Loan loss provisions and audit quality: Evidence from MENA Islamic and conventional banks

Rami Salem*, Muhammad Usman, Ernest Ezeani

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

47 Citations (Scopus)

Abstract

This paper examines the impact of audit quality on earnings management through loan loss provisions among both conventional and Islamic banks operating in MENA countries. Using the Generalised Method of Moments (GMM) and Random Effects, we found that Big-4, Co-audit, audit committee size, and audit committee independence restrain earnings management practices of Islamic bank managers. In contrast, audit committee mechanisms do not influence earnings management practices in conventional banks. We also found that the extent of earnings management is lower in Islamic banks operating in countries experiencing turmoil as compared to conventional banks. Using the T-test and the Wilcoxon Signed-ranks, we found that the audit quality in conventional banks is lower compared to Islamic banks. Our findings have implications for policymakers since it helps them to enhance the regulations regarding audit quality and accounting standards. It also provides helpful insights into the determinants of earnings management in both conventional and Islamic banks operating in MENA countries.

Original languageEnglish
Pages (from-to)345-359
Number of pages15
JournalQuarterly Review of Economics and Finance
Volume79
Early online date20 Jul 2020
DOIs
Publication statusPublished - Feb 2021

Keywords

  • Audit quality
  • Earnings management
  • Islamic and conventional banks
  • Loan loss provisions
  • MENA countries

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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