Quality comes cheap: Evidence from auditing in Islamic banks

Abstract

In this paper, we examine the audit market in Islamic banks, focusing on the pricing of audit services. To our knowledge, academic research has not yet examined the role of external auditors in Islamic banking. We argue that significant differences between Islamic and conventional banks, most notably in terms of activities allowed, corporate governance structure and ethical aspects of the business model, may lead to different audit outcomes. We find a fee discount of approximately 50% for Islamic banks relative to conventional banks, after controlling for the cross-sectional determinants of fees. This result is in line with the view that the risks borne by auditors are lower in Islamic banks than in conventional banks. In addition, we document that the fee discount for Islamic banks is lower if auditors have higher expertise in Islamic banking. On the other hand, we do not observe significant differences in audit quality between Islamic and conventional banks. Therefore, importantly, the fee discount for Islamic banks comes at no cost for the quality of audit services.