Shariah Audit Paper

Transcription

1. 1 Contents 1 .0 Introduction .................................................................................................................. 3 2.0 Shariah Governance Framework .................................................................................. 4 2.1 Shariah Audit ................................................................................................... 6 2.1.1 The scope and objectives of shariah Audit ........................................ 8 2.1.2 The Shariah Audit process ............................................................... 8 3.0 Current Shariah Approach ............................................................................................9-11 4.0 The ideal role of shariah Audit .....................................................................................12-13 5.0 Issues & Challenges of Shariah Audit ..........................................................................14 5.1- independent of Shariah Audit .................................................................................14 5.2- lack of accountability of shariah Audit ....................................................................15 5.3- qualification of shariah Audit ...................................................................................15 5.4- lack of mandatory external shariah Audit ................................................................16 6.0 Recommendation ..........................................................................................................17 7.0 Conclusion ....................................................................................................................18 References------------------------------------------------------------------------------------------------19
2. 2 Introduction Shariah principles are the foundation for the practice of Halal business including Islamic banking and finance . Comprehensive compliance with Shariah principles would bring confidence to the stakeholders and the financial markets on the credibility of Islamic finance operations (BNM, 2010: 1.1). In order to sustain and maintain this Shariah compliance in Islamic financial industry, adequate Shariah audit practices are necessary to ensure that the operations and activities of IFIs should be in line with Shariah principles and rules, and guidelines set by the regulatory authority. According to Shahar, Hassin & Zan (2018), In the Islamic history, shariah auditing is not new concept, it was started at the time Prophet Muhammad (s.a.w) by the establishment of an institution called “Alhisbah” which means an agency of the Islamic government whose main function to safeguard the public interest by forbidding the bad deeds (including financial fraud) subject to shariah principles and rules. The basis of such institution can sourced from the Quran where Allah says: “And let there be (arising) from you a nation inviting to (all that is) good, enjoining what is right and forbidding what is wrong, and those will be the successful”. (Surah Al-Imran, Verse: 104). With the expansion of the industry, it is desirable that effective governance tools such as external Shari’ah audit are put in place to ensure qualitative improvements and harmonization, and in turn to enhance the public confidence on Islamic finance industry. External Shari’ah audit is increasingly becoming an important element of the Shari’ah governance framework of IFIs around the world. It is therefore imperative to standardize the practices of external Shari’ah audit and bring them in line with international best practices, (AAOFI, ASIFI No.6). In relation to this, IFIs are in dire need for competent and independent auditors who can accumulate evidence about information to determine and report on the degree of correspondence between the information and established criteria of shariah principles as guided by local shariah governance framework and internal SBB. Furthermore, global IFIs need to establish well-versed shariah auditors that conduct periodic assessment from time to time in order to provide accurate and independent assessment intended to add value and improve the degree of compliance in relation to the IFI’s business operations, with the main objective of ensuring a sound and effective internal control system for Shariah compliance.
