The Role of Sharia Governance in Reducing Earnings Management: An Empirical Study on Islamic Banks

Abstract

Purpose: This research aims to analyze the role of governance in reducing earnings management in Islamic banks in Indonesia. Design/methodology/approach: The sample comprises 80 firm-year observations from Indonesian Islamic banks during the 2017-2022 period. The independent variables analyzed are the effectiveness of the sharia supervisory board (SSB), the board of commissioners, and the audit committee. The dependent variable is earnings management as measured by discretionary loan loss provisions (DLLP). The moderator variable is auditor quality. Findings: The test results using the partial least squares (PLS) technique show that the effectiveness of the SSB has no influence on earnings management (β=0.081, p-value=0.21). Meanwhile, the effectiveness of the board of commissioners has a significant negative influence on earnings management (β=-0.402, p-value <0.01) and the audit committee has a negative influence on earnings management (β=-0.071, p-value=0.04). The results of testing the moderating role of the public accounting firm’s auditor quality show that only hypothesis 5 is supported (β= -0.187, p-value=0.03). Research limitations/implications: The implications of this study are the importance of regulators and the government in strengthening the role of the board of commissioners, audit committee, and auditing by public accounting firms and SSBs in preventing and reducing the practice of manipulating financial reports in Islamic banks. Originality/value: This study is relevant and important because there are still only a limited number of studies that examine governance and earnings management in Islamic banks and use the quality of auditing by public accounting firms as an additional variable.