Academic journal article Academy of Accounting and Financial Studies Journal

Ownership Structure and Audit Pricing: Conventional versus Islamic Banks in Jordan

Academic journal article Academy of Accounting and Financial Studies Journal

Ownership Structure and Audit Pricing: Conventional versus Islamic Banks in Jordan

Article excerpt

INTRODUCTION

The banking system is around the two types in the world; the first one is conventional banking system called as interest based banking system, and the other is an Islamic banking system called as a (riba or usury) interest-free banking system. These two types are differentiated commonly on the basis of their goals, control and risk sharing practice. The conventional banks were first modified by the Greeks, Roman and Byzantines in 600 B.C. Medieval banking was headed by the Jews and Levantine (Davies, 2002) while the establishment of banking activities that similar to modern banking systems was during the first century of Islam (AD600) (Al-Harbi, 2015).

The governmental requirements in Jordan for external (statutory) audit stem from the Company law (22/1997); the Banking law (28/2000); Central Bank of Jordan law (CBJ) (23/1971); the old income tax law (28/2009); the new income tax law (34/2014) and the Jordanian Certified Public Accounting profession (JACPA) law (73/2003). All these laws require companies to have their annual reports audited by a Certified Public Accountant (CPA) on a yearly basis. These Laws overlook important provisions that could strength the auditing, regulatory framework in Jordan, particularly auditor's independence, but it doesn't include provisions specifically focusing on the determination of auditing fees (1). Moreover, Applying IFRS/IAS and ISA are mandatory for all auditors providing service to listed companies, and all auditors subject to Auditors' Practice Review Committee (ARRC) (2).

Statutory audit service in Jordan is not highly regulated and the demand for audit services derives its strength from the legislative provisions such as the Banking law. Currently, all the Big 4 audit international firms operate in Amman, through their affiliated firms. Currently, most public companies are audited by auditors have affiliation with Big 4 international auditing firms or by other large auditing national firms (3). The Jordanian authority for (JCPA) has registered (477) members, of which (432) are in practice (4).

The Jordan economy was able to withstand the repercussions of the global financial crises. For the banking sector, the main challenge will continue to be characterized as being saturated despite its growth. The main objective of the Jordanian banking sector is to earn a sufficiently high return on customers' deposits and credit facilities granted to customers. This is done despite the diversity of corporate governance in conventional banks from Islamic banks (Shibani & Fuentes, 2017).

Banks operating in Jordan are required to submit to CBJ their annual audited financial statements because auditing is apart from the corporate governance system (Francis et al., 2003). In additions, financial audit is mandatory for banks; such an audit plays an important role in the transparency and credibility of financial statements.

As aforementioned, the vast majority of audit of banks in Jordan is in the hand of the Big Four; means that; Deloitte, and Ernst and Young. Nevertheless, there is a strong competition among the Big Four. The auditor of a bank's financial statement is required to be pre-approved by CBJ each year, through issuing a list of acceptable auditors for banks. Some external auditors feel that approval of bank auditors by CBJ is increasingly concentrated in the hands of a limited number of auditors; this list of auditors has only the permission to audit of banks in Jordan.

The agency problem suggests that an independent audit is a function of the extent of divorce between control and ownership (Khan et al., 2011). Drawing from the agency theory, two types of agency conflicts found; type 1 agency conflict between shareholders (owners) and managers (control), this is reduced in low investor protection countries, and type 11 agency conflicts between non-controlling and controlling shareholders, which is higher (La Porta et al., 1999). …

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