Maintenance script: Imported from text file

2016-09-17T13:47:54Z

Imported from text file

New page

AUDIT & SHARIA COMPLIANCE –

ISSUES IN ISLAMIC BANKING AND

FINANCE

Presentation By:

Omar Mustafa Ansari

Partner

Ford Rhodes Sidat Hyder & Co.

(Member of Ernst & Young Global Limited)

‫الرحمن الرحیم‬ ‫ٰ‬ ‫بسم ہللا‬

‫ب ا ْش َر ْح ِّلي َ‬

‫ص ْد ِّري‬ ‫قَا َل َر ِّ‬

‫َویَ ِّس ْر ِّلي أ َ ْم ِّري‬

‫سانِّي‬ ‫احلُ ْل ُ‬

‫ع ْق َدة ً ِّمن ِّل َ‬ ‫َو ْ‬

‫یَ ْفقَ ُهوا قَ ْو ِّلي‬

‫(سورہ طه)‬

‫‪Presentation By:‬‬ ‫‪Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.‬‬

Role of Auditors and Accountants in

Islamic Finance

 Allah SWT says in Quran that “Allah doth command you to

render back your trusts to those to whom they are due; And

when ye judge between people that ye judge with justice.”

 According to the code of ethics for accountants and auditors of

Islamic financial institutions, accounting (duly including auditing

– external, as well as, internal) is one of the professions that is

required by Shariah as a Fard Kifaya.

 In other words it is a duty which, if performed by some, would

exempt others in the society. Otherwise, the whole society is

sinful.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Purity of Transactions and Building

Reliance on Islamic Finance

 Islamic banking industry is presently growing at a very high

pace.

 One of the critical issues the industry is facing is the matter of

purity in transactions which, in longer run, will ensure reliance of

Muslim Ummah in this model of Islamic finance and banking.

 If this issue, at this stage, is ignored, it may result in a disaster

in the name of Islamic Finance.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Strategy to Build Reliance on Islamic

Finance and Banking

 A three fold strategy may help out the industry to ensure

Shariah compliance on an ongoing basis.

1. Standardization of Shariah Compliance Regulations for

Islamic Finance;

2. Improved governance and Shariah Compliance Assurance

for Islamic Financial Institutions; and

3. Shariah Compliance Rating of Islamic Financial Institutions

and Products.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

STANDARDIZATION OF SHARIAH

COMPLIANCE REGULATIONS FOR

ISLAMIC FINANCE

Standardization of Shariah Compliance

Regulations for Islamic Finance

 Standardization is necessary to ensure that all the matters of

Islamic financial institutions are dealt with, within a framework

which is acceptable for all Muslims.

 Internationally, there have been a lot of efforts for

standardization of practices being followed by various Islamic

financial institutions. These efforts include a lot of research

work.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Standardization of Shariah Compliance

Regulations for Islamic Finance

 The most admirable job has been performed by:

 the Islamic Fiqh Academy of the Organization of Islamic

Countries; and

 the Accounting and Auditing Organization of Islamic

Financial Institutions (AAOIFI).

 In respect of governance and risk management, Islamic

Financial Services Board has also performed a commendable

job.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Introduction to AAOIFI

 AAOIFI was established in 1990 in Algiers under an Agreement

of Association between a number of Islamic financial institutions

(IFIs). Now it is based in Bahrain.

 Its objectives primarily include development of accounting,

auditing, governance and Shariah standards for Islamic

financial institutions.

 Accounting, Auditing and Governance Standards (AAGS) are

issued by AAOIFI’s Accounting and Auditing Standards Board

whereas the Shariah Standards Board issues the Shariah

Standards.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Introduction to AAOIFI

 These Boards have, to date, performed a remarkable job by

issuing accounting, governance, auditing and Shariah

standards for Islamic financial institutions.

 These Boards have been established by choosing the experts

of the fields from throughout the Islamic world. Accordingly,

their works, are considered to be a consensus (Ijma) of the

experts from the field.

 These work may be used for standardization of practices of

Islamic finance and banking throughout the world.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Introduction to IFSB

 Officially inaugurated on November 03, 2002 and started

operations on March 10, 2003.

 Serves as an international-standard setting body of regulatory

and supervisory agencies that have vested interest in ensuring

the soundness and stability of the Islamic financial services

industry.

 Promotes the development of a prudent and transparent Islamic

financial services industry through introducing new, or adapting

existing international standards consistent with Islamic Shariah

principles.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Pakistan’s Perspective

 Accounting and Financial Reporting

 The Institute of Chartered Accountants of Pakistan has issued

Islamic Financial Accounting Standards for Ijara and Murabaha

which are under implementation stages. These standards are

approved by SBP and notified by SECP.

