The role of Islamic corporate governance and quality of environmental disclosures in moderating the application of accounting conservatism to mitigate financial risks in Islamic banks

Purpose This study aims to analyze the role of accounting conservatism in reducing the financial risk performance of Islamic banking in Indonesia by examining the moderating effect of Islamic corporate governance, which consists of Sharia compliance and the good corporate governance index, as well as environmental disclosure. Design/methodology/approach This study took annual reports from Islamic banks listed on the Financial Services Authority as the main data. A total of 63 observations from 14 Islamic banks from 2017 to 2021 were used. Saturated sampling technique and moderated regression analysis were applied to analyze the data, supported by E-Views as the statistical tool. Findings Partially, although this study was unable to prove that accounting conservatism, Sharia compliance and environmental disclosure quality are determinants in reducing the risk of Islamic banking, this study successfully demonstrated that the implementation of good corporate governance can reduce the risk of failure in the financial disbursement at the bank. The results also indicated that neither Sharia compliance nor the good corporate governance index serves as a mediator in the relationship between accounting conservatism and risk performance. However, environmental disclosure quality demonstrated conversely, where it can moderate the relationship between accounting conservatism and risk performance. Research limitations/implications Theoretically, this study supports the agency theory, where the application of accounting conservatism can prevent corporate losses caused by financial activities, which ultimately helps to control bankruptcy risk. Additionally, this study also supports stakeholder theory and Sharia enterprise theory, asserting that Islamic banks should be accountable not only to primary stakeholders, but also to the broader environment and community. Originality/value This study investigates risk mitigation in Islamic banking linked with accounting conservatism as well as considering Sharia compliance, good corporate governance and environmental disclosure as moderating variables.