accounting standards used.
and standards relating to AC expertise.To obtain a higher level of
compliance with AAOIFI standards, AC members could be selected
presented in Table 9 (Model II), our results largely confirm our previous based on their relevant accounting financial knowledge. In addition, AC
findings (except for some control variables). members should have a sound knowledge of the IB’s business environ­
ment and industry in order to improve compliance with AAOIFI’s
6. Conclusion standards.As a consequence, our findings imply that there is a need to re-
examine the qualifications and expertise required for AC membership.
The purpose of this study was to examine the effect of audit com­ Standard-setters could collaborate with regulatory authorities on such a
mittee characteristics (size, independence, and expertise) on compliance project because of the importance of the topic and its implications for
with AAOIFI FASs. In order to achieve this purpose, we examined 372 the Islamic banking industry.
bank-year observations from eight jurisdictions for the period2009 to Our results suggest opportunities for future research. We examined
2015. compliance with only AAOIFI FAS disclosure requirements. Future
Our findings reveal that compliance with AAOIFI FASs is positively research could investigate compliance with AAOIFI FAS recognition and
influenced by AC size. However, AC independence does not affect the measurement rules. However, such an investigation might require ac­
compliance level. With respect to AC expertise, we find a positive and cess to IBs’ non-public information. This study only focused on one

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Y. MNIF and M. TAHARI Advances in Accounting 57 (2022) 100596

major sector of the Islamic financial service industry (Islamic banks).
Future research could explore compliance with AAOIFI FASs among
other Islamic financial institutions.
Declaration of Competing Interest
Acknowledgements
The authors gratefully acknowledge the constructive comments and
suggestions from the editor, Professor Dennis Caplan, and the two
anonymous reviewers.

The authors have no conflict of interests with any related parties.

Appendix 1. A brief summary of the FASs

Standard Title Descriptiona

FAS 1 GENERAL PRESENTATION AND DISCLOSURE IN THE FINANCIAL This standard is applicable to the financial statements published by the IBs to meet the common
STATEMENTS OF ISLAMIC BANKS AND FINANCIAL INSTITUTIONS. information needs of the main users of such statements. Moreover, this standard specifies the
complete set of the IBs’ financial statements.
FAS 2 MURABAHA AND MURABAHA TO THE PURCHASE ORDERER This standard is applied to the assets available for sale by Murabaha and Murabaha to the
purchaser, the revenues, expenses, gains and losses attributable to such an asset as well as
Murabaha receivables. This shall apply whether the IB buys these assets exclusively from its own
funds, from the pool of commingled funds comprising the IB’s own funds and unrestricted
investment accounts, or from restricted investment account funds.
FAS 3 MUDARABA FINANCING This standard is applied to Mudaraba financing transactions carried out by the IB as a provider of
funds and the transactions related to the capital provided by the IB to be used from the time of its
inception to the time of its completion. This applies whether the IB finances the Mudaraba capital
exclusively from its own funds, from the pool of commingled funds comprising the IB’s own funds
and unrestricted investment accounts or from restricted investment accounts. The standard shall
also apply to the transactions pertaining to the IB’s share in Mudaraba profits or losses.
FAS 4 MUSHARAKA FINANCING This standard is applied to Musharaka financingtransactions carried out by IBs whether by means
of a constant Musharaka (short or long-term) or a diminishing Musharaka (one which ends in
transferring ownership to one party). This shall apply whether the IB finances its share in
Musharaka capital exclusively outs of its own funds, out of the pool of commingled funds
comprising the IB’s own funds and unrestricted investment accounts or from restricted investment
accounts. The standard also applies to the transactions pertaining to the IB’s share in Musharaka
profits or losses.
FAS 5 DISCLOSURE OF BASES FOR PROFIT ALLOCATION BETWEEN This standard targets the disclosure for profit allocation between owners’ equity and IAHs.It is
OWNERS’EQUITY AND INVESTMENTS ACCOUNTS HOLDERS applicable to the financial statements published by IBs to meet the common information needs of the
main users of such statements. This standard is also applicable to all Islamic banks regardless of
their legal form, countries of incorporation or size.
FAS 6 EQUITY OF INVESTMENT ACCOUNT HOLDERS AND THEIR This standard addresses the accounting rules relating to the funds received by the IB for investment
EQUIVALENT. in its capacity as a Mudarib at its discretion, either in whatever it the IB deems appropriate (equity
of unrestricted IAHs) or subject to certain restrictions (equity of restricted IAHs).
FAS 8 IJARAH AND IJARAH MUNTAHIA BITTAMLEEK This standard addresses the accounting rules relating to Ijarah and Ijarah muntahiabittamleek in
which the IB is a lessor or a lessee, including the acquisition of assets for Ijarah, Ijarah expenses,
revenues, gains and losses.
FAS 9 ZAKAH This standard is applied to the accounting treatmentsrelated to the determination of the Zakah base,
measurement of items included in the Zakah base and disclosure of Zakah in the financial
statements of the IB.
FAS 10 ISTISNA’A AND PARALLEL ISTISNA’A. This standard address the accounting rules of Istisna’a and Parallel Istisna’a contracts in the
financial statements of IBs relating to the measurement and recognition the costs and revenues from
Istisna’a and Parallel Istisna’a, the gains and losses accruing there from, and their presentation and
disclosure in the financial statements of the IB.
FAS 11 PROVISIONS AND RESERVES The aim of this standard is to set out accounting rules to recognize, measure, present and disclose
the provisions which are formed by IBs and financial institutions to revalue their receivables,
financing and investment assets. In addition, this standard is intended to sett out the accounting
rules for the reserves that the IB assets aside, either from the Mudaraba income, before allocating
the Mudarib share, to maintain a certain return on investment (profit equalisation reserve) or from
the profit of the IAHs, after allocating the Mudarib share, to cater against future losses for IAHs
(investment risk reserve).
FAS 16 FOREIGN CURRENCY TRANSACTIONS AND FOREIGN OPERATIONS This standard sets out the accounting rules for recognizing, measuring, presenting and disclosing
transactions in various currencies other than the reporting currency of the IB, whether such
transactions relate to assets, liabilities, off-balance sheet items, revenues, expenses, gains or losses
in the financial statements. This standard also covers accounting for net investments in foreign
operations of an IB which prepares its financial statements in a currency which is different from the
reporting currency of the IB (foreign operations).
FAS 17 INVESTMENTS This standard is applied to the institution’s investments, whether in the form of direct investments,
investment funds or investment portfolio, in sukuk (Islamic bonds), shares, and real estate. The
funds invested represent either the institutions’ own funds, the funds of unrestricted investment
accounts or both, or the funds of restricted investment accounts.
FAS 18 ISLAMIC FINANCIAL SERVICES OFFERED BY CONVENTIONAL This standard shall apply to the institutions which offer Islamic financial services in addition to
FINANCIAL INSTITUTIONS their conventional financial services. This standard sets out the accounting rules only for the Islamic
financial services offered by these institutions (Islamic windows).
FAS 20 DEFERRED PAYMENT SALE This standard shall apply to assets available for deferred payment sales, the revenues, expenses,
gains and losses relating to these transactions and receivables arising from deferred payment sale
transactions.
FAS 21 DISCLOSURE ON TRANSFER OF ASSETS This standard shall apply to the operations of transferring assets between different investment
accounts conducted by institutions. These transfers shall include the following: the transfer of assets
(continued on next page)

