Independence and effectiveness in internal Shariah audit with insights drawn from Islamic agency theory

Abstract

PurposeThis paper aims to examine bases of effectiveness in internal Shariah auditing undertaken in Islamic financial institutions (IFIs).Design/methodology/approachThis paper is theoretical in approach taking, as its starting-point, an extensive literature review. From a general agency theory, an Islamic agency theory is articulated and then applied to ascertain attributes of internal Shariah audit effectiveness revolving around the concept of independence.FindingsEffective internal Shariah auditing, as a mechanism of assuring Shariah compliance by IFIs, varies directly with the degree of independence enjoyed by internal Shariah auditors themselves. The research propounds that an articulated Islamic agency theory holds potential to serve as a theoretical foundation to build a multi-dimensional conceptual framework based on independence utile for evaluating internal Shariah audit effectiveness.Research limitations/implicationsEvidence is drawn strictly from secondary sources.Practical implicationsTo assure effectiveness of internal Shariah auditing, IFIs ought to increase the level of independence of internal Shariah auditors.Originality/valueInternal Shariah audit effectiveness in IFIs has not been extensively studied in comparison with both studies of external Shariah audit effectiveness in IFIs and internal audit effectiveness undertaken by conventional financial institutions. This research fills that gap.