AAOIFI urged to improve Islamic auditing system

DUBAI Tue May 8, 2012 8:21am EDT

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DUBAI May 8 (Reuters) - Auditors of Islamic financial institutions need better training to make sure they can conduct accurate assessments of products and practices, a major industry conference was told this week.

Internal teams of auditors check whether Islamic banks and other financial firms are obeying religious principles. They work with companies' boards of scholars, who then issue rulings on whether specific financial instruments and activities comply with sharia law.

The relationship between auditors and boards of scholars is a delicate one which Mufti Aziz Ur Rehman, sharia manager at Dubai-based Mawarid Finance, said was not always certain to deliver careful and consistent supervision of companies.

In a speech to the annual meeting of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain, Rehman questioned the ability of auditors to conduct proper reviews if their knowledge of sharia law was not as extensive as that of the scholars.

He also questioned whether AAOIFI's training programmes and certifications for Islamic finance professionals were adequate.

"How many sharia auditors are fully qualified?" Rehman asked the conference.

REVIEW

AAOIFI, one of the world's top standard-setting bodies for Islamic finance, has said it will conduct a wide-ranging review of its guidelines, and Rehman's speech may encourage it to focus on auditing as an area for potential reform.

In his speech, the Pakistani-born Rehman said the relationship between auditors and scholars was vulnerable to an imbalance of knowledge between the two.

For example, auditors might not understand products or practices, and so might not report them clearly to scholars. Or auditors might end up relying on scholars to explain complex products, undermining the independence of the audit team.

Training is a way to bridge the knowledge gap, but there are concerns over whether AAOIFI's two industry certifications for Islamic finance professionals are rigorous enough, Rehman said.

Rehman, who holds both certifications, said there were no pre-conditions for eligibility; candidates were required to have no specific experience or education except for Arabic proficiency. A trainer and university lecturer himself, he also questioned the quality of the training and whether the curriculum fully covered all of AAOIFI's standards.

In an interview before the AAOIFI conference, Rehman told Reuters that the audit process needed greater clarity in its roles and responsibilities. AAOIFI might achieve this, he said, by "disciplining the sharia advisory process and addressing conflict of interest issues and corporate governance matters".

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In his speech, Rehman suggested that the next steps for AAOIFI could be to standardise sharia audit procedures. This could take the form of clearer reporting lines to senior management and formalising the output from audit teams.

At present, auditors' reports can vary widely in format and content. Usually, they are only circulated internally with little scrutiny by shareholders or other external parties. (Editing by Andrew Torchia)

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