 Shariah Compliance

 SBP has established a Shariah Board.

 SBP has issued essentials for Islamic banking and financial

products and a bunch of model agreements. But all these are

considered to be guidelines, and not regulations. SBP has also

issued various circulars in this respect.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Pakistan’s Perspective

 Governance – What SBP is Doing

 Shariah compliance framework being established. Draft Islamic

banking guidelines issued and comments received.

 A Shariah compliance inspection mechanism is being introduced

and a Shariah compliance inspection manual has been

developed.

 Risk management standards are being adopted with suitable

modifications.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Pakistan’s Perspective

 Takaful

 Takaful Rules developed and now being reviewed for

improvement. Revised Rules will include accounting regulations

for Takaful.

 SECP has established a Central Shariah Board.

 Mandatory Shariah Compliance Audit for Takaful.

 Modarabas

 All model agreements and products are being reviewed from

Shariah compliance perspective.

 Religious Board for Modarabas is now in operation after a long

gap.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

IMPROVED GOVERNANCE AND

SHARIAH COMPLIANCE

ASSURANCE FOR ISLAMIC

FINANCIAL INSTITUTIONS

Shariah Non-Compliance Risk: What &

Why?

 Shariah non-compliance risk is a significant risk for an Islamic

financial institution from two perspectives:

1. It impacts the reputation of the Islamic financial institution

and deteriorates reliance of the depositors, investors,

customers and other stakeholders in the long-term; and

2. It impacts the revenue as well, because in case of an

identified Shariah non-compliance, the income arising

from such transaction is to be given in charity.

 But, for the society, and considering it a step towards

complete transition of economy on Islamic principles, Shariah

compliance is the essence of Islamic banking and finance.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

How to Manage Shariah Non-

Compliance Risk?

Shariah Review

Shariah

Supervisory Board

/ Shariah Advisor

Consideration of

Internal Shariah Shariah

Review Compliance by the

External Auditor

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Assurance for

Islamic Financial Institutions

 Rules, regulations and standards might not work unless and

until an effective network of check and balance is established to

ensure compliance of the same in letter and spirit.

 Shariah compliance cannot be ensured merely on the basis of

approval of products by the Shariah Supervisory Boards and

the Shariah Advisors.

 Approvals have to be matched with the ground realities.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Assurance for

Islamic Financial Institutions

1. Shariah compliance review report of Shariah Supervisory

Board or the Shariah Advisor (May, or may not be, based on

Internal Shariah Review).

2. Shariah compliance audit by the external auditors of the

Islamic financial institutions.

3. Shariah Compliance Inspection of Islamic commercial banks.

4. Independent Shariah compliance assurance (internal or

external) from professionals.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah

Advisor – Issues

 Competence (From Assurance Perspective)

 Without any disregard to the individuals, and not as a

generalized rule, it needs to be realized that the jurists

sitting on the Board or working as Shariah Advisors

possess little knowledge about the accounting and

auditing, and more importantly, the operations of the

financial institutions.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah

Advisor – Issues

 Consequently, their compliance review generally remains

limited to the extent of assurance of the legal form of

transactions i.e. vetting of agreements and documents etc.

 On the contrary, the operational matters which include the

substance of the transaction might remain unattended

because it is not the core competence of these respectable

jurists.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah

Advisor – Issues

 Management’s Attitude

 Generally the management does not wish to bring each and

every matter in the attention of the Board or the Advisor.

 Accordingly, unless they have enough time to review things

on their own, and they take reasonable interest in the same,

it is not possible for them to have a look on most of the

operational matters.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah

Advisor – Issues

 Independence

 Although we don’t have any doubt on the personal

independence and integrity of these respectable jurists, they

would themselves appreciate that the work performed under

one’s guidance should always be counter checked by an

independent person.

 Particularly, keeping in view the human tendency of errors,

it cannot be advised that the person supervising and

monitoring the transactions is also entrusted to recheck and

audit the same.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah

Advisor – Issues

 Scarcity of Resources (Time and Skilled Staff)

 Generally those on the Shariah Boards and on the seat of

Shariah Advisors are busy guys. They are generally serving

a number of Boards and educational institutions and are

involved in a number of social and religious activities.

 In addition, they do not have sufficient budgets available for

their departments, nor an adequate number of skilled staff

hired for the purpose of assisting them in the assurance

work.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah

Advisor – Issues

 Consequently, you can easily imagine that it is humanly not

possible for a single person to perform a comprehensive

Shariah compliance audit of the operations of a full-fledged

Islamic financial institution which may even have a number

of branches.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Audit by External

Auditors – Issues

 According to AAOIFI standards, the auditor should, to a

limited extent, ensure compliance with Shariah

requirements.

