How to Successfully Select the Best-Performing Bank Based on the Best Auditor’s Choice Quality in Islamic and Conventional Banks?

Abstract

Prior research looked at the impact of external audit quality (EAQ) on financial performance (FP) subsequent to the certification of the financial statements, which means after the external auditor’s choice (EAC). However, in this research, I chose the EAC as a proxy for the EAQ to study the results of the EAC quality before the external auditor (EA) appointment on FP in the most well-known bank types, namely conventional and Islamic banks. This paper aims to minimize the EAC problem, overcome the choice risks, and solve the choice ambiguity between conventional and Islamic banks that exists in the literature. The first datum was collected from 180 conventional banks (CBs), while the second datum was composed from 180 Islamic banks (IBs). By using random and fixed effects, we investigated cylindrical panel data to parse the link between EAC quality and FP during the period (2010–2022). Hence, we inferred that the EAC quality ameliorated the IBs’ FP but lowered that of the CBs.

1. Introduction

The progressive reading has shown that the EAC is considered a central governance mechanism around which several other mechanisms and stakeholders are correlated [1]. Banks’ shareholders appoint a renowned audit corporation and choose a reputable EA to obtain sufficient assurance that presents a good report quality. Generally, the best EAC in management control is increasingly becoming an obligation in the banking system to strengthen internal governance, which exposes managers to disciplinary forces inside and outside the bank. Besides, banks can be companies in other banks or subsidiaries in multinational bank groups; thus, they manage high capital and are forced to allocate it more efficiently. In practice, the EAC can threaten managers who benefit from their positions and act according to their interests without considering those of shareholders. This will subsequently cause suspicious consequences that can negatively influence the banks’ FP.

Moreover, external governance represents stakeholders’ control, with the markets allowing the completion of internal governance [2]. Among these mechanisms that are part of external governance, we cite the financial market, the market for goods and services, the labor market for managers, EA, etc. Hence, external audits address the importance of the EAC to the EAQ. According to Caprio and Levine [3], the possible sources of banks’ external governance are fourfold. These sources are creditors, shareholders, governments, and competitive discipline in product and service markets. To evaluate the EAQ, we chose the EAC as an external governance mechanism to meet the expectations of shareholders and creditors [4]. Nevertheless, all competitive external audit mechanisms may urge managers to behave opportunistically since the impact of substitutability leads to information asymmetry between the mechanisms or between managers and investors within the same bank. Audit opinion shopping was extensively studied in accounting research. Many firms are committed to opinion shopping by influencing or even manipulating their auditor’s decision to obtain the estimated opinion [5]. Therefore, the accumulation of these acts will destroy the process of creating FP and weaken the audit’s protective effect on investors.

The banks’ control policy that complies with standards of good governance practices requires the disclosure of reliable information that is relevant, intelligible, and accurate to promote performance, maintain stability, and reflect the banks’ real situation [6]. However, several empirical studies explored the effect of the EAQ on earnings management, FP evolution, financial handling, and banks’ accounting restatements [7, 8, 9, 10, 11, 12, 13, 14, 15]; since the appearance of such financial and accounting phenomena created a paradox and confirmed that the theoretical foundations for selecting the EA differ from the real and practical criteria. Because there are no studies that discussed the standard basis on which the banks select their auditors and the effects of the EAC on the banks’ FP, we took the initiative to resolve this issue by focusing on the two famous bank types, namely Islamic banks and conventional banks.

Before studying the difference between the detailed effects of the EAC within conventional and Islamic banks, it seems appropriate to, first, draw the readers’ attention to the fact that an overview of the literature on the EAC sheds light on two separate lines of research: the effect of the EAC on governance quality [16, 17, 18, 19, 20, 21, 22] and the impact of the EAC on FP [13, 23, 24, 25, 26, 27]. Figure 1 schematizes the link between the EAC and FP measurements in the presence of endogenous and exogenous factors that can create practical flows that lead to altering the EAC or influencing FP.

Figure 1.

Explanation of possible effects movements between EAC and FP.

The financial audit that is conducted by a BIG4 auditor has a major effect on other internal governance mechanisms. Therefore, an independent external audit plays a crucial role in maintaining stakeholders’ confidence in financial reports and contributes to reducing agency costs [28, 29]. Shareholders aim to curb agency costs, optimize the FP, increase owners’ dividends, gain the confidence of the financial markets, and protect the interests of current and potential investors. It is a complicated, multidimensional relationship where the shareholders control the auditor and the auditor controls the managers. An auditor’s conspiracy with the officers will result in a conflict of interest between the shareholders and the officers. When shareholders discover this complicity, the auditor risks losing their bank fees.

Although the recent financial crises stem from the decline in the banks’ FP, a noticeable increase is found in the practice of earnings management and the reporting of fictitious false FP levels, originating in most cases from false reporting and the lack of external audit transparency [18, 21, 30, 31, 32]. The banks’ EAC may alter the relevance of the audit engagement and ensure the financial statements’ reliability. The Subprime scandal affected the stakeholders’ trust through the financial information included in the auditors’ reports. It destroyed financial reports users’ trust, which raises the question of the auditors’ honesty and independence and whether audit quality enhances the quality of disclosed information [33]. Kassem and Higson [34] concluded that EAs are liable for assessing corruption risks. Yet, external audit regulators could not clearly define their role. Moreover, Mohammad and Ahmed [35] proved that big audit corporations have no considerable impact on financial reporting quality.

Following the 2007 governance scandal, many multinational banks failed, and governments bailed out many financial institutions, whether in developed or undeveloped countries around the world. Because of the revival of interest in CBs and the credit governance problems, the false disclosure results and the FP swelling were transformed into toxic interest gains. The discussed gap originates from their bad EAC and the decline of their EAQ. It all depends on the bank’s audit policy goal. Indeed, the EAC quality can make a radical change (positive/negative) through the integration of a constructive/destructive vision, the implementation of an efficient/deficient monitoring system, and the introduction of a good/bad transparency policy, whether in conventional or Islamic banks. However, because banks worked within an agency financial framework, financial reality showed many complicated details and opposite results from the expectations of the EAC. Furthermore, in the literature on IBs’ governance, not many papers tackled the subject of EAC [36, 37, 38] because, in IBs, there are other substitutable mechanisms like the Charia Supervisory Board and religion standards, where this mechanism has lost some of its importance.

At this stage, given that prior research on the impact of EAC on FP revealed inconsistent findings and EAC showed different and inclusive impacts on the association with banks’ FP and that none of them has compared these impacts in conventional and Islamic banks, we examined whether the EAC provides indications on the development or the fall separately on the Islamic or conventional banks’ FP. Furthermore, because the failure of banking transactions becomes imperative and occurs regardless of the bank type, we invested in this virgin field. Moreover, since the results evaluating the EAC’s effect on the FP of conventional and Islamic banks are mixed, we tried to solve the ambiguity problem, find an effective solution to this contradiction, and definitively answer our comparative hypothesis. Based on the governance literature of Islamic and conventional banks, the criticisms of previous research showed that the EAC’s impacts on conventional and Islamic FP are different. Some countries where banks applied international accounting standards also met international auditing standards. Other countries adopted local accounting and auditing standards. However, a third class of countries implemented specific sectoral accounting and auditing standards. Because there is no unique standard that organizes the external audit function [16], our explanatory paper aims to examine the link between the EAC and selected FP measures. This method will remain valid and useful in future studies in case the samples or contexts change.

With all this huge momentum of critics and challenges on the EAC on the IBs’ FP and especially on the CBs’ FP, financial literature may benefit from our study in many ways. From a practical perspective, our study improves how the EAC controls FP policy and determines the bank’s fate. Indeed, our second practical contribution is to provide economic agents with the most serious bank type when choosing their EAs and in which bank type the EAC internal restrictions can force the EAQ and oblige the EA to respect their obligations towards the bank. Theoretically, we demonstrated that the banks’ FP is a dependent variable of the impact generated by EAC which is a strategic process that leads either to the financial sustainability of the Islamic or/and conventional bank or to its exposure to unbearable financial shocks.