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(continued )
Standard Title Descriptiona

from unrestricted to restricted investment accounts and vice versa, the transfer of assets from
investment accounts (unrestricted or restricted) to owners’ equity and vice versa, the transfer from
restricted investment accounts to other restricted investment accounts, and transfer of assets from
investment accounts and owners’ equity to investment funds. The assets to be transferred shall
include all tangible and financial assets.
FAS 22 SEGMENT REPORTING The purpose of this standard is to establish principles for reporting financial information by
segments. Segment information is to be presented for each of the parent, subsidiary, or associate’s
separate financial statements. However, if both consolidated financial statements of the IFI or its
subsidiary or associate and the separate financial statement of the parent institution are presented
together, segment information need only be presented on the basis of the consolidated financial
statement.
a
The description of the FASs is taken from AAOIFI standards (AAOIFI, 2015).

Appendix 2. Variable definitions

Variable name Description Predicted Data sources

Sign

ACI The accounting compliance index + Hand-collected from the annual

reports
ACS The total number of members serving on the AC + Hand-collected from the annual
reports
ACIND Proportion of independent non-executive members serving on the AC + Hand-collected from the annual
reports
ACAFE The proportion of AC members who are only accounting financial experts and not industry experts, where AC + Hand-collected from the annual
members are accounting financial AC experts if their biographies indicate at least one accounting qualification reports and websites
or certification such as certified public accountant, auditor or chartered accountant.
ACIE The proportion of AC members who are only industry experts and not accounting and financial experts. AC + Hand-collected from the annual
members are considered industry experts if their biographies indicate that they were employed by a reports and websites
conventional bank.
ACBE The proportion of AC members who are accounting financial experts and also culture experts. AC members are + Hand-collected from the annual
considered culture experts if their biographies indicate that they were employed by another Islamic bank. reports and websites
ACSCHANGE Audit committee size change: If the number of AC members decreased, did not change, or increased, the + Hand-collected from the annual
variable takes a value of − 1, 0, and 1, respectively. reports and websites
ACAFECHANGE The change in accounting financial expertise: Takes the values of either − 1 (decrease in accounting financial + Hand-collected from the annual
expertise), 0 (no change in accounting financial expertise), or 1 (increase in accounting financial expertise). reports and websites
ACEFFEC Audit committee effectiveness: continuous measures of the AC characteristics are transformed into + Hand-collected from the annual
dichotomous variables. reports and websites
BS The total number of directors on the board + Hand-collected from the annual
reports
BI Proportion of independent non-executive members on the board + Hand-collected from the annual
reports
CEOD An indicator variable equals 1 if the IB’s CEO serves as board chairman and 0 otherwise − Hand-collected from the annual
reports
AUDIS Dummy variable coded 1 if the IB is audited by an industry specialist auditor and 0 otherwise. An industry þ Hand-collected from the annual
specialist is an auditor who has the most clients in the Islamic banking sector at the national level and for a reports
given year.
CONC The percentage of shares held by investors having 5% or more of the IB’s shares. ¡ Hand-collected from the annual
reports
INST Percentage of shares held by institutional investors þ Hand-collected from the annual
reports
GOV Percentage of shares held by the government. þ Hand-collected from the annual
reports
SIZE The natural log of total assets translated into USD + Hand-collected from annual
reports
PROF The ROE ratio: net income to total equities. + Hand-collected from the annual
reports
ACCSTAND An indicator variable equal to1 if the IB refers to the use of IFRS (for matters not covered by FASs) and + Hand-collected from the annual
0 otherwise. reports and websites

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