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

Rami Salem, Muhammad Usman and Ernest Ezeani

The Quarterly Review of Economics and Finance, 2021, vol. 79, issue C, 345-359

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.

Keywords: Audit quality; Earnings management; Loan loss provisions; Islamic and conventional banks; MENA countries (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.qref.2020.07.002

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