As an implication, this study will contribute to the disclosure quality of bank accounting information. Second, our research helps banks detect the weaknesses of the accounts’ certification on the FP of such a bank type and correct possible threats resulting from the wrong EAC. Third, this study can help banks ameliorate their EAC quality, support the strengths and opportunities that promote the effectiveness of financial reporting, and maximize their FP via the EAC’s generated impact. Fourth, our study also helps banks’ investors choose the most efficient bank.

The present work is organized as follows: Section 2 provides a literature survey of structural differences between the impacts of EAC on the FP of Islamic and conventional banks. Section 3 exposes our methodology, tools, and data. Section 4 contains empirical results. Section 5 concludes the paper.

2. Litterature review

2.1 External audit choice

There are different techniques through which the EAC could be demonstrated (independence, audit tenure, auditor size, auditor experience, BIG4, etc.) [39, 40, 41, 42]. The best choice is measured by qualification, sufficient training, and experience. The annual report’s quality is regarded as the most important tool for monitoring the EAC [4, 18]. For the firm’s transparency and accountability obligations towards the stakeholders [13], a lot of detailed information should normally be mentioned in the annual report. This information mainly concerns the operational risk level, financial parameters’ evolution, significant errors, and the tests’ extent carried out to assess the assets’ value at market value. There are different techniques through which the EAC could be demonstrated (independence, audit tenure, auditor size, auditor experience, BIG4, etc.) [39, 40, 41, 42]. The best choice is measured by qualification, sufficient training, and experience. The annual report’s quality is regarded as the most important tool for monitoring the EAC [4, 18].

For the corporation’s transparency and accountability obligations towards its stakeholders, a lot of detailed information should normally be mentioned in the annual report [13]. It mainly concerns the operational risk level, financial parameters’ evolution, significant errors, and the tests’ extent carried out to evaluate the assets’ value at market value. This information could go beyond EA’s technical functions, but it contains all financial measures and adjustments to all assistants’ interests [43]. The approval or rejection of accounting data is not a simple control process; it requires a lot of vigilance and professionalism to extract the errors of the mismanagement of any bank, which also depends mainly on the EAC’s effectiveness. In this sense, Kamolsakulchai [44] showed a strong and positive link between the quality of audits and the quality of financial reporting, as determined by an unqualified audit opinion. This indicates that financial reporting was prepared according to generally accepted accounting standards.

The main limitations of the EAC effectively contributed to little transparency in audit procedures, the absence of large databases (Big Data) containing official figures, and the dearth of in-depth studies that illustrate the real hurdles of global regulation and the profession’s dynamism. In reality, there is an insufficiency of practical explanations that represent unique standards to judge the EAC’s quality. External audits as well as the audit control authorities could not clearly define the EA’s role [34]. The visibility issue is fundamental not only for academic researchers but also for regulators and global rating agencies to appreciate and evaluate the EA’s efforts. Ideal oversight requires the auditor’s ability to judge difficult times with consistency, vigilance, and transparency, as well as their resistance to pressure and conflict from leaders [45, 46]. Otherwise, the EAC will have doubts about the EA’s independence. The greater the auditor’s financial dependence, the greater the pressure on their responsibilities to interfere with their duties. Conversely, the more the EA’s independence improves, the richer the audit quality. As a result, the EAQ maintains good surveillance. This leads to supporting the bank’s profitability, creating more liquidity, repaying more liquidity, and contributing to a rational use of resources that is normally positively reflected in wealth creation.

However, previous empirical studies resulted in controversial outcomes on the effect of competition between auditors operating in similar audit markets. Regulators discovered that little competition in the audit market is likely to curb the EAQ, while its strengthening promotes auditor independence and improves the EAQ, even though other researchers reported the opposite. More specifically, Fujiao [47] studied the impact of competition between EAQ in the audit market on the EAQ. He stated that competition negatively reflects the auditee-auditor relationship. The competition considerably modifies the EAC that moderates the EAQ provided to the customers by providing non-audit services (NAS) by the agent. However, EAC, measured by competition, has a positive moderating impact on the inverse association between the NAS provision and the EAQ. He also discovered that EAC indirectly affects EAQ through increased auditor independence. In conclusion, he declared that weak internal control, such as continuity notices (favorable or unfavorable) and financial restatements, determines the EAQ.

Likewise, Brooks et al. [48] came to the conclusion that the EAQ increases in parallel with the mandates’ length due to a learning effect and decreases with recent audit mandates due to a surety effect. When the link effect dominates the learning effect during the service period, the EAQ decreases as a result of the decrease in the audit team’s independence. The EAQ change grows with EAC, BIG4 auditors, and specialist auditors. Also, Elad [49] noted that the auditors’ training has a partial effect on the intentional reduction of their responsibilities related to the preparation of accounting records and financial statements since this facilitates the audit procedure judgment. However, the auditors’ training does not affect the detection of fraud, the financial statements’ reliability, and the usefulness of decisions.

Indeed, to evaluate the risk of sudden and recent changes in control approaches applied by the chosen audit firms, Kutum [50] tested the extent of applying the risk audit approach to business by non-BIG4 auditors, as well as its pros, cons, and consequences, particularly in three countries, which are the United Kingdom, America, and Canada. As measurement parameters, our paper relies on four alleged advantages for large companies, which are, respectively, the informational content of audit reports, the consistency of audit practices with audit manuals worldwide, the auditors’ awareness of risks, and audit effectiveness. During the period of collecting information, the author considered the contextual factors affecting non-BIG auditors’ choices. The results showed that non-BIG4 auditors in the three countries adopted firms’ risk auditing. First, this approach helps auditors better understand their customers, promotes audit efficiency, and facilitates the audit risk management process. Second, risk control makes it easier to follow the general trend of non-BIG4 auditors and the accounting standards applied within each country.

Nevertheless, other studies that analyzed the EAC effect on the banks’ FP revealed the opposite. It turned out that big audit corporations are the best known. They have higher expertise [46, 51], are more able to appreciate the situation’s complexity [39, 52], are more independent [53, 54], and are more competent [45, 55] than others because they no longer have to worry about their reputation. Moreover, they are more cautious about significant legal sanctions [56]. According to this current, the certification of multinational banks by this type of auditor is not tainted by manipulation, omissions, or falsification. In addition, big auditors will be more likely to maintain the audit’s credibility than small audit corporations by resisting accounting and financial pressures when negotiating their fees. The various EAC approaches proved that the services provided by BIG4 audit are distinctive and provide better services suited to their customers’ needs compared to those of other firms because they are less involved in fraudulent acts. In this sense, Watts and Zimmerman [57], Chan et al. [58], and Firth [59] found that auditors who are involved in bad accounting manipulations lose their reputations.

Based on its experience, Ernst and Young reported in 2003 that the audit committees’ power was stronger than that of EAs in the studied institutions. However, big audit firms better recognize how to interact with banks’ committees. Indeed, they know how to rise above difficulties, solve problems, and communicate solutions. To do so, Ernst and Young indicated that a detailed assessment of the guidelines would help audit committees adopt more efficient operating procedures. To improve the discussed correlation, Baumann and Erlend [60] noticed that banks disclosing more information on their profits and FP have higher funds ratios. This reserve provides greater protection against the probability of unexpected losses. In conclusion, thanks to their good EAC, banks that improve their publishing processes increase their FP because they build stakeholder confidence by attracting new investments [61, 62]. A good EAC positively influences the governance quality and, consequently, the equity book value.

Returning to the accounting literature, the audit firms’ classification started as BIG6s, then as BIG5s, and then as BIG4s, which currently represent a basic benchmark related to control quality worldwide [63]. For example, Francis et al. [64] found that on average, 50% of the audit services costs were granted to leading corporations in the audit market, whereas only 22% of these services were entrusted to small firms. Besides, the most developed sectors in America are audited by BIG5 firms. Thus, the sample was distributed according to the audit firms: 14 companies for Arthur Andersen, 5 companies for Deloitte & Touche, 16 companies for Ernest & Young, 9 companies for KPMG, and 19 companies for PricewaterhouseCoopers. Moreover, Jeff et al. [65] confirmed that, generally, investment banks are oriented towards BIG4 auditors mainly for insurance and trust reasons. This proves that the choice between BIG4 firms and second-level firms is not based on actual quality that reflects their fundamental independence but rather on a preference limited to their perceived quality based mainly on structural choices.

