AAOIFI Reporting Standards: Measuring Compliance

Abstract

Islamic banking and finance has grown rapidly in recent decades. Islamic banks offer a range of products that comply with Shari'a law, many of which differ from traditional Western financial products. In addition modern Islamic banks are large entities listed on stock exchanges around the world, and as such are required to provide annual financial statements which accord not only with the relevant regulatory authorities, but also demonstrate the entities' compliance with Islamic principles. In consequence, the development of Islamic accounting standards to guide Islamic financial reporting has become an important issue. A practical response exists in the form of the Accounting and Auditing Organization for Islamic Financial Organizations (AAOIFI), established in Bahrain in 1991. To date, the AAOIFI has published a substantial body of accounting and governance standards, but little empirical research has thus far been conducted into compliance with these standards by Islamic reporting entities. This study provides an initial step in addressing the empirical gap. An index approach following that used to study compliance and disclosure of Western reporting entities is used to test compliance with the accounting and governance standards published by the AAOIFI. A benchmark index comprised of items identified in the literature as most significant for Islamic accounting is identified through a study of the literature. The English language Annual Reports from a sample of Islamic banks licensed and domiciled in Bahrain provide the data to measure compliance over a three year period.