The impact of AAOIFI accounting standards on earnings quality: The case of Islamic banks in Bahrain

Abstract

The purpose of this paper is to examine the change in earnings quality after the adoption of AAOIFI Accounting Standards in Islamic Banks of Bahrain. In this paper, we hypothesize that, adoption of AAOIFI accounting standards could lead to high level of earnings quality. However, data were collected from the annual reports of 5 Islamic banks in Bahrain during 2002-2011. The findings indicate that the change in earnings quality after the adoption of AAOIFI in Islamic Banks of Bahrain is higher due to the improvement of the quality of financial reporting. The Adoption of AAOIFI accounting standards is expected to lead to high level of earnings quality among Islamic Financial Institutions and play a significant role in attracting global investors’ interest in the local markets, especially in a developing country like Bahrain.