According to international auditing standards, before expressing an opinion, the EA must comply with accounting standards, the bank’s operating principles, and good governance rules. Because the communication of FP information in conventional and Islamic banks is very delicate, these banks call on the big audit firms as part of their stakeholders - shareholders, creditors, and investors - who are looking for reliable and relevant FP information. This helps to monitor the leaders’ behavior, protect their interests, and evaluate their decisions [4]. The fundamental role of a good EAC is to curb the information asymmetry between both holders and users of FP information. In the event of financial manipulation, the EAs assume responsibility for their actions and the results of the fake FP information. The truly independent EA always tends to reduce FP information asymmetry. However, since qualified auditors are more likely to behave in compliance with standards, boosting the banks’ FP depends on the EAC’s activeness and their ability to discover inappropriate accounting practices, limit managers’ opportunistic behavior, detect moral hazard problems that threaten the shareholders’ interests, and cover managers’ revenue manipulation [66, 67]. The EAs generate a fundamental role as bank supervisors if they guarantee that depositors are informed about the encountered financial difficulties that may affect the bank’s FP and lead to a bank panic. In this case, their role is still focused on strengthening deposit protection so that depositors have fewer incentives to monitor the bank [68, 69]. The published report consistently reflects the various aspects of a bank’s operations with or without reserves [44].

Because all audit missions must be carried out in secrecy to protect property rights and to respect the banks’ private information, the information covers the protection of their customers’ particularities in front of their competitors and also agrees with the accounting methods’ conservatism. Indeed, Steven et al. [70] stated that in firms audited by experienced auditors, the managers’ discretionary power is weak. It is recognized that all practices, experience, and professional audit training in various fields that are acquired over time increase the error detection levels in financial statements [71, 72, 73, 74]. In the same sense, Chia et al. [75] noticed that the companies audited by BIG4 record lower rates of earnings management than other companies. Moreover, given the BIG4s’ reputation in the global financial market, Cahan and Zhang [76] reported that big audit corporations are more attentive to litigation risk compared to smaller ones. Similarly, other academics explored the link between the EAQ and the earnings management level. They noticed that the institutions audited by BIG4 auditors recorded low rates of earnings management [25, 26]. From the same perspective, Lee and Vivek [77] studied the link between discretionary accruals and the litigation risks of private firms audited by BIG6 versus firms audited by non-BIG6. They concluded that the former managed fewer discretionary accruals than the latter since they avoided the risk of losing their reputation on the market. In the Korean context, Jeong et al. [78] demonstrated that companies that have certified accounts by state-appointed auditors recorded a higher level of abnormal accruals than firms audited by freely chosen auditors. Furthermore, Hasan et al. [18] examined the moderating impact of audit quality on financial reporting quality, i.e., real earnings management, in Malaysian companies. They recorded that audit quality plays an important role in restricting real earnings management practices.

Moreover, Houqe et al. [79] revealed that compliance with ethical principles leads to a positive and significant effect on the BIG4s’ choice. Thus, all the countries’ control variables are positively linked to the BIG4’s choice. Yet, by controlling both company and country factors, the probability of hiring a quality auditor is enhanced by the company’s ethical values. Yet, the impact of the company’s ethical values on the auditor’s choice remains significant and positive when the control variables in the country are included in the model. So, the indicators of the companies’ ethical values have additional explanatory power for controlling countries. In conclusion, the EAC indirectly improves the relationship between companies’ compliance with ethical standards and financial information quality.

As for the impact of EAC that results in the EAQ on FP, Teoh and Wong [26], Becker et al. [30], and Krishnan [25] noted that the EAQ and the results quality announced by the companies audited by BIG4s are more reliable compared to the results of firms audited by non-BIG4s [13, 80]. The BIG4s’ resources are greater than those owned by small firms [81], so as to maintain their reputation and ensure accounting and financial information quality. Indeed, the perceived independence of BIG4 firms is positively correlated with a competitive environment [82]. Consequently, BIG4s certify more credible financial statements compared to the financial statements audited by other auditors [25, 30]. Moreover, Hamed et al. [83] showed the existence of an insignificant correlation between EA quality proxies and ROA. They also noted that the audit fee has a positive and significant relationship with Tobin’s Q. Yet, EAs’ rotation has an insignificant correlation with Tobin’s Q. Indeed, Ezejiofor et al. [24] examined the impact of audit quality on the FP of bank deposits in Nigeria between 2009 and 2016. Their results showed the existence of a significant correlation between audit quality and deposits’ FP. Furthermore, Rahman et al. [13] found that BIG4s have a positive and significant correlation with firms’ FP. Even more, Ziaee [5] found that EAQ could affect companies’ FP. Similarly, Muotolu et al. [84] revealed that BIG4 positively and significantly affects Nigerian banks’ FP. To avoid the deposits’ management, the researchers suggested that Nigerian banks be audited by one of the BIG audit firms. In the same context, Ado et al. [23] showed that auditor size positively and significantly affected the ROA. Moreover, they concluded that auditor independence had more power over the FP than auditor size.

The discussion of the EAC effect on the IBs’ FP is not very extensive in the literature given the delimitation of the IBs’ networks worldwide [85]. A few studies have previously assessed whether the EAC really affects or contributes to the growth of the IBs’ FP [86, 87, 88, 89]. According to Quttainah et al. [89], IBs support the risk of losing all or some of their investments since they use contracts like Murabaha, Musharakah, and Mudarabah. Without the Charia audit, IBs rely on the same auditing standards used by their competitors [12]. However, according to some researchers, an independent external audit system is very important in IBs since it ensures management supervision and develops a healthy culture within the organization adapted to the nature of their risks [87]. In Indonesia, for example, the central bank regulations require the presence of an independent EA within the Indonesian IBs. The auditing of the financial statements is obligatorily entrusted to competent personnel. Furthermore, the Indonesian central bank is forcing IBs to appoint an accounting firm registered in its system of recognized independent auditors who must put the enhancement of the IBs’ FP at the top of their priorities [88]. To reach this goal, by obligation, the EA should disclose much information in their report, such as equitable ownership of the board’s members, compensation policy, board meetings, internal fraud, charity funds allocation, rooting symptoms, etc. Therefore, the EAs deal with inappropriate accounting treatment, failures in the risk management system and internal control, obstacles that prevent the creation of FP, fraud, and manipulation of charges and products, which add to operational management weaknesses.

From the history of previous research that has explored this theme, we estimated the following hypotheses:

Hypothesis 1:

Hypothesis 1-1: The EAC positively impacted the FP of conventional and Islamic banks.

Hypothesis 1-2: The EAC negatively impacted the FP of conventional and Islamic banks.

Hypothesis 1-3: The EAC positively impacted the CBs’ FP and negatively affected the IBs’ FP.

Hypothesis 1-4: The EAC negatively impacted the CBs’ FP and positively affected the IBs’ FP.

2.2 Control variables

We selected control variables that focus on the factors that best explain the measures of FP. In order to achieve our research objective, we chose four commonly used parameters that, we believe, can shed light on the FP of both conventional and Islamic banks. These variables consist of the age, size, type, and inflation of the banks.

2.2.1 Bank size

In a contractual environment, while the financial system remains stable, individuals who seek personal gains focus on taking advantage of agency relationships. The bank’s size plays a crucial role in determining the nature of financial streams and informational content beyond its financial policy, regardless of the specific bank type. In situations that deviate from the norm, like conflicts of interest or information imbalances, opportunistic individuals in governance tend to focus on specific factors such as net result, FP, cash flow, dividends, etc., in order to maximize their profits. For instance, Bhushan [90] claimed that executives in big companies were pressured into deliberately making errors. The purpose of earnings management is either to deceive shareholders by presenting unreal and distorted results that reflect the achievement of predetermined objectives, or to underestimate actual results. In both cases, the directors have control over financial information. Skinner and Sloan [91] support this idea by stating that banks that do not accurately predict and analyze their FP based on rational accounting choices will face negative consequences in their results and profits. Consequently, they concluded that the size of a bank is negatively associated with its FP. Existing literature provides numerous studies illustrating the natural relationship between bank size and FP. Table 1 demonstrates several diverse studies that utilized bank size in similar research.