3. 3 To achieve with the above highlighted objectives in the global Islamic marketplace the shariah Auditors might require to emphasis their Audit in all aspects of the IFI ’s business operations and activities, which include Auditing of financial statements, compliance audit on organizational structures, people, process and information technology application systems as well as review of adequacy of the Shariah governance process. In addition, there should be a clear process designed by the shariah Auditors and intended to enable the IFI to assess whether a sound and effective internal control system for Shariah compliance have been implemented. This paper we will focus on the current stage of development of shariah auditing which is an important pillar in shariah governance framewrok, in Islamic financial institutions (IFIs) and we will also explore and deliberate some shariah audit issues and challenges facing the IFI. 2.0 Shariah Governance Frameworks Shariah principles (that derived from the shariah sources, the Qur'an and Sunnah) are the foundation for the practice of Islamic business and finance through the observance of espoused by. Comprehensive compliance with Shariah tenets, conditions and principles would bring confidence to the general public and the financial markets on the credibility of Islamic finance operations, (BNM, 2010). Hence, Shari’ah governance is an important component of IFIs' governance framework as it promotes accountability and transparency, and helps gain the confidence of the public. Shaping a proper governance structure is vital for the overall soundness of IFIs, and building a strong base of Shari’ah governance shall be the aim of every IFI. In Malaysia, the governance of IFIs falls under the purview of its Central Bank of Malaysia (hereafter referred to as BNM). BNM introduced the Shari’ah Governance Framework (hereafter referred to as “SGF”) in 2011 as depicted in Fig. 1 to strengthen the structure of shari’ah governance, therefore accomplishing the shari’ah compliant IFIs in Malaysia. Subject to the SGF, (2010) the shariah governance framework of the Islamic financial institution (IFI) shall comprise at least the following: i. The board of director's oversight on shariah compliance aspects of the IFI's overall operations. In this case, the board of directors is ultimately responsible for the establishment of appropriate shariah governance framework of IFI;
4. 4 ii . A shariah committee with qualified members who can deliberate Islamic finance issues and provide sound shariah decisions. To do so, majority of this committee shall comprise persons with appropriate qualifications and experience in Shaiah; iii. Effective management who is responsible in providing adequate resources and capable man power support to every function involved in the implementation of shariah governance, in order to ensure that the execution of business operations are in compliance with the shariah; iv. Conducting internal shariah review on a continuous basis; v. A regular shariah audit, at least once a year, verifying that the IFI's key functions and operations are in accordance with shariah; vi. A shariah risk management processes to identify all possible shariah non-compliance risks and take remedial measures, where appropriate, to mitigate the risk; vii. An internal shariah research team to conduct research on shariah issues; and viii. Issuance and reporting the shariah decisions to the relevant stakeholders. Fig. 1 (Source: BNM, 2010) In this context, shariah audit is one of the key pillars in corporate and shariah governance of IFIs. The role of shariah audit is to ensure a sound and effective internal control systems based on the
5. 5 relevant fatwas of respective shariah supervisory board and local regulatory framewrk . in this assignment, the shariah audit function of the IFI will be focused. 2.1 Shariah Audit Shariah auditing and assurance function can come into two types; (i) internal shariah audit, which concerned with evaluating and improving the effectiveness of internal shariah risk management, control and governance processes in an IFI, and (ii) external shariah audit, which concerned to provide independent assurance that IFI complies with shariah principles and rules subject to certain criteria, as specified by shariah supervisory board (SSB) or regulator. In the figure 2 below is an illustration of where the role of shariah fits in the context of approval and all the way to implementation of shariah compliance of business transaction of an IFI. By Shariah Committee (SC) By Internal Shariah Auditors & Reviewers Ex-ante shariah compliance review Ex-post shariah compliance review New Products Approval Governance Operations Ex-ante shariah compliance review Ex-post shariah compliance review Approval Stage Implementation Stage IT Figure 2 (Source: Yussof, 2013) Ex-ante shariah compliance refers to the SSB’s supervision, monitoring and control tasks to comply with the Shariah rules and guidelines during the designing of the contracts and agreements up to the implementation of the terms of contract. Whereas, the Ex-post shariah compliance involves a comprehensive Shariah audit and/or shariah review to ensure and check the transactions that took place after the execution of the contracts are in accordance with shariah principles and rules subject to that fatwas of the SBB or shariah manual of IFI and regulatory shariah governance framework. Although shariah auditing is gaining more is gaining greater recognition among the Islamic finance community, there is no widely accepted definition for shariah auditing. It seems that the terms of shariah audit and shariah review are used interchangeably in Islamic finance, given that they convey different implications, at least in the conventional sense. Thus, in its shariah governance framework (2010), BNM defines shariah audit as internal auditing as "shariah audit