 Option being used by certain Islamic mutual funds in the

country is Shariah compliance audit by their external

auditors.

 According to Takaful Rules, a Shariah compliance audit is

required. But this is not being performed by external

auditors, as the Rules do not provide any further detail.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Audit by External

Auditors – Issues

 Since the external auditor is also entrusted with the task of

performing the Shariah compliance audit, his expertise in

Islamic finance is not ensured. You would appreciate that if

the auditor is not equipped with the necessary skills and

knowledge, the output of the assignment might not be as

good as may be expected from an experience auditor; and

 Since the scope of the audit is pre-defined and the matter of

permissibility of a transaction is generally subject to the

opinions and perspectives of the Shariah Supervisory Board

or the Shariah Advisor, the independence of the exercise, to

some extent, remains in jeopardy.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Inspection by SBP

- Issues

 This is a very good approach, as it is independent and

authoritative in nature.

 Issues identified are forwarded to the SBP’s Shariah Board

so the exercise remains independent.

 Nevertheless, since the results of such inspections are

considered to be confined to the management of the Bank

and the State Bank, the benefits of such exercises cannot

be forwarded to the general public.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Inspection by SBP

- Issues

 Moreover, such exercise is limited to the Islamic commercial

banks and the Islamic banking branches of conventional

commercial banks and consequently other financial

institutions that are governed by the SECP including Islamic

mutual funds, Modarabas, Takaful companies, Housing

finance companies, Investment finance companies and

leasing companies shall remain out of ambit of such

exercise.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Independent Shariah Compliance

Assurance by Professionals

 This approach is now being applied by a few Islamic banks.

 This may be applied in form of:

1. Internal Shariah Review; and

2. External Shariah Compliance Assurance / Audit.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

SHARIAH COMPLIANCE RATING

OF ISLAMIC FINANCIAL

INSTITUTIONS AND PRODUCTS

Shariah Compliance Rating of Islamic

Financial Institutions and Products

 Anyone having basic understanding of Islamic finance

would easily understand that generally all the products

being launched by Islamic financial institutions cannot be

termed equivalent for Shariah compliance purpose.

 There might be certain provisions in an Ijara contract that

may render it less desirable as compared to a similar Ijara

contract. Or in general a Murabaha may be less preferable

as compared to a Modaraba product.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Rating of Islamic

Financial Institutions and Products

 In addition to the products being launched by the Islamic

financial institutions that are subject to the approval of their

respective Shariah Advisors and Shariah Supervisory

Boards there are certain Islamic financial products that are

launched by the conventional financial institutions or by

various companies and even by the Government.

 These products, for example, include the housing finance

option offered by the House Building Finance Corporation,

Sukuks being issued by the Government of Pakistan and

various government owned entities, Musharaka TFCs

issued by the Sitara Energy and operating lease options

offered by various leasing companies.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Rating of Islamic

Financial Institutions and Products

 In view of the same it is imperative that a Shariah

compliance rating mechanism be introduced so that the

general public may be able to differentiate between various

products being launched.

 In addition, this will encourage the financial institutions to

continuously improve the purity factor in their financial

products.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

GOVERNANCE STANDARDS BY

AAOIFI

Governance Standards

 Shari’a Supervisory Board: Appointment, Composition and

Report

 Shari’a Review

 Internal Shari’a Review

 Audit and Governance Committee for Islamic Financial

Institutions

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shari’a Supervisory Board (SSB)

 It is an independent body of specialized jurists in fiqh

almua’malat (Islamic commercial jurisprudence).

 Appointment, Composition and Report

 It is appointed by shareholders in AGM upon recommendation

of Board of Directors (BOD), they may authorize BOD to fix the

remuneration of SSB. SSB shall be consisted of atleast three

members, it may seek the service of consultants but excludes

directors and significant shareholders of IFI.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Shari’a Review

 The objective of the Shari’a review is to ensure that the

activities carried out by an IFI do not contravene the Shari’a. It

is the responsibility of SSB to form and express an opinion on

the extent of an IFI’s compliance with the Shari’a.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Internal Shari’a Review

 The internal Shari’a review is an integral part of the organs of

governance of the IFI and operates under the policies

established by the IFI. It shall be carried out by an independent

division or part of internal audit department, depending on the

size of an IFI. The primary objective of internal Shari’a review is

to ensure that the management of an IFI discharge their

responsibilities in relation to the implementation of the Shari’a

Rules and Principles as determined by the IFI’s SSB.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Audit and Governance Committee

(AGC)