Previous research	Context	Period	Impact class	Conclusions
Jemric and Vujcic [92]	Croatia	1995–2000	Negative impact/FP	There is a clear relationship between the size of banks and their FP measures. Smaller banks tend to be more efficient because they have a lower number of non-performing loans. On the other hand, larger banks only demonstrate effectiveness when it comes to generating profits through large-scale sales.
Salas and Saurina [93]	Spain	1985–1997	Positive impact/FP	FP measures, especially non-performing loans, were significantly influenced by the banks’ size.
Jonathan and Nghia [94]	South Asian region.	1990–2003	Positive impact/FP	Big CBs are bigger than big IBs. Regardless of the type of bank, there is a clear and significant connection between bank size and effectiveness. In fact, larger banks have demonstrated higher levels of profitability compared to their smaller counterparts.
Shamsher et al. [95]	21 countries of the OIC1	1990–2005	Not significant impact/FP	The average cost scores of both large and small banks in each bank type are not significantly different. However, big banks have effectively managed their profits compared to their profitability. Additionally, there are no noticeable disparities in the profitability of banks with varying assets and cash flows. Although the costs of big IBs are slightly more efficient than those of big CBs, the benefits of large CBs are more effective.
Manthos, and Nikolaos [96]	EU countries2	1994–2005	Positive impact/FP	The banks’ efficiency was enhanced by external factors and the investment environment, including the size of the banks.
Hussein and Charif [97]	UAE	1996–2005	Positive impact/FP	Large banks are more effective than small ones.
Alharthi [98]	MENA region	2005–2012	Positive impact/FP	Big CBs outperformed smaller CBs in terms of performance. Additionally, accepting loans brought benefits that enhanced their efficiency. Concerning IBs, effectiveness is higher in large IBs compared to their smaller counterparts.
Ulussever [27]	16 countries	2005–2011	Negative impact/FP	The size of banks has a significant and negative impact on the values of IBs, but it does not have a significant impact on the FP of CBs.

Table 1.

The contradictory findings of some studies regarding the association between FP and the size of banks.

¹

OCI, Organization of the Islamic Conference.

²

Bulgaria, Czech, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

According to the legitimacy theory, as a firm grows larger, it becomes more accountable legally, socially, and politically to both the law and its stakeholders [99]. Consequently, as financial operations become more complex, the flow of financial information expands and financial complexities increase [100]. Moreover, as big banks focus on serving their customers [101], their size negatively impacts their FP. In fact, as the bank grows, bureaucratic obstacles start to hinder its FP.

After exposing the necessary theoretical foundations, our hypotheses were formulated as follows:

Hypothesis 2:

Hypothesis 2-1: Bank size affects the FP of conventional and Islamic banks.

Hypothesis 2-2: Bank size ameliorates the FP of conventional and Islamic banks.

Hypothesis 2-3: Bank size affects the CBs’ FP and ameliorates the IBs’ FP.

Hypothesis 2-4: Bank size ameliorates the CBs’ FP and affects the IBs’ FP.

2.2.2 Bank age

Age was commonly used in literature as a variable for control, particularly in studies examining its influence on various bank parameters. Yet, the research results regarding the relationship between a bank’s age and its FP were varied and inconclusive. This inconsistency motivated us to investigate and clarify the true correlation between these two variables. One prevailing belief is that regardless of the type of bank, the level of seniority can impact the quality of services and restrict the authority of auditors due to the presence of friendly connections and conflicts of interest. This hinders auditors from adhering to good governance standards and obstructs efforts to enhance FP and generate value. Another existing viewpoint elucidated the restricted growth of the Islamic banking sector, with studies revealing that the industry remains confined and primarily localized in certain regions due to various reasons. Additionally, the slow spread of the Islamic banking sector can be attributed to the limited support from the government and the low demand for investment, all while adhering to the Profit and Loss Sharing (PLS) technique [102]. Moreover, the lack of liquidity in the secondary markets has hindered the growth of the IBs, although there have been gradual improvements over time [103, 104]. The reason for the different conclusions of previous studies is explained by the fact that Islamic banks are concentrated in certain regions more than others, as stated by Samad [105]. However, it should be noted that the funding model has evolved over time, leading to the expansion of the banking network to new regions. Table 2 reveals the uncertainty regarding the impact of the banks’ age on their FP.

Previous research	Context	Period	Impact class	Conclusions
Kraft and Tirtiroglu [106]	Croatia	1994–1995	Positive impact/FP	Regardless of whether banks are owned by private institutions or the government, those that recently intervened in the monetary market showed less efficiency compared to older banks. Yet, the new banks have achieved higher profitability than their older counterparts.
Jemric and Vujcic [92]	Croatia	1995–2000	Negative impact/FP	The effectiveness of the new banks is superior to that of the old banks. This can be attributed to the poor quality of the old banks’ portfolio, which primarily comprised inefficient investments, ineffective products, and unprofitable services. Additionally, the old banks faced higher expenses in terms of personnel and assets than the new banks.
Shamsher et al. [95]	21 countries of the OIC1	1990–2005	Negative impact/FP	The new banks were able to attain greater profitability compared to the old banks. The old banks gained valuable insights from their experiences, which helped them avoid various risks and safeguard themselves against fraudulent activities and manipulation. It is evident that the primary focus for the new CBs is to maximize their profits, due to the challenges they currently face. In order to achieve this goal, they need to entice customers who are currently with other banks. Therefore, their strategy involved offering higher interest rates to the customers of the old CBs, while bargaining elevated profit rates with the old IBs’ customers.
Filip et al. [107]	Macedonia	2008–2011	Positive impact/FP	The banks’ outdated nature had a negative effect on capital requirements, suggesting that increasing capital would stimulate the provision of additional liquidity over time to compensate for the fall in profitability.

Table 2.

The contradictory findings of some studies regarding the association between FP and the age of banks.

¹

OIC, Organization of the Islamic Conference

In general, international banking networks view Islamic products as a chance for investment and profit, according to Siddiqui [108]. As time has passed, the Islamic banking model has evolved from a basic system of depositing funds to a more complex investment-focused system that emphasizes value creation. As the demand for Islamic products grew, shareholders were motivated to focus on creating flexible products that tailored to their customers’ needs. In addition, they developed derivative products and innovative services that mirrored those offered by conventional banks, allowing them to tap into new markets [109].

From what we have already seen, the most suitable hypotheses are the following:

Hypothesis 3:

1. Hypothesis 3-1: Bank age ameliorates the FP of Islamic and conventional banks.

2. Hypothesis 3-2: Bank age affects the FP of Islamic and conventional banks.

3. Hypothesis 3-3: Bank age ameliorates the CBs’ FP and affects the IBs’ FP.

4. Hypothesis 3-4: Bank age affects the CBs’ FP and ameliorates the IBs’ FP.

2.2.3 Bank type

The objective of our study is to conduct a study that examines the different effects of flows on FP, and by distinguishing between different types of banks, we can consider the unique characteristics of each type. This segmentation of banks can be determined by factors such as the field, sector, or type of activity. The specific characteristics of different bank types are important in monitoring their economic and financial indicators, particularly governance. This interdependence between different criteria allows researchers to distinguish between the unique effects of conventional and Islamic banks, taking into account their inherent traits. However, specialization in banking allows for a narrower market and allows multiple competing banks to divide the available customer base in order to control the banks’ overall FP (Table 3).

Previous research	Context	Period	Impact class	Conclusions
Cornett et al. [110]	16 countries1	1989–2004	Negative impact/FP	They showed that the FPs of private and public banks decreased greatly during the time of the study. In countries where public participation in bank capital is high, banks recorded low FP. In contrast, private banks generated higher profitability and efficiency than public banks.
Farazi et al. [111]	MENA region	2001–2008	Positive impact/FP	Most of the listed banks are private; however, the number of publicly listed banks is limited. In both cases, the listed banks generated higher interest margins compared to the unlisted banks because of their smaller balance sheets. The authors explained this statement by citing the application of very strict governance standards by the listed banks despite the exorbitant listing costs.

Table 3.

