AAOIFI standards and income smoothing perspective in Islamic financial institutions (IFIs): a study of the MENA region

Purpose The purpose of this study is to investigate the influence of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards on income smoothing perspective in the Islamic financial institutions (IFIs) operating in the Middle East and North Africa (MENA) countries, with a comparative analysis of the outcomes under AAOIFI standards versus those under International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Design/methodology/approach The authors used the General Least Square regression on a panel data of 35 IFIs from six countries from 2013 to 2018. Data was collected from the BankScope database, annual reports of the selected IFIs and the World Bank databases. Findings The authors find a significant positive connection between intentional income smoothing and the levels of earning persistence and cash-flow predictability. The implementation of the AAOIFI accounting standards has a detrimental impact on intentional income smoothing and persistence of earnings. The level of income smoothing efficiency is lower among IFIs that adhered to the Financial Accounting Standards (FASs) issued by AAOIFI in contrast to those that adopt IFRSs issued by the IASB. Practical implications The results of this study carry significant implications for reporting practices, reporting standards and trust toward IFIs operating globally. This research offers interesting avenues for IFI managers who try to attract more investors especially when AAOIFI accounting and auditing standards are a signal of higher earnings quality. The results can be expedient guidance to the external auditor concerning the choice of the auditing standards of the IFIs. Originality/value This is an attempt in comparing AAOIFI with IFRS standards and their impact on income smoothing efficiency. The results accentuate the importance of establishing specific standards to improve the pertinence of financial reports disclosed by the IFIs. The authors highlight that IFRSs are insufficient to guide IFI operations and AAOIFI accounting standards are needed to cater to the uniqueness of IFIs.