How can AAOIFI standards enhance Shariah and corporate boards’ oversight to curb earnings management in Islamic banks?

Purpose The article investigates how governance mechanisms, specifically Shariah Supervisory Boards (SSBs) and Boards of Directors (BDs), interact with the adoption of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards to mitigate earnings management (EM) in Islamic banks (IBs). This study aims to explore the contextual effectiveness of these governance structures and regulatory frameworks in strengthening financial reporting quality. Design/methodology/approach Based on 450 bank-year observations from IBs across 10 Middle East and North Africa (MENA) economies over the period 2010–2018, the analysis deliberately excludes COVID-19 years to ensure data stability and comparability. Discretionary loan loss provisions (DLLPs) were used as proxies for EM. To address potential endogeneity, we employed an instrumental-variables two-stage least squares (IV-2SLS) regression, allowing for a robust evaluation of the moderating role of AAOIFI standards in the relationship between governance mechanisms and EM. Findings The results show that SSB cross-membership significantly reduces EM, reinforcing its role as an effective governance mechanism. In contrast, SSB size has no direct impact, but becomes positively associated with EM in weaker regulatory contexts. Board independence mitigates EM when moderated by AAOIFI standards, while the effect of board size remains context-dependent. Although AAOIFI adoption alone is linked to higher EM, indicating potential symbolic compliance, it strengthens the capacity of both the Shariah and corporate governance mechanisms to curb EM when effectively enforced. Practical implications Policymakers in jurisdictions with voluntary or partial adoption should consider mandating these standards to prevent symbolic compliance and to ensure substantive alignment with ethical and financial objectives. Furthermore, targeted capacity-building initiatives, such as training programs for members of SSBs and BDs, can strengthen governance effectiveness by enhancing their familiarity with AAOIFI principles, thereby contributing to EM reduction. Social implications AAOIFI standards enhance the transparency and accountability of IBs by fostering ethical compliance and curbing EM practices. This reinforces stakeholder trust and supports the broader societal role of IBs as credible and ethically guided financial intermediaries in the global financial system. Originality/value This study advances the literature by examining how AAOIFI standards moderate the relationship between governance mechanisms and EM in IBs. It fills key gaps by assessing contextual effectiveness across diverse regulatory settings. Aligned with signaling theory, the findings suggest that symbolic adoption may mask opportunistic behavior, emphasizing the need for strong enforcement to ensure meaningful compliance and prevent the misuse of governance frameworks.