The contradictory findings of some studies regarding the association between FP and the type of banks.

¹

The countries highlighted are India, Bangladesh, China, Hong Kong, Malaysia, Indonesia, Macao, Nepal, Pakistan, South Korea, Philippines, Singapore, Thailand, Sri Lanka, Taiwan, and Vietnam.

Based on the previous researches, the possible hypotheses are:

Hypothesis 4:

1. Hypothesis 4-1: Bank type affects the FP of conventional and Islamic banks.

2. Hypothesis 4-2: Bank type ameliorates the FP of conventional and Islamic banks.

3. Hypothesis 4-3: Bank type affects the CBs’ FP and ameliorates the IBs’ FP.

4. Hypothesis 4-4: Bank type ameliorates the CBs’ FP and affects the IBs’ FP.

2.2.4 Country inflation

The finance literature extensively examined the effect of inflation on the FP of CBs. However, this aspect was not widely covered in Islamic finance literature. Despite operating under a specific regime, some research indicates that Islamic banks may not be affected by inflation’s impact on their FP. Additionally, the finance literature observed that IBs are not affected by the interplay of inflation, interest rates, and traditional banks’ financial policies. The connection between inflation and typical bank fees is not substantial as IBs do not engage in interest-based practices. In the context of inflation, IBs maintain stability and experience an increase in their return rate [112].

Prior studies found a positive correlation between inflation and banks’ FP, regardless of the type of bank. However, recent research showed that changes in inflation have no impact on the profitability of banks, specifically the income costs of both CBs and IBs [113, 114]. On the other hand, other recent studies by Bashir [115], Bennaceur and Omran [100], and Saeed [116] demonstrated that inflation increases debt costs and decreases the value of banks. Table 4 highlights selected previous research that investigated the impact of inflation on banks’ FP.

Previous research	Context	Period	Impact class	Conclusions
Bennaceur and Omran [100]	Middle East and North Africa countries	1989–2005	Negative impact on the FP	The decrease in deposits indicated the observed growth, suggesting that banks suffered the full burden of inflation. If banks fail to foresee inflation, they will have difficulty controlling the adjustment of their interest rates, resulting in faster growth of management fees compared to income. Consequently, inflation will have a detrimental impact on banks’ FP policies.
Fahad [113]	Bangladesh	2008–2012	Negative impact on the FP	Inflation has a significant negative impact on IBs’ FP, despite their prohibition of interest in their transactions and exchange of goods and services.
Rashwan and Ehab [117]	12 countries1	2009–2014	Not significant impact/FP	The increase in inflation had a significant impact on the net interest margin and non-interest costs for banks. When inflation rates rise, banks are able to reduce their expenses not related to interest and increase their net interest margin. As a result, both conventional and Islamic banking models experienced a significant improvement in their operating income thanks to inflation.
Rashwan and Ehab [117]	12 countries	2009–2014	Positive impact on the FP	The banks in the sample have absorbed the entire burden of inflation, which can be seen through the decrease in deposit rates. Even though inflation is not foreseen, the delay in adjustment led to an increase in spending that outpaced income. Consequently, inflation had detrimental effects on the efficiency and profitability of the banks.

Table 4.

The contradictory findings of some studies regarding the association between FP and inflation.

¹

Egypt, Pakistan, Bangladesh, Saudi Arabia, Kuwait, Qatar, Iraq, United Arab Emirates, Sudan, Turkey, Bahrain, and Jordan.

The exposed literature leads us to pose the following hypotheses:

Hypothesis 5:

1. Hypothesis 5-1: Country inflation affects the FP of Islamic and conventional banks.

2. Hypothesis 5-2: Country inflation ameliorates the FP of Islamic and conventional banks.

3. Hypothesis 5-3: Country inflation affects the CBs’ FP and ameliorates the IBs’ FP.

4. Hypothesis 5-4: Country inflation ameliorates the CBs’ FP and affects the IBs’ FP.

3. Methodological aspects

Given the lack of an exhaustive and up-to-date database that integrates all conventional and Islamic banks’ information worldwide and their FP evolution, the generalization of the impacts resulting from the comparative results remains a challenge. Moreover, there are no big data sets that contain BIG4s and non-BIG4s EA characteristics worldwide, nor is there an exhaustive list of their clients. Furthermore, the correlation between the EAC and the banks’ FP is generally subject to regional and behavioral rules with no constant or compliant impacts since they are dependent on law systems that differ from one country to another as well as people’s behaviors that differ from one person/stakeholder to another. Because of the scientific gap between the theoretical cumulation and the unfounded exceptions to the empirical reality, maximizing the bank’s FP means the selection of a good EAC and the selection of a good bank type based on a good EAC in the case of comparative studies. This remains an open debate for arbitration. That is why we insisted on using a demonstrative approach. First, we present the data collection. Next, we describe the search variables. Finally, we show the models to be estimated.

3.1 Data collection

From two financial institutions populations (3822 conventional financial institutions and 794 Islamic financial institutions), we chose two samples of banks that are located in 56 countries¹ whose banking systems integrate conventional as well as Islamic banks during the period (2010–2022). Based on qualitative and quantitative filtration criteria, we excluded specific, mutated, non-banking institutions and banks for which data is not available and added non-purely conventional or Islamic banks. Afterward, we filtered the remaining banks for each type until each CB had its Islamic counterpart in the same country. Therefore, we obtained two smaller sample sizes than those of the original populations. The cited conditions led us to eliminate 3642 conventional financial institutions and 514 Islamic financial institutions to end up with two equal samples, made up of 180 banks each.

3.2 Variables to be tested

3.2.1 Endogenous variables

To explain FP, we used four measures. Table 5 displays the chosen ratios as well as their symbols.

FP measurement	Measurement	IBs’ rating	CBs’ rating
Profitability ratio	Marginal Profit/Total Revenues; Onuonga [118]; Salem et al. [85]	LnMPTRi	LnMPTRc
Efficiency ratio	Operating result/Average Total Assets; Osama et al. [119]; Haddad et al. [120]	NLTAi	NLTAc
Liquidity ratio	Net Loans/Total Assets; Lartey et al. [121]; Salem et al. [85]	ORATAi	ORATAc
Solvency ratio	Total Loans/Total Deposits; Tandelilin et al. [122]; Haddad et al. [123]	LnTLTDi	LnTLTDc

Table 5.

Endogenous variables details.

3.2.2 Exogenous variable

EAC was symbolized by the EA size. With reference to the previous studies, the main independent variable is described in Table 6 as follows:

EAC measurement	IBs’ rating	CBs’ rating
Binary variable: 1: If the conventional/Islamic bank assigned one of the BIG4 firms as EAC; 0: if not; Houqe et al. [79]; Nafli [1]; Jiang et al. [80]; Salem et al. [85]	EAC performed by IB (EACi)	EAC performed by CB (EACc)

Table 6.

Explanatory variable details.

3.2.3 Control variables

Referring to the literature, the most widely used control variables that may correlate with the banks’ FP are bank type, bank age, bank size, and inflation. Table 7 summarizes the details of the variables’ list.

Control variable	Measurement	IBs’ rating	CBs’ rating
Bank size	Logarithm of the total assets of conventional/Islamic bank; Rashid and Jabeen [124]; Salem et al. [85]	LnBSizei	LnBSizec
Bank age	Age of the conventional/Islamic bank from the start date; Jemric and Vujcic [92]; Filip et al. [107]	LnBAgei	LnBAgec
Bank type	This variable can take 3 forms: if the bank is commercial if the bank is of investment if the bank is universal Kim and Rasiah [125]; Charles et al. [126]	BTypei	BTypec
Country inflation	The average of annual inflation rate of all countries by sample; Fisseha [127]; Rashwan and Ehab [117]	LnCInflationi	LnCInflationc

Table 7.

Control variables details.

3.3 Models to be estimated

Before moving on to estimation, we present our formal models, one list is specific to CBs and the other relates to IBs. As it appeared in Table 8, we ordered the proposed models as follows.

