The impact of AAOIFI accounting and auditing standards on earnings persistence and cash-flow predictability: evidence from MENA IFIs

What the paper says

Purpose The purpose of this study is to examine whether the accounting and auditing standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) enhance the forward-looking quality of financial reporting in Islamic financial institutions (IFIs). Specifically, the authors investigate the effect of AAOIFI standards on earnings persistence and cash-flow predictability in IFIs operating in the Middle East and North Africa (MENA) region. Design/methodology/approach Using Generalized Least Squares (GLS), the authors analyze panel data on 35 IFIs operating in six MENA countries over the period 2013–2018, with financial reporting regimes mandated at the jurisdictional level. They compare financial reporting outcomes under AAOIFI standards with those under International Financial Reporting Standards (IFRS). Findings The authors find that, relative to IFRS, financial statements prepared under AAOIFI accounting standards exhibit lower earnings persistence and weaker cash-flow predictability. The application of AAOIFI auditing standards does not offset these effects. These findings are robust to alternative model specifications. Practical implications The authors recommend providing reconciliations of material reserves and adjustments with Shariah Standard Board (SSB) approved rules and explaining the effects on the earnings-to-cash link. Auditors should treat this as a key audit matter and test compliance, SSBs monitor and confirm. Originality/value The authors provide multi-country evidence on AAOIFI with an auditing moderator and isolate cash-flow versus accrual channels in MENA IFIs.