The Effect of Independence and Competency of External

Auditors on Audit Quality in Islamic Banks in Malaysia

Abstract
The recent global crisis and its subsequent outcomes, by which many of big economies in the
world suffered, again highlighted the inefficiency of capitalism and called for an alternative
that can bring stability to the world. Many economists and researchers believe that Islamic
economy and finance system can be a good alternative to serve this purpose (Abdul Hassan,
2009). Islam neither approves capitalism nor communism however we can find the traces of
both in Islam. Islamic banking constitutes a considerable part of Islamic finance. It is based on
Islamic law (shariah) and all of its rules come from Quran, Sunnah and other secondary sources
of Islamic law. The main concern in Islamic banking is justice, equity and welfare and to reduce
Riba and poverty (Rodney Wilson, 2009). The market for Islamic banking has grown over the
past few years and this growth is expected to continue in the future. Only in Malaysia the
volume of total assets for Islamic banks has raised to $141 billion in 2011 (Bloomberg, 2012).
People come to Islamic banks because they want their financial affairs to be compliant with
shariah; apart from that, Islamic banks perform other socio-economic activities like Zakat,
Waqaf, etc. In order to build and sustain public confidence on Islamic banking which is vital
for their survival, a thorough, precise and transparent shariah compliance assurance system is
required on documentations, contracts and transactions of Islamic banks.
The Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) has
provided standards on shariah review that must be undertaken by Shariah Supervisory Board
(SSB) and Internal Shariah Auditors which are the integral part of Islamic banks (Besar, 2009).
But to what extent the shariah compliance is reviewed by SSB and internal shariah auditors
and how external auditors contribute to this issue are the questions that present paper aims to
address and also to explore the ongoing processes for shariah compliance assurance and their
efficiency and effectiveness. The objective of this paper is to measure the level of independence
and competency among external auditors in Islamic banks in Malaysia and also to examine its
effect on their audit quality which is considered as a measure of reliability of financial
statements and in case of Islamic banks because of the nature of their performance i.e. shariah
rules, the audit quality can be regarded as a shariah compliance assurance for customers and
regulatory bodies.
Key words: Islamic Banking, Shariah Auditing, Accounting and Auditing for Islamic
Institutions, Internal shariah auditors.