Bank type; Association type	IBs’ models	CBs’ models
Association between profitability and EAC	LnMPTRiit = β0 + β1EACiit + β2BTypeiit + β3LnBAgeiit + β4LnBSizeiit + β5LnCInflationiit + εit	LnMPTRcit = α0 + α1EACcit + α2BTypecit + α3LnBAgecit + α4LnBSizecit + α5LnCInflationcit + εit
Association between efficiency and EAC	NLTAiit = β0 + β1EACiit + β2BTypeiit + β3LnBAgeiit + β4LnBSizeiit + β5LnCInflationiit + εit	NLTAcit = α0 + α1EACcit + α2BTypecit + α3LnBAgecit + α4LnBSizecit + α5LnCInflationcit + εit
Association between liquidity and EAC	ORATAiit = β0 + β1EACiit + β2BTypeiit + β3LnBAgeiit + β4LnBSizeiit + β5LnCInflationiit + εit	ORATAcit = α0 + α1EACcit + α2BTypecit + α3LnBAgecit + α4LnBSizecit + α5LnCInflationcit + εit
Association between solvency and EAC	LnTLTDiit = β0 + β1EACiit + β2BTypeiit + β3LnBAgeiit + β4LnBSizeiit + β5LnCInflationiit + εit	LnTLTDcit = α0 + α1EACcit + α2BTypecit + α3LnBAgecit + α4LnBSizecit + α5LnCInflationcit + εit

Table 8.

The equivalent models to be estimated.

4. Analysis of the comparative impacts between conventional and Islamic banks

4.1 Individual impacts analysis

To bridge the problem of evaluation and comparison between the Islamic and conventional FP levels via the EAC effect, it is necessary to first solve the comparison ambiguity of individual effects on each FP measure to see if the EAC individual effects are the same or different among FP measures. Since EAC can have a positive impact or negatively affect the banks’ FP, it all depends on the bank type and their financial situation. First, we checked each model’s EAC effects significance. Second, we established a comparative study of the impacts resulting from similar models. Finally, we compared the predicted signs with the actual signs. In what follows, Tables 15-22 in the appendices include the findings of equivalent regressions for two bank types.

Returning to the list of tables in the indexes, we noticed that for each bank type, the estimates gave different individual coefficients that varied from one model to another according to the sign and significance of each FP measure. This implies that the individual effects are heterogeneous. In addition, with regard to the similar separate impacts of CBs and IBs on the same FP measures, the same models also recorded variable impacts according to sign and significance. Therefore, we cannot rely on these preliminary results to make a definitive comparative decision. We must advance the decision rule even further by bringing the divergent signs together. The solution requires the grouping of the separate EAC impacts given by a similar modeling technique.

4.2 Combined impacts analysis

To avoid the detailed EAC ambiguity effects on the FP of each bank type, we followed a more developed analysis process. We started by grouping the individual EAC impacts and each control variable on each FP measure. Then, we compared the close effects of the independent variable in each IB model with the similar close effects of the independent variable in each CB model.

4.2.1 Differential analysis between the impacts of the EAC on the FP of conventional and Islamic banks

According to Table 9, choosing a BIG4 auditor to verify and certify the CBs’ financial statements presented a brake force that restricted their FP. This effect reflects the lack of professionalism, independence, or qualifications of the regional BIG4s’ executive managers, accountants, or auditors. Although the presence of experts favorably preoccupied the CBs’ profitability, the effect of the designation of a BIG4 on other CBs’ FP indicators showed the opposite. This explains why, even if the EA is qualified and stimulates the CBs’ profitability, there are other stronger internal factors that fill in the other measures. This scenario casts doubt on the reasons for the creation of wealth and profits as well as the dividend destination. But, above all, it shows that the BIG4 weakened and reduced the CBs’ liquidity. CBs’ managers and internal auditors broke down BIG4 choices and sometimes blocked their work, and vice versa. Instead of becoming a transparency certificate for economic agents and insurance of the accounting information’s quality for financial statements’ users, it turned out that the BIG4 appointment resulted in the demotivation of staff and the destruction of all purification initiatives of the big CBs’ accounting documents. In our case, the BIG4 choice showed that the BIG4 negatively fulfilled almost all the FP measures except for profitability. This result explains why BIG4s’ auditors hide the bad realities of their audited CBs by following a strong counseling approach. Hence, this leads us to confirm that in our conventional sample, the BIG4s auditors allowed the publication of the CBs’ reports without reservations. However, in most selected countries, listed CBs have to publish their audited annual reports by internationally renowned and reputable BIG4s. However, choosing the big names does not mean maintaining audit quality and providing consistent information that reflects the CBs’ reality. Along with the lack of effectiveness and solvency, CBs’ commercial reputation does not provide assurance for their depositories and investors. Also, the lack of transparency in liquidity management does not protect owners’ rights. The harmony between the bank’s size and the auditors’ size and independence is only a cover that hides several financial difficulties, many conflicting relationships, and many opportunistic behaviors between the CBs’ managers. Consequently, over time, the shareholders will lose their control powers over their holdings in the bank capital to new share and bond buyers through an adverse selection transfer.

Variables	LnMPTRc/LnMPTRi	NLTAc/NLTAi	ORATAc/ORATAi	LnTLTDc/LnTLTDi	Cumulative effect	Decision
EACc	+*	—	-*	-*	—	H1-1 rejected, H1-2 rejected, H1-3 rejected, H1-4 accepted
EACi	+*	-*	+*	—	+

Table 9.

Summary of the close effects of the EAC on the FP of conventional and Islamic banks.

Contrary to what happened in the CBs, the certification of the IBs’ financial statements by an independent, well-known, and international BIG4 auditor marked a positive effect on their FP. BIG4s’ choice should normally draw the attention of those in charge to the sources of weaknesses in IBs’ FP, account for the reasons for the bad IBs’ financial situation, and solve the internal networks of conflicts of interest or conscious manipulations. This act generated a deposit for the various stakeholders to maintain compliance with Charia standards and to audit listed IBs. In fact, the large and listed IBs audited by BIG4s, including specialists in Fikh Al-Mouamalat and Islamic Charia, reflected the credibility and good quality of their financial statements in their users’ eyes, especially the shareholders and donors. From the recorded results, we drew two conclusions. First, we stressed the basic IBs’ EAC principles and the Islamic model’s characteristics on the EAQ and the FP. Second, the total EAC impact on the IBs’ FP is the combination of the individual EAC impacts on several IBs’ factors. This does not happen haphazardly but is caused by the ethical culture advantage, which is inspired by Islamic Charia standards. IBs’ Islamic culture played a fundamental and significant role in improving the efficiency of the external audit process. This demonstrated that in IBs, the accounting and financial information verified by a BIG4 auditor is much more accredited and credible than that published by local or smaller auditors. Consequently, the EAC is a principal tool for continuous assessment of the IBs’ governance systems, which promote the internal control process, the detection of specific opportunistic behavior, and the management of financial, operational, liquidity, and profitability risks.

4.2.2 Differential analysis between the impacts of control variables on the FP of conventional and Islamic banks

To understand the difference between the effects of control variables on the FP for each bank type, we also regrouped the individual effects of each bank type on the FP measures. The aim of this step is to obtain purely combined effects for each bank model. Then, we moved on to the total comparative analysis between the combined EAC effects on all conventional and Islamic FP measures and drew the necessary conclusions.

4.2.2.1 Bank size

According to Table 10, the close effect of the CBs’ size weakened their FPs and, more precisely, their efficiency and liquidity. This implies that for CBs that become exceptionally large, their size negatively affects their FP because of the bureaucracy, the transactions’ complexity, and the huge number of branches. This result means that despite their enormous sizes, the CBs were limited in their ability to produce, manage, or market these ranges of services through their multiple subsidiaries. Moreover, this indicates that the FP speed and the scale of transformation of the asset values at these banks are very slow and insufficient to create growth. Our CBs’ sample generally used a poor policy of managing their product and service lines and a poor orientation to launch new competitive products, to practice the scale sale commercial policy, or to order their business priorities. Indeed, our results showed that the CBs developed in a badly controlled way and exceeded their threshold sizes. Therefore, any extension beyond the optimal size or that exceeds the possible localization limit on the financial market has the opposite consequences. There are other reasons that may be at the origin of the obtained results, given the expansion of large CBs’ branches or the presence of financial corruption centers within large CBs’ groups. Among these, we cite the poor control of the financial information process, the management of accounting results, the misuse of resources, the handling of expenses, revenues and provisions, and uncontrollable governance structures. All these reasons caused the explicit and implicit dwindling of the CBs’ FP.

