The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) held public hearings on two of its standards on March 20 in Kuala Lumpur.
The standards under review were Shariah compliance and fiduciary ratings for Islamic financial institutions (IFIs), as well as internal Shariah audits.
The “Internal Shariah Audit” exposure draft is a revised and improved version of a standard developed in the initial phase of the development of the Islamic finance industry.
The industry has evolved significantly in the last two decades, with regulators implementing improved governance frameworks and internal auditing professions applying improved standards, according to the exposure draft.
AAOIFI said the internal Shariah audit function is an important component of IFIs’ governance framework which promotes internal accountability and transparency, and helps gain the confidence of all its stakeholders.
It said the function is considered important in building a strong base in IFIs to comply with Shariah principles and rules.
The standard aims to provide a comprehensive guideline on independent assessments of IFIs’ adherence with Shariah principles and rules to those charged with governance and the Shariah supervisory board (SSB) — thereby helping in managing Shariah non-compliance risk and ensuring a sound internal control system, it added.
On the responsibility for setting up and supervising the internal Shariah audit function, the document said the audit committee of an IFI shall ensure that a robust and effective internal Shariah audit function exists in the IFI and remains in operation.
“The audit committee shall keep oversight of the overall internal Shariah audit function and shall provide its input in this regard.
“The SSB, on the other hand, shall provide necessary input to the internal Shariah audit function on a need basis,” according to the 27-page document.
An internal Shariah audit — part of the governance organs of an IFI — is defined as a process that is independent of management, and with the primary objective to provide assurance to those charged with governance and the SSB in relation to the IFI’s adherence to Shariah principles and rules.
The Bahrain-based AAOIFI is an Islamic international autonomous not-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shariah standards for IFIs and the industry.