6. 6 refers to the periodical assessment conducted from time to time , to provide an independent assessment and objective assurance designed to add value and improve the degree of compliance in relation to the IFI’s business operations, with the main objective of ensuring a sound and effective internal control system for Shariah compliance". The role of shariah auditor function shall be performed by internal auditors who have acquired adequate shariah-related knowledge and training. In conducting their duties, internal shariah auditors may engage the expertise of the SSB of the IFI, as long the objectivity of the audit is upheld (BNM 2010: 7.8). However, AAOIFI drafted new standard on external shariah auditing (ASIFI No. 6) in which it provides guidelines on performance of an independent assurance engagement of external shariah audit to ensure compliance of an IFI with the shariah principles and rules. In this standard AAOIFI defines external shariah auditing as "an independent assurance engagement to provide reasonable assurance that an IFI complies with the ‘Shari’ah principles and rules’ applicable to its financial arrangements, contracts and transactions during a specific period based on a specific set of ‘Shari’ah principles and rules’ contained in the criteria" . Also, AAOIFI (Standard No.2), defines shariah audit as: "Shariah review is an examination of the extent of an Islamic financial institution’s (IFI’s) compliance, in all its activities, with the Shariah. This examination includes contracts, agreements, policies, products, transactions, memorandum and articles of association, financial statements, reports (especially internal audit and central bank inspection), circulars, etc.” Although the above definitions describe the shariah audit, there are some areas such as information technology systems, organizational structure, and marketing initiatives that should also be covered as part of the shariah audit as these are potentially risk areas of the IFI. Hence, Alwi, (2007), proposes a general definition from academic point of view for shariah audit to be "shariah audit is the examination of an IFI's compliance with the shariah, in all its activities particularly the financial statements and other operational components of IFI that are subject to risk of compliance including, but not limited to, products, the technology supporting the operations, operational processes, the people involved in the key areas of risk, documentations and contracts, policies and procedures and other activities that require adherence to shariah principles". This definition seems to be comprehensive, but in reality each shariah audit exercise
7. 7 will have to take into consideration the mandate from the local statutory requirement in which the IFI operates and fatwas provided by the SSB in the IFI . 2.1.1 The Scope and Objectives of a Shariah Audit According to BNM's shariah governance framework (2010), the scope of the shariah auditors shall cover all aspects of the IFI's business operations and activities, which include not limited to the following areas: i. Auditing of the financial statements of IFI; ii. Compliance audit on organizational structure, people, process and information technology application systems; and iii. Review of adequacy of the shariah governance processes. In this sense, the scope of shariah auditing will not merely restricted to the examination of the IFI's financial statements and give opinion on it. In other words, shariah auditing should be comprehensive in all aspects of the business operations of the IFI which can be a potential source of shariah non-compliance risk (SNCR), as the IFI might commit violations against shariah precepts in the contracts entered into with the customers or erroneously compute the amount client makes as payment for a certain financing facility which may lead the later to be shariah non-compliant, (Alwi, 2007). The primary objective of a shariah audit exercise (internal and external) is to ensure the business activities carried out by an IFI are in compliance with shariah. The objective of internal shariah auditor is to ensure a sound and effective internal control system for shariah compliance of an IFI. In other word, internal shariah audit function primary objective focuses on making ensure that the management of an IFI discharges its responsibilities in relation to the implementation of the shariah precepts. Whereas, the external shariah auditor's main objective is to provide an independent assurance or attestation on the state of compliance of an IFI with the shariah principles and rules, (AAOIFI, ASIFI No. 6). 2.1.2 Shariah Audit Process Like any other audit, implementing shariah auditing exercise follows three key phases: (i) planning phase, (ii) execution phase and (iii) reporting phase. In addition, external auditors (shariah and conventional alike) may include another important stage, known as engagement
8. 8 process (Htay, Arif, Soualhi, Zaharin and Shaugee, 2013). This is the process through which auditor perform their auditing exercises at their prospective clients, IFIs in the case of shariah auditing. These three major phases of shariah auditing processes is summarized in the figure 3 below. Figure 3 (Source: Htay, et.al (2013) In the first phase, the shariah auditor will collect data by sampling and observing data from the IFI's business operational and activities such as identifying the main risk areas like contract documentations and more importantly financial statements. During the second phase, shariah auditor will perform a detailed analytical review for each product and selected transactions to gain understanding of the current operations and to update and confirm their understanding of the accounting and shariah risk management internal control systems. Then, perform a walk through and verification test of in identifying the effectiveness of internal control systems. Lastly, but not least, the shariah auditor will make his final review and analysis of shariah risks and risk control systems to make sure the adherence of shariah compliance manual and regulatory guidelines. Then, the findings will be reported to management. The report will include recommendations on rectifications of shariah non-compliance activities, if any, and how to mitigate shariah potential risk area. 3.0 Current Shariah Audit Approach From the corporate governance framework perspective, including the shariah governance, the shareholders are the owner of the IFI and they appoint the board of directors to run the business
9. 9 on behalf of former . As they appoint the directors, shareholders have no role in managing the IFI. Board of directors has the responsibility for running the IFI instead. So, the directors are responsible for hiring, supervising and training of the IFI's staff including the shariah SSB member. In its SGF (2010), BNM requires the directors of IFIs to appoint a shariah committee possessing strong knowledge in shariah with its appropriate qualifications whose members must not be less than five, upon the recommendation of the of the nomination committee. The appointment and reappointment of a shariah committee member shall obtain prior approval from BNM and its SAC. Also, the resignation and dismissal of a shariah committee member shall only take effect after the approval of the BNM and SAC. As required by regulator, internal shariah auditors address their reports to the board of audit committee and shariah committee. Both shariah and audit committee are members of the main board and they report to them. In this case, one may question the independence of shariah committee and internal shariah auditors as they are hired and remunerated by the company in which they work. It has been a common practice for the SSB of an IFI to issue an annual opinion (as seen in figure 3 below) certifying that the contracts, transactions and dealings of the IFI are in compliance with Shari’ah. In arriving at this conclusion, the SSB undertakes an audit but mostly relies on the work of the internal Shari’ah audit and shariah review departments (UKIFC & ISRA, 2016). Meaning that there is currently no independent third party publicly reaffirming the view of Shariah supervisory boards (SSB) on Shariah compliance matters and this raises a number of fundamental questions such as: Are the SSB members in danger of being in an impaired position as they are being asked to audit products they themselves have designed and signed off as compliant? Is there a need for an additional an independent external check and balance on Shariah compliance; if the work of internal Shariah auditors is to be relied on, how independent are they, and what is their level of expertise in conducting an audit?
10. 10 “In carrying out the roles and the responsibilities of the Shariah Supervisory Council (SSC) as prescribed in the Shariah Governance Framework for Islamic Financial Institutions issued by Bank Negara Malaysia (BNM) and in compliance with our letter of appointment, we hereby submit our report for the financial year ended 31 December 2017. The Banks Management is responsible to ensure that its conduct and businesses are in accordance with the Shariah rules and principles, and it is our responsibility to form an independent opinion based on our review on the conduct and businesses of the Bank and to produce this report. We had eight (8) meetings during the financial year in which we reviewed inter alia products, transactions, services, processes and documents of the Bank. In performing our roles and responsibilities, we have obtained all the information and explanations which we consider necessary in order to provide us with sufficient evidence to give reasonable assurance that the Bank has complied with the Shariah rules and principles. At the management level, the Chief Shariah Officer who functionally reports to us oversees the conduct and effectiveness of the internal Shariah compliance functions i.e. Shariah Research & Advisory, Shariah Review and Shariah Risk Management which are further substantiated by Shariah Audit that resides