Islamic corporate governance and financial statements fraud: A study of Islamic banks

Hasan Mukhibad,Prabowo Yudo Jayanto,Indah Anisykurlillah

doi:10.22495/jgrv10i2siart16

Hasan Mukhibad, Prabowo Yudo Jayanto + Show 1 more

Open Access

https://doi.org/10.22495/jgrv10i2siart16

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Abstract

Financial statement fraud (FSF) in Islamic banks is unethical because it generates incorrect information for the stakeholders (Anisykurlillah, Jayanto, Mukhibad, & Widyastuti, 2020; Obid & Demikha, 2011). We identify some institutional factors, specifically corporate governance, as factors that can control FSF. Using the sample of Islamic banks in Indonesia, we found that the attributes of the bank’s Sharia Supervisory Board (SSB), such as its expertise, the number of members, and the number of meetings it holds, can reduce FSF. Besides, the number of audit committee members, and the reputation of the external auditors, can also help control FSF. This research does not find any influence of the board of commissioners’ structure toward FSF. Another finding is that of the three SSB attributes used in this research, the most decisive influence for controlling FSF is each SSB’s expertise in accounting, finance, or economics. We suggest that every SSB should have experts in those fields to complement the expertise in Islamic legal fields.

Highlights

Many articles have concluded that there is no difference between Islamic and conventional banks, including the conclusion that fraud can occur in both conventional and Islamic banks
This fact indicates that each Supervisory Board (SSB)‘s expertise in accounting, finance and economic issues is required to prevent its banks‘ management conducting Financial statement fraud (FSF)
Each SSB‘s expertise in these fields complements their expertise in the fields of jurisprudence and Islamic law

Summary

Introduction

Many articles have concluded that there is no difference between Islamic and conventional banks, including the conclusion that fraud can occur in both conventional and Islamic banks. This finding is inconsistent with Sharia principles because Islamic banks follow Islamic law which promotes honesty, fairness, and accountability. Fraud cases in Islamic banks are shown in a study conducted by Yusuf, Ahmad, Shahril, and Ahmad (2016) and Rahman and Anwar (2014a), including fraud in the South African Islamic Bank, Ikhlas Finance House, Dubai Islamic. Finance House, and International Islamic Bank of Denmark (Awang & Ismail, 2018). Occupational fraud is a severe problem because, based on the Global Fraud

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