An external Shari’ah audit is an audit of compliance, not an audit of Shari’ah rulings

Some appear to be in confusion about the scope of external Shari’ah audit. They are of the impression that it involves auditing the Shari’ah rulings issued by the Shari’ah board. Hence, they argue that the external Shari’ah audit team must comprise experts primarily from the Shari’ah background. They also wonder about resolving disputes, if opinions vary between the external Shari’ah auditors and Shari’ah board.

Bahrain, Oman and Pakistan have made external Shari’ah audit compulsory for their Islamic banks. The audit is to be conducted on an annual basis. In all these three jurisdictions, the scope of this audit is to assess Shari’ah compliance of the Islamic banks. In none of these jurisdictions, the scope extends to auditing the appropriateness of the fatwa issued by the Shari’ah board.

The Shari’a Governance Module of Bahrain states that:

The IESCA should have no responsibility for assessing the competence of the members of the SSB other than whether they meet the fit & proper criteria specified by the CBB.

The Islamic Banking Regulatory Framework of Oman states that:

An independent Shari’a audit shall be similar in scope as internal Shari’a audit. It is not meant to provide an opinion on the Shari’a legitimacy of the SSB’s decisions. It will only assess the extent of implementation by the Licensee’s management of the decisions given by the SSB.

The Shari’ah Governance Framework for Islamic Banking Institutions of Pakistan states that:

… the scope of external Shari’ah audit shall be limited to assessing compliance of an IBI’s financial arrangements, contracts, and transactions with Shari’ah rules and principles.

The above is consistent with the AAOIFI Auditing Standard No. 4 (Testing for Compliance with Shari’a Rules and Principles by an External Auditor), which states that:

… the responsibility to interpret the Rules and Principles of Shari’a lies with the SSB.

The auditor shall be knowledgeable about Shari’a Rules and Principles. However, he would not possess the same level of knowledge as that of SSB members and thus the auditor shall not be expected to provide interpretation of these rules and principles.

Hence, there is no issue of arising a dispute between the external Shari’ah auditors and Shari’ah board on forming a Shari’ah opinion as the former is not supposed to form a Shari’ah opinion or give a Shari’ah ruling. The external Shari’ah auditors are only responsible to form an opinion on compliance with the Shari’ah rulings issued by the Shari’ah board and other applicable authorities. Furthermore, it is not essential for all or majority members of the external Shari'ah audit team to be a Shari'ah expert.

Abbreviations:

AAOIFI: Accounting and Auditing Organization for Islamic Financial Institutions

CBB: Central Bank of Bahrain

IBI: Islamic Banking Institutions

IESCA: Independent External Shari’a Compliance Audit

SSB: Shari’ah Supervisory Board