in the Internal Audit Division. Both Shariah Review and Shariah Risk Management functions also report to Chief Compliance Officer and Chief Risk Officer respectively. The roles of these functions are facilitating new research & product development activities, refining existing products & procedures, providing Shariah training, managing Shariah non-compliance risks bank-wide, conducting Shariah audit & review on departments and branches and coordinating with us on any matter that requires our decision”. Figure 4: Partial Report of the Shariah Supervisor Council (SSC) of BIMB Even though BNM stipulates that the shariah auditing function shall be performed by internal shariah auditor, the shariah internal auditor’s responsibility seems to be limited (Kasim & Sanusi, 2013). After the SGF (2010) issued, not many Islamic banks have not established a dedicated unit of shariah audit for the shariah auditing task. IFIs are relying on their existing internal audit and control department and leveraging on their experience in conventional audit knowledge and expertise (Yahya, 2016). Such reliance on conventional audit procedures and methods is inappropriate due to different nature and concepts of Islamic banking products and operations that require different assurance of wider scope of shariah compliance. Out of the many nations across the world with Islamic finance jurisdictions, only a few of them have issued specific guidelines for external Shariah audit. These countries include; Oman and
11. 11 Pakistan . Bahrain is poised to be the next one to adopt external Shariah audit regulations following the issuance of a related consultation paper by the Central Bank of Bahrain (CBB).1 In Malaysia for example, there are no specific shariah auditing framework that guides the shariah auditors in IFIs in designing their own shariah auditing program which is based on the nature of Islamic financial products and operations offered by IFIs. Internal shariah audit units has adopted auditing standard as stipulated in the International Standards for Professional Practice of Internal Auditing (IPPF) issued by IIA and Guidelines on Minimum Audit Standards for Internal Auditor of Financial Instituions, (Yahya, 2016). Therefore, the current mechanism of shariah auditing is raising flags as to whether the current model of shariah governance is fit for purpose. 4.0 The Ideal Role Shariah Audit in IFIs The emergence of IFIs seems as a new dimension for the auditor since the wider of scope on the audit process including the compliance with Islamic guidelines is the key element for IFIs to achieve Maqasid Ash-Shari’ah, instead of relying on the conventional auditing framework for audit purposes. Shari’ah auditor in the IFIs enables them to assist Muslims as the whole through their socio-economic justice and to the IFIs itself throughout the compliance of Shari’ah requirement. Therefore, a Shari’ah auditor should knowledgeable in Shari’ah and in accounting, auditing and finance and competent in order to reflect with the significant growth in Islamic finance (Rashid, Hamid, Sidek, Abdullah, & Ali, 2017). According to Kasim, Ibrahim & Suleiman, (2009), the ideal shariah auditing processes are desired to differ from those of conventional audit in terms of theoretical framework, scope of auditing (shariah auditing should be broader than conventional), auditor’s required qualifications (specialized in both shariah and accounting) and independence of the internal auditor (shariah auditor should be independent from the organization in which he work). Shariah auditors should have wider responsibilities in their audit processes where they are liable to all stakeholders (not only to shareholders but to investment account holders (IAHs)), disclose any reasonable information in accordance with the shariah and report socio-economic and religious events and transaction, not only economic transactions and events as the case in conventional audit. 1 https://www.isra.my/site-map/information/press-statement/448-strong-calls-for-mandatory-independent-shariahaudit-for-islamic-financial-institutions.html
12. 12 In order to sustain wholesome shariah compliance of IFIs and as a result to protect the right of all stakeholders , there should be an external shariah auditor firms who perform an independent assurance for the financial information users. For this purpose, in the standard on external shariah audit (ASIFI, No.6), which is complement to the “International Standard on Assurance Engagement (ISAE) 3000” as issued by International Auditing and Assurance Standards Board (IAASB), AAOIFI proposes that external shariah auditor firms should provide an independent assurance to various stakeholders with regard to IFIs’ compliance with shariah principles and rules. The rationale for issuance this standard (ASIFI, No.6) is that it is desirable that effective corporate governance (including shariah governance) tools are put in place to ensure qualitative improvements and harmonization, and in turn to enhance public confidence in Islamic finance industry. The general objective of such corporate governance tools is that (i) to reduce agency cost, and (ii) to create long term stakeholder value. The agency theory behind corporate governance system is depicted in the figure 5 below. Principal Shareholders Contract Agent Managers Provide Financial Report IAHs Verifies the Correspondence of the Financial Information in the Report to the Issues Audit Report       Stewardship Conflict of Interest Information asymmetry Moral hazard Maximize Own Self-interest Creditors Concern Independent Auditor Figure 5: Information Flow between the Principal and Agent The shariah auditor’s responsibility towards IAHs derived from the prohibition of interest bearing finance in Islamic banking and finance. One of the ideal alternatives to interest bearing instruments is the mudarabah investment accounts with different maturities. The investment account holders in mudarabah contract, known as IAHs, provide funds (as rabbul mal) on the
