Does Sharia compliance affect financial reporting quality? An evidence from Muslim majority countries
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 5 December 2020
Issue publication date: 8 February 2021
Abstract
Purpose
Sharia compliance states that the compliant company operates not only under regulations but also to the restrictions and permission of Islam. This study aims to reveal whether Sharia compliance enhances the financial reporting quality.
Design/methodology/approach
The sample is constructed from 15 Muslim majority countries, 2,300 companies for the periods between 2005 and 2017 with 23,810 firm*year observations. Financial reporting quality is measured with discretionary accruals and audit aggressiveness. Discretionary accruals is the absolute of Kothari, Leone and Wasley’s (2005) “performance matched discretionary accruals model.” Audit aggressiveness is calculated with Gul, Wu and Yang’s (2013) model.
Findings
This study reveals the behavioral differences in financial reporting quality between Sharia-compliant and non-compliant companies. According to the analyzes, Sharia compliance increases the financial reporting quality by decreasing the discretionary accruals and audit aggressiveness. This result is supported by the robustness tests.
Practical implications
Sharia compliance is not limited to business activity, financial restrictions and supervisory board for Sharia-compliant companies. It also enhances the companies’ financial reporting quality. Robustness analysis also showed that the International Financial Reporting Standards (IFRS) increases the financial reporting quality by reducing discretionary accruals and audit aggressiveness.
Originality/value
This study contributes to the accounting literature by providing an insight on the use of Islamic financial instruments. The empirical results also show that the use of IFRS and Islamic financial instruments decreases the discretionary accruals and audit aggressiveness.
Keywords
Citation
Can, G. (2021), "Does Sharia compliance affect financial reporting quality? An evidence from Muslim majority countries", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 1, pp. 16-33. https://doi.org/10.1108/IMEFM-04-2019-0149
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited