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

Salem, Rami, Usman, Muhammad and Ezeani, Ernest ORCID: https://orcid.org/0000-0003-0401-9000 (2021) Loan loss provisions and audit quality: Evidence from MENA Islamic and conventional banks. Quarterly Review of Economics and Finance, 79. pp. 345-359. ISSN 1062-9769

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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.