13. 13 basis of profit sharing and give the IFI (as mudarib) the mandate to management and invest the fund as it seems fit. In this case, there is possibility of information asymmetry and moral hazard from mudarib side as the rabbul mal does not involve in the management of the fund. Therefore, IAHs will need an extended assurance, from an independent agency, to ensure that the profit or loss declared by the management is true and fair. This is where the role of shariah auditor (internal and external) comes in to protect interest of, among others, IAHs. 5.0 Issues and Challenges of Shariah Audit for IFIs As described earlier, shariah auditing activities and process should be comprehensive in all IFI’s operations, affairs and activities to ensure compliance of the principles of Islamic shariah and Islamic business ethics of IFI. However, there are challenges ahead of the shariah auditing field of which IFIs, regulators, professional bodies, higher learning institutions and other stakeholder are to face. These issues and challenges include, not limited to, the following: 5.1 Independence of Shariah Auditors Shari’ah audit profession in Islamic finance is one of the social functions for the benefit of the ummah as shariah auditor providing an additional check and balance and reassurance to stakeholders. One of the most important reports in the financial statements read by stakeholders of any IFI is that of auditor’s opinion (including shariah audit which is currently prepared by SBB) on the entity as presented in figure 4. The full benefit of the shari’ah audit cannot be realized if they are not truly independent, and hence, ensuring and maintaining the integrity of the Shariah auditor professionals is paramount to sustaining future confidence and growth in the Islamic finance industry. The independence of the shariah auditor comprise two important element; (i) the shariah auditor’s judgment about a certain IFI should be independent from undue influence from the management of that institution, (ii) the shari’ah auditor’s job needs to be perceived as independent enough by those stakeholders of IFI. It is a common practice for the shari’ah auditors (especially the internal auditor as current practices) are employed by the IFI itself and heavily rely on or follow the advice of shari’ah advisors or the SSB. In this case, selfreview threats may occur because there is no clear line of separation of duties (Shahar, Hassin & Zan, 2018, Kasim, et. al, 2009) where SSB are making fatwas and at the same time helping the shari’ah auditors in conducting shari’ah review or shari’ah audit.
14. 14 In order to mitigate this , the IFIs need to rethink of where they could clearly separate these roles to avoid the misperception of the stakeholders on the SSB and/or shari’ah auditors’ independence. These functions (those of SBB and shariah auditors) should be clearly stated and not to interfere with each other and the IFIs could just outsource the shari’ah audit to outside professional shariah auditors who are well-versed in shari’ah and accounting (Yaacob, 2012). In other words, there should be a qualified external shariah auditor firms who provide an independent opinion on the shariah compliance of the IFIs on regular basis at least annually, which is mandated by the regulator. In turn, external shariah auditors must be competent and acquire the necessary knowledge and skills for shariah auditing so that they will no longer rely merely on shariah reviews done by internal shariah auditors. 5.2 Lack of Accountability of Shariah Auditors According to the current practices by IFIs, the shariah audit is performed by internal shariah auditor/shariah review function. But when it comes to reporting to the stakeholders, it is the responsibility of the SBB to prepare their annual shariah report (as depicted in figure 3 earlier) in which they give their opinion on shariah matters. Subject to BNM (2010) shariah governance framework, the regulator states that: “the Shariah Committee is expected to understand that in the course of discharging the duties and responsibilities as a Shariah Committee member, they are responsible and accountable for all Shariah decisions, opinions and views provided by them”. And one of the responsibilities of SC is that: “To assess the work carried out by Shariah review and Shariah audit in order to ensure compliance with Shariah matters which forms part of their duties in providing their assessment of Shariah compliance and assurance information in the annual report” (BNM, 201: Appendix 4 ). In this case, the role of shariah auditor is very much limited in influencing the decisions of IFIs (Yaacob, 2012). The shari’ah auditors are accountable to ensure that the IFIs follow all shari’ah guidelines and principles; and hence, their role and responsibility should be more than that. 5.3 Qualification of Shariah Auditors As stated earlier above in this paper, the shariah auditor should have sufficient know how and skills in both shariah and accounting and auditing. In other words, shariah auditor should be competent person so that they can fulfill their duties, which is providing an independent
