The impact of corporate governance and Islamic Shariah on internal controls over financial reporting : evidence from Jordan

Abstract

This thesis examines the impact of corporate governance and compliance with Shariah on internal controls over financial reporting. Three research questions are asked and answered: (i) How do corporate governance structures affect a company's internal financial reporting controls and the quality of its financial reports in Jordan?; (ii) What is the effect of Shariah-compliance on the same?; and (iii) How does Shariah-compliance moderate the relationship between corporate governance structures and internal reporting controls? Two theoretical frameworks - agency theory and Islamic theory - are used to interpret the findings. Generalised Method of Moments regression model with 94 listed Jordanian companies as a sample reveal the following findings. Board size, audit committee meetings, and Shariah-compliance have a negative impact on MWIC, i.e., material weaknesses in internal controls, defined as a reasonable possibility that a deficiency, or a combination of deficiencies, in internal control over financial reporting will not be prevented or detected on a timely basis. Second, board meetings and audit committee size are both negatively correlated to account-level weaknesses. Third, Shariah-compliance strengthens the effect of board size, audit committee size, and audit committee meetings, suggesting that Shariah-compliance and good corporate governance mechanisms reinforce each other to ensure higher-quality internal financial reporting controls. Further, deeper analyses show that report quality is positively correlated to board size, audit committee size, and Shariah-compliance, and negatively related to unitary leadership, where the same individual is both the chair and CEO. The findings of this study enrich the accounting and corporate governance literature with contributions to agency theory and Islamic theory. Additionally, the analyses provide empirical evidence of the links between corporate governance, internal controls, financial reporting, and Shariah-compliance in emerging markets. The insights revealed have implications for all financial policymakers, especially those in developing economies.

Date of Award	2021
Original language	English