 The importance of the AGC for an IFI emanates from its role in:

 achieving the fundamental objectives of an IFI, by

enhancing greater transparency and disclosure in financial

reporting; and

 enhancing the public’s confidence of the IFI as genuine in

its application of Shari’a rules and principles.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

AUDITING STANDARDS BY AAOIFI
Auditing

 Objective and Principles of Auditing

 The Auditor's Report

 Terms of Audit Engagement

 Testing for Compliance with Shari'a Rules and Principles by an

External Auditor

 The Auditor's Responsibility to Consider Fraud and Error in an

Audit to Financial Statements

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Objective

And Principles

 Objective

To enable the auditor to express an opinion as to whether the

financial statements are prepared, in accordance with Shari’a

Rules and Principles and the accounting standards of the

Accounting and Auditing Organization for Islamic Financial

Institutions (AAOIFI).

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Objective

And Principles

 Principles

The auditor should comply with Code of Ethics for

Professional Accountants which include; righteousness,

integrity, trustworthiness, fairness, honesty, independence,

objectivity, professional competence, due care, confidentiality,

professional behavior and technical standards.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Auditor’s Report

 The auditor should review and assess the conclusions drawn

from the audit evidence obtained as the basis for the expression

of an opinion on the financial statements, it should contain a

clear written expression of opinion on the financial statements

taken as a whole.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Terms of Audit Engagement

 The auditor and the client should agree on the terms of the

engagement. The agreed terms would need to be recorded in

an audit engagement letter.

 The engagement letter documents and confirms the auditor’s

acceptance of the appointment, the objective and the scope of

the audit, the extent of the auditor’s responsibilities to the client

and the form of any reports to be provided by the auditor.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Testing for Compliance with Shari’a Rules and

Principles

 When testing for Shari’a compliance, the auditor shall obtain

sufficient appropriate audit evidence that provides the auditor

with reasonable assurance that the Islamic Financial Institution

(IFI) has complied with Islamic Shari’a Rules and Principles

(the Fatwas, Rulings and Guidance issued by Shari’a

Supervisory Board (SSB) constitutes Islamic Shari’a Rules and

Principles).

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Fraud and Errors

 The fact that an audit is carried out may act as a deterrent, but

the auditor is not and can not be held responsible for prevention

of fraud and error, however, the auditor shall be held

responsible for negligence and misconduct.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

WHAT ISSUES I HAVE FACED?
What Issues I Have Faced?

 As External Auditor

 Management is of the view that I have nothing to do in

respect of Shariah compliance (Even if I feel that it has

something to do with the Objects of the Bank / Modaraba).

 Even if I have some evidence in hand, coupled with some

sort of research work, I am told that the Shariah Advisor is

the final authority. (I am independent, and without any

disregard, he is a paid employee and a party to the

transaction as he approved it).

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

What Issues I Have Faced?

 As Internal Shariah Reviewer / External Shariah Auditor

 Top management and Shariah Advisor, are on my side, but

the middle level management makes all efforts to fail the

exercise.

 I am bound to follow the advice of the Shariah Advisor,

without any opportunity of being heard at any independent

forum.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

What Issues I Have Faced?

 As Shariah Compliance Inspector

 Management of the bank under inspection makes all efforts

that either no inspection be carried out or if an inspection is

inevitable, then it should remain limited to whatever Shariah

Advisor has approved.

 Shariah Advisor becomes a party along with the

management, as he has approved the transactions and

issued a clean Shariah review report.

 SBP’s management is not sure as to what extent it may

interfere into the matters of the Bank with respect to Shariah

compliance.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

What Issues I Have Faced?

 SBP’s management changes its decisions with regard to the

scope of inspection and the responsibility for inspection

within various departments.

 SBP’s Shariah board includes a member who was the

Government’s advocate in the case against the declaration

of bank’s interest as Haram, and another member, who is

on a number of Shariah boards and Shariah Advisor of a

Bank whose independence from this perspective is not

ensured.

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

Thank you…..

Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.

← Older revision		Revision as of 12:08, 10 November 2017
Line 223:		Line 223:


−	[~~http~~://45.40.~~136.134~~/~~~hodhood~~/HodHoodDocuments/IslamicFinance/Takaful/Audit%20Issue%20of%20Islamic%20Banking.pdf Read the Full Document]	+	[https://www.hodhood.com/en/HodHoodDocuments/IslamicFinance/Takaful/Audit%20Issue%20of%20Islamic%20Banking.pdf Read the Full Document]

Audit Issue of Islamic Banking - Revision history

Admin: Text replacement - "http://45.40.136.134/~hodhood/" to "https://www.hodhood.com/en/"

Admin at 02:17, 21 September 2016

Admin: Blanked the page

Maintenance script: Imported from text file