15. 15 assurance on the extent of shariah compliance of the IFI in question . To be competent a person would need to have been trained. The auditing profession requires every auditor to have the knowledge of the philosophy and practice of auditing including adequate training and experience in all facets of auditor’s work. The profession has also placed more emphasis on continuous professional development on accounting and auditing education programs (Ahmed & Aidaros, 2015). Above all, shariah competency is crucial need to shariah auditor (both internal and external), and thus, he/she must have adequate training in this area to conduct shariah audit. The challenge here is that it is very rare to find a shariah auditor with both shariah and accounting knowledge and skills. Until today, the lack of both shari’ah and accounting knowledge, in the same person, has dampened the crucial needs of the shari’ah auditor. Those with accounting knowledge tend not to have shari’ah knowledge and vice versa (Uddin, et.al, 2013). Kasim, et.al (2009) stated in their study, that the proportion of those shariah auditors who qualified in both shariah and accounting were only 5.9%. This shows that there is talent mismatch between what is required by the rapid growth of Islamic finance industry and what is supplied by labor market. 5.4 Lack of Mandatory External Shariah Audit According to UKIFC and ISRA (2016), at present there is no independent third party reaffirming the opinion of the SBB on shariah compliance of IFIs. However, there are some countries such as Pakistan and Oman are currently in the process of implementing external shariah auditing. In Pakistan, the State Bank of Pakistan (SBP) issued it shariah governance framework (referred to as “SGF-SBPP”) in 2015 which is aimed to strengthen the control mechanisms around shariah compliance defining the related responsibilities of each shariah governance functions, including the external shariah audit. In the same way, the Central Bank of Oman issued Islamic banking regulatory framework (2012) in which the IFIs shall an independent third party to conduct an annual external independent shariah audit whose main purpose is to add credibility to the internal shariah audit of the institution in question. AAOIFI which is standard setting body who standards are not mandatory to any jurisdiction, issued Auditing Standard for Islamic Financial Institutions (ASIFI No.6) which is effective on 01 January 2019 for specific guidelines of external shariah auditing firms.
16. 16 Apart from that , however, it should be noted that big global Islamic finance hub countries like Malaysia has not been actively considering regulatory guidance mandating external shariah auditing as part of the overall shariah governance framework (UKIFC & ISRA, 2016). This can have a far reaching impact on the accountability and transparency of IFIs and the confidence of the general public, and subsequently to the long term growth of the Islamic finance industry. 6.0 Recommendations While it is true that Islamic finance industry is relatively new phenomenon to the world when compared to conventional finance, it is also a pressing need that the industry should have robust corporate governance, and most importantly shariah governance framework and guidelines including a knowledgeable and independent audit systems. The next step in creating robustness in this industry and in safeguarding all relevant stakeholders we recommend the following points:  A comprehensive talent development program where professional accountancy bodies and institutions of higher learning should be assigned to take the responsibility of identifying and implementing a comprehensive and integrated shariah auditing curriculum (encompassing shariah, accounting and auditing) and train chartered shariah auditors (CSA) in order to cater for the ever increasing demand of qualified shariah auditors by the Islamic finance industry. For example, shariah auditors to have more exposure to certified training and continous professional development conducted by established organizatios such the AAOIFI’s Certified Shariah Adviser and Auditor (CSAA) and Islamic Banking and Financial Institute of Malaysia (IBFIM). Management of IFIs needs to ensure that sufficient resources are allocated for in-house talent development in improving the knowledge base of their internal shariah auditors.  Regulators and Shariah financial institutions around the world should adopt the external shariah standards issued by AAOIFI and implement mandatory independent audit of Shariah compliance in Islamic finance, in the wake of louder calls for trust, transparency and accountability from financial market participants. To be perceived as independent, then sharih audit should be carried out by external auditing firms.
