Does Sharia Compliance Affect the Financial Reporting Quality? An Evidence from Muslim Majority Countries
21 Pages Posted: 28 Apr 2018 Last revised: 10 Apr 2019
Date Written: April 9, 2018
Sharia compliance states that the compliant company operates not only under regulations but also to the restrictions and permission of Islam. In other words, one may expect a Sharia-compliant company to act in a higher degree of ethics. This research reveals the behavioral differences in financial reporting quality between Sharia compliant and non-compliant companies. 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 are 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. According to the analyses, Sharia compliance increases the financial reporting quality by decreasing the discretionary accruals and audit aggressiveness. The robustness tests support this result. Also, this research contributes to the accounting literature by providing an insight into 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: Sharia Compliance, Discretionary Accruals, Audit Aggressiveness
JEL Classification: G38, M42, M49
Suggested Citation: Suggested Citation