Variables	LnMPTRc/LnMPTRi	NLTAc/NLTAi	ORATAc/ORATAi	LnTLTDc/LnTLTDi	Cumulative effect	Decision
LnBSizec	—	−*	−*	+*	—	H2-1 rejected, H2-2 accepted, H2-3 rejected, H2-4 rejected
LnBSizei	−*	+*	+*	+*	+

Table 10.

Summary of the close effects of the bank size on the FP of conventional and Islamic banks.

On the contrary, Table 10 gives an inverse combined effect. Indeed, the increase in IBs’ size was reached according to income, profits, assets, and employees; all these are important to increase their efficiency, liquidity, and solvency, despite the strong competition that negatively weighs on their profitability. Large IBs have good cost management policies and abilities. Thus, effective big sales management and efficient big asset management automatically generate excess liquidity. Besides, large IBs can produce cheaper goods than small CBs because they can spread their fixed costs over a greater number of services and achieved more learning and cumulative experience. Also, since we worked on a large IBs’ sample, their size encouraged them to raise their assets and their capital base, as this would re-enhance their efficiency after a financial crisis period. Moreover, as Mule et al. [128] revealed, a unit change in firm size in terms of return on equity leads to a rise in its FP. Even more, the positive association between IBs’ size and FP stems from the IBs that implemented greater differentiation and a variety of services compared to their conventional counterparts. The IBs have succeeded in relaunching specialization strategies that are likely to be concurrently provided to their customers. Therefore, this is why the IBs’ size generated a strengthening effect on efficiency, liquidity, and solvency at a time when the IBs’ size negatively influenced their profitability.

4.2.2.2 Bank age

Referring to Table 11, the CBs’ age significantly improved all their FP measures. As a result, the longer the CBs were created and advanced in time, the more efficient they became. In our case, the CBs’ experience offered them the ability not only to resist variations in FP parameters but also to acquire the necessary skills to avoid risky events and serious financial transactions that might impact their FP. Besides, seniority enabled the CBs to plan a harmonious internal audit scheme for their FP, leaving the fewest gaps between the different measures. Older banks went through difficult situations and learned many lessons that seriously affected their FP in the past, especially during the financial crises periods. Thus, aged CBs prepared advance planning and risk management programs for all their FP measures. Hence, they estimate the evolution of each FP measure so as to correct, improve, and maximize it daily. During the period of our study, CBs showed that they gained immunity through seniority, so they are vaccinated against financial shocks. They also amended the sudden factors that might act negatively on FP and benefited from opportunities to maximize their profitability, efficiency, liquidity, and solvency. In addition, the older CBs enjoy a solid reputation that could help them mobilize their resources to implement appropriate business strategies that allow them to guarantee their sustainability and their FP continuity.

Variables	LnMPTRc/LnMPTRi	NLTAc/NLTAi	ORATAc/ORATAi	LnTLTDc/LnTLTDi	Cumulative effect	Decision
LnBAgec	+*	+*	+*	+*	+	H3-1 accepted, H3-2 rejected, H3-3 rejected, H3-4 rejected
LnBAgei	+*	+*	−*	+*	+

Table 11.

Summary of the close effects of the bank age on the FP of conventional and Islamic banks.

The same table showed that the combined effect of the IBs’ age recorded a driving and significant influence on their profitability, efficiency, and solvency. However, our sample includes some recent IBs, so their combined impact on the IBs’ FP is positive. The IBs’ experiences, measured by the bank’s age, resulted in the last stage in the accumulation of profitability, efficiency, and solvency. However, the individual negative impact on the IBs’ liquidity is accounted for by the mismanagement and under exploitation of liquidity reserves. Also, the older the IBs, the more they can develop a reputation in the credit market with other banks, the more they control their expenses, and the more gradually they shrink the information asymmetry with borrowers in the event of their existence through the guidance policy that builds on the reputation of their credit history. As a result, new IBs are riskier than old ones. The latter, being older, become more famous and well-known to lenders, and are therefore more capable of developing longer relationships and making the most profitable, efficient, and solvent investment choices that can create more wealth for the IBs. Furthermore, when partners request funding for investments, the old IBs’ risks are easier and faster to assess by stakeholders than the evaluation of recent IBs’ risks.

4.2.2.3 Bank type

Referring to Table 12, the CBs’ segmentation by specialization into three types weakens their FPs. More precisely, with reference to the most commonly used classification and segmentation into commercial banks, investment banks, and universal banks, CBs’ profitability, efficiencies, and solvency are depleted. The economic phenomenon we are talking about indicates that the CBs’ customers will be divided into several divisions of the same sector. This policy does not meet the forecast axes; it contradicts the planning and limits the choices, opportunities, and fields of activities facing the banks’ decision-makers. This orientation also costs the CBs extra expenses that make them lose money due to competition. This constraint type causes the creation of many nodes with financial problems. Therefore, the strong rivalry in the market for goods and services creates financial difficulties, which consequently lead to a decrease in CBs’ FP. If we adopt the cost function as the first criterion to evaluate CBs, we retain the intermediation approach, where bank products are loans, direct and indirect commissions, and other income-generating assets. Our findings reveal that the presence of competition between CBs reduces both their profitability and efficiency levels, which results in a drop in FP as a whole.

Variables	LnMPTRc/LnMPTRi	NLTAc/NLTAi	ORATAc/ORATAi	LnTLTDc/LnTLTDi	Cumulative effect	Decision
BTypec	−*	−*	—	−*	—	H4-1 accepted, H4-2 rejected, H4-3 rejected, H4-4 rejected
BTypei	—	—	−*	+*	—

Table 12.

Summary of the close effects of the bank type on the FP of conventional and Islamic banks.

Similarly, Table 12 shows that the IBs’ specialization within the same sector causes a drop in their FP. But unlike CBs, in this case, the IBs focus on specific customer niches in particular had a negative impact on their liquidity and, to a lower degree, their profitability and efficiency due to the reduction in the scope of banks’ practice within the same sub-sector. The inadmissible impact is explained by several reasons, such as sharing the same commercial or investment activity between several Islamic competitors, who themselves compete with other conventional competitors in the financial market and the capital market. This confirms that IBs operate under financial stress, which leads to their isolation and suffering with regard to financial flows. Besides, sharing the IBs’ customers among several specialists makes it possible to represent a problem in marketing their products insofar as the customers’ number is always limited. IBs’ clients are retained by religious convictions and are not overly motivated by financial interests, as in the instance of CBs. Furthermore, sectoral specialization is oriented towards specific activities that require a high development cost and a diversification of their services to face their competitors’ pressures and gain an advantage over them. Attracting more customers and maximizing FP, specifically profitability and liquidity, always remains a limited probability since the chosen commercial policy is limited to a few products. Moreover, IBs suffer from a shortage of product and service diversity, which can attract more customers and increase their business margins. Indeed, IBs retain the Islamic finance principle; they are not allowed to earn additional products through the mobilization of additional sources. This attitude is the result of operational failure and poor management efficiency, which are seriously reflected in their profitability and, more precisely, in their liquidity.

