Adoption of the COSO methodology for internal Shariʿah audit

Purpose – Islamic financial institutions (IFIs) are required to establish a Shariıʿah Governance Framework (SGF) to strengthen their Sharıʿah-compliance mechanism and ensure that all relevant IFI regulations are in line with Sharıʿah rules and principles. Effective implementation of the Shariıʿah-compliance function will further promote stakeholder confidence, as well as the integrity of IFIs, by reducing Shariıʿah non-compliance risks. This study aims to examine the internal control framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and explore the extent to which it can be incorporated in the Sharıʿah-compliance function of IFIs.

Design/methodology/approach – This study adopts a qualitative method of inquiry, utilizing the inductive method and content analysis to build comprehensive knowledge that will assist in exploring the framework of COSO methodology and the extent to which it can be adopted by IFIs.

Findings – The findings indicate that the existing frameworks of Sharıʿah governance, whether that of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) or Bank Negara Malaysia (BNM), need to be further developed. Therefore, the adoption of COSO methodology in the internal Sharıʿah audit of IFIs, as suggested by AAOIFI, is not only possible but desirable. The study also finds that the COSO framework places the highest priority on risk management in that it makes it an integral part of the decision making process in all the institution’s activities. As a result, incorporating the comprehensive COSO risk management structure within the Sharıʿah-compliance function will enhance risk management in IFIs.

Originality/value – This study highlights the importance of the COSO internal control framework and examines its components, principles and the possibility of its adoption by IFIs. The findings of this study are expected to contribute to enhancing the Sharıʿah-compliance function of IFIs.