17. 17  To mitigate the risk of self-review between the internal shariah auditors and SBB, then the regulator should accommodate that internal shariah audit staff report directly to the board of director or audit committee. 7.0 Conclusion Global IFIs need to establish well-versed shariah auditors that conduct periodic assessment from time to time in order to provide accurate and independent assessment intended to add value and improve the degree of compliance in relation to the IFI’s business operations, with the main objective of ensuring a sound and effective internal control system for Shariah compliance. Through the efforts made by the regulators of many countries and standard setting board (e.g AAOIFI and IFSB), a remarkabble development have been made in the shariah governance frameworks (including shariah auditing) of the IFIs. However, there are some challenges ahead of shariah audit as a profession. These challenges include, not limited to:  The independence of shariah auditors, where the internal and external shariah audit are heavily relying on or following the advice of the SBB. This may lead to a self-review between the shariah auditors and SBB;  Lack of accountability of shariah auditor, where the shariah auditors are reporting to the SBB who provide their last opinion in their SBB’s annual report to the board of directors and the public. The role of shariah auditor is very much limited in influencing the decisions of IFI;  Unqualified shariah auditors, where there are talent shortage in shariah auditing. It is rare to find out shariah audit with the required knowledge, skills and experience in both shariah, accounting and auditing;  Lack of mandatory external shariah audit, where there is no independent third party reaffirming the opinion of the SBB on shariah compliance of IFIs, despite some jurisdiction like Pakistan and Oman are in progress towards implementing external shariah audit.
18. 18 Reference AAOIFI , (2018). Auditing Standard for Islamic Financial Institutions No. 6: External Shariah Audit. available at: http://aaoifi.com/wp-content/uploads/2018/03/ASIFI-6-External-Shari27ah-AuditClean-by-ZAS-26-March-2018-FINAL-for-Issuance.pdf. accessed on 15 July, 2018 Bank Negara Malaysia (2010). Shariah governance framework for Islamic financial institutions. Available at: https://www.bnm.gov.my/guidelines/05_shariah/02_Shariah_Governance_Framework_ Htay, S.N., Arif, M., Zaharin, H.R. & Shaugee, I. (2013). Accounting, Auditing, and Governance for Takaful Operations. John Wiley & Sons Singapore Pte.Ltd. Kasim, N., Ibrahim, M.,& Sulaiman, M. (2009). Shariah Auditing in Islamic Financial Institutions: Exploring the Gap Between the “Desired” and the “Actual”. Retrieved from: https://www.researchgate.net/publication/228480312_Shariah_Auditing_in_Islamic_Financial_I nstitutions_Exploring_the_Gap_Between_the_Desired_and_the_Actual. Accessed on: 19 July, 2018 Rashid, A. A., Hamid, M. A., Sidek, A. S., Abdullah, M. T. & Ali, I. M., (2017). Shari’ah Auditing: A Review of Shari’ah Audit Practices in Islamic Financial Institutions. Retrieved from: https://www.researchgate.net/publication/318669128_Shari'ah_Auditing_A_Review_of_Shari'ah _Audit_Practices_in_Islamic_Financial_Institution_IFIs. Accessed on: 20 July, 2018 References Sanusi, Z. M., Kasim, N. (2013). Emerging issues for auditing in Islamic Financial Institutions: Empirical evidence from Malaysia. Retrieved from: http://www.iosrjournals.org/iosrjbm/papers/Vol8-issue5/B0851017.pdf. Accessed on: 18 July, 2018 Shahar, W. S., Hassin, W. S. & Zan, U.M., (2018). Shariah Audit for Islamic Financial Institutions: Issues and Challenges. Available at: http://www.m-hikari.com/ref/ref2018/ref1-42018/p/ref14-2018.pdf. accessed on: 25 July, 2018 Sultan, S. A., (2007). A Mini Guide to Shariah Audit for Islamic Financial Institutions- A Premier. CERT Publications, Malaysia. UKIFC & ISRA, (2016). Exeternal Shariah Audit Report. Retrieved from: http://www.mifc.com/index.php?ch=48&pg=203&ac=151&bb=uploadpdf. Accessed on: 17 July, 2018 Yaacob, H. (2012). Issues and Challenges of Shari’ah Audit in Islamic Financial Institutions: A Contemporary View. Retrieved From: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2175700. Accessed on: 19 July, 2018
19. 19 Yahya , Y. (2016). Shariah Audit in Islamic Financial Institutions: The Effects of Spirituality and Moderating Role on Judgement and Decision Making. University of Malaya, Kuala Lumpur. Yussof, S. A., (2013). Prospects of a Shariah Audit Framework for Islamic Financial Institutions in Malaysia. Available at: https://www.researchgate.net/publication/291203349_Prospects_Accessed on: 16 July, 2018