4.2.2.4 Country inflation

Referring to Table 13, about the combined effect of inflation on the CBs’ FP, we pointed out that all FP measures suffered a significant decline. As presented in Table 14, since the average inflation over the entire period was not stable, it dwindled between several peaks where positive inflation (9.52% in 2012, 8.56% in 2015, 7.09% in 2017, 7.35% in 2018, 8.46% in 2019, 9.48% in 2021, and 9.96% in 2022) was followed by deflation, and so on (7.26% in 2011, 8.12% in 2013, 6.73% in 2014, 6.22% in 2016, and 7.26% in 2020). However, following the Subprime crisis, we noticed two phenomena: a recessionary shock that resulted in a lasting opening of the output gap because of the unstable national inflation rates; followed by deflationary rates that led the CBs to seek historical inflation levels. The quick inflation variation in all the countries explained that whatever the region, the CBs’ activities had unique consequences and that the conventional banking system is sensitive to inflation. When inflation increases, resource deposits and loan demand fall. Consequently, the CBs’ benefits undergo a reduction, which is reflected in their efficiency and liquidity and, in the end, in their solvency. Moreover, since the deflation periods are limited, the inflation return filled new investments given the rise in commodity prices and investment costs (2012, 2015, 2017, 2019, 2021, and 2022). Our results underline the sharp deterioration of CBs’ FP and justify the old conventional products’ weaknesses. Therefore, relying on new unconventional instruments as a supplement to the practice of monetary policy to create new revenues that are primarily focused on price stability can be an efficient solution to maintaining FP continuity. As such, the obligation to reduce large variations in the interest rate is clear. Taking the broad view that prevailed before and following the Subprime crisis, inflation was the most important factor that triggered a huge rise in interest rates. In an unstable economic framework with significant financial shocks, it was necessary to plan FP growth according to inflation rates on relatively stable trajectories using the functions that would allow CBs to minimize the variances of inflation and maximize their FP.

Variables	LnMPTRc/LnMPTRi	NLTAc/NLTAi	ORATAc/ORATAi	LnTLTDc/LnTLTDi	Cumulative effect	Decision
LnCInflationc	−*	+*	−*	−*	—	H5-1 accepted, H5-2 rejected, H5-3 rejected, H5-4 rejected
LnCInflationi	−*	+*	−*	−*	—

Table 13.

Summary of the close effects of inflation on the FP of conventional and Islamic banks.

Year	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Average inflation rate	8.41%	7.26%	9.52%	8.12%	6.73%	8.56%	6.22%	7.09%	7.35%	8.46%	7.26%	9.48%	9.96%

Table 14.

Evolution of the average inflation rate.

Source: World Bank.

Returning to Table 14, despite the price deflation between 2010 and 2011, this variable had an unfavorable effect on the IBs’ FP. Like CBs, between 2010 and 2022, the obtained combined effect implies that the rise in inflation froze all measures of IBs’ FP due to the sharp rise in prices by designing the investment costs, especially in 2012, 2015, 2017, 2019, 2021, and 2022. Indeed, we worked over a stable economic decade without a crisis, whereas inflation remains a variable that evolves dependently on the prices’ variation on the markets of goods and services. Given the average rates, the period immediately after the Subprime financial crisis showed specific characteristics similar to those of the second half. This difference reflected rational and significant consequences in this situation. Therefore, we advocated the hypothesis of the transfer of difficulties between the financial market and other market types. Since Islamic finance forbids the practice of all kinds of interest, usury, and Riba, the IBs’ activities are essentially based either on techniques practicing potential investment based on the principle of sharing of products and losses, such as Mucharaka and Mudaraba, or on the exchange of real products, such as Murabaha and Ijara. Anyway, the impact of inflation on these financial instruments had no great influence on their historical values. However, inflation has an indirect effect on the IBs’ FP. Optimal arbitrage is now more in favor of IBs activity volume. Inflation results in a swelling of the value of exchangeable products and raw materials necessary for investments. In other words, it slows down the initiative and the speed of investment, which significantly deteriorates the IBs’ profitability and liquidity and creates subsequent efficiency and solvency problems. Finally, the main distinction in the IBs’ FP measures is accounted for by the higher activity variance, an original phenomenon of the great moderation in prices that happened in 2012, 2015, 2017, 2018, 2019, 2021, and 2022. This inflationary rise created volatility and instability in all IBs’ FP indicators.

5. Conclusion

From the empirical results, we concluded that the evaluation of the breach in BIG4 legitimacy as well as its impacts on the Islamic and conventional banks’ FP should be performed by the most appropriate chartered accountants. The latter have the right to do so given their expertise in the domain of bank financial statements’ certification, especially by CBs’ stakeholders and, to a lower degree, by IBs’ investors. Therefore, the lack of substantial impacts generated by the EAC quality on some CBs’ FP measures means that the added value of BIG4 is low or nil. In other words, no difference is found between choosing a BIG4 or a non-BIG4. Consequently, the BIG4s lost the reason for their advantage within the CBs. This justifies two conclusions. First, most of the CBs’ EAC are not efficient. Second, since they represent an external governance mechanism, the BIG4 fail to effectively fulfill their obligations according to the general norms. This is what explains and improves their inability to respect good audit standards and to support CBs’ liquidity, efficiency, and even solvency. The main question at this level is whether to put at stake the validity of the reports surrounding the audit function, the CBs’ transparency, and the credibility of the selected BIG4. But this does not prevent the fact that IBs’ EAC weakness also deeply affects a part of their efficiency. Therefore, what is available is that the banking governance systems, specifically CBs, suffered mainly from systematic failures that focused for a long time on improving the perceived EAQ independently of the actual quality [129].

Indeed, because of the managers’ preferences and the owners’ expectations rather than the assessment of the discussed financial situation, which is especially determined by the FP measures, the EAC will be taken subjectively. In general, these shortcomings in the EA impact can be linked to the recording of accounting and financial data, the weaknesses of the banks’ governance structure, the shortage of EA behavior recognition, and the lack of exhaustive knowledge of the BIG4 accountants. This finding is precisely due to the false BIG4 reputation.

Based on the above, the present paper represents a better understanding of the difference between the weight of the EAC within the CBs and the weight of the EAC within the IBs. We discovered that the EAC can lead not only to the EAQ which constitutes a tool for stimulating banks’ FP, but can also be a filling factor for banks’ FP. In a paradigm of contractual efficiency, this situation leads us to investigate the audit process at the heart of conflicts of interest and agency problems that characterize the banks’ governance in general and the CBs’ governance in particular and which come from the likelihood that the EAs have more or less recourse to external funding sources. Thus, a qualified EAC should logically meet a demand for handling agency conflicts intended to minimize contractual costs and maintain a balanced governance system. Consequently, our reflection will make it possible to be precisely located at the heart of the audit process to resolve the financial issues and rectify the internal and external weaknesses that may affect the EAC at the beginning and at the end of their regular control process.

EAC for IBs and specifically for CBs is not only a way to ensure management and accounting documents but also provides the usual EA tools to continuously improve collective FP, ameliorate security, and develop control efficiency [130, 131]. Moreover, the EAC for conventional or Islamic banks is not identical. In some countries, the banks applied international accounting and auditing standards; in another category of countries, they adopted local standards; and in some other countries, they implemented sector-specific standards. For these reasons, international banks should try to develop a contemporary system that helps them make a good EAC for banks and that eludes them from similar scenarios. There are many alternatives based on internal control and the auditor’s reputation, but we aim to establish an original system based on EAC progress and FP planning. Implementing a new and original approach to EAC must be done by adopting a comprehensive, clear, and detailed evaluation vision of the conventional and Islamic banks’ FP. Kuhn [132] stated that scientific revolutions are considered non-cumulative development episodes because an older and incompatible paradigm can be replaced as a whole or in part by a new paradigm. Our contribution in this area is the proposal of a new governance approach called “Dynamic EAC By Objective”; the objective, in our case, is the amelioration of conventional/Islamic banks’ FP. This system can be defined as a series of dynamic audit procedures organized in a parallel structure to classical organizational bank control. However, the limitation of our study is that our results might be changed in future research if the latter uses other ratios or another couple of banks.

A. Appendices

LnMPTRtc	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualitytc	0.4424734	0.0820987	5.39	0.000***	0.2815628	0.603384	H1 accepted
LnBankSizetc	−0.0624853	0.0847836	−0.74	0.461	−0.228658	0.1036874	H4 rejected
LnBankAgetc	0.3078381	0.0418379	7.36	0.000***	0.2258374	0.3898389	H3 accepted
BankTypetc	−0.070767	0.0301271	−2.35	0.019**	−0.1298151	−0.0117189	H2 accepted
LnInflationtc	−0.2450715	0.0280158	−8.75	0.000***	−0.2999816	−0.1901615	H5 accepted
Constant	2.198415	0.3147353	6.98	0.000	1.581545	2.815285	—

Table 15.

Results of the impacts of EAC on the CBs’ profitability.

^**

Correlation is significant at the 5%.

^***

Correlation is significant at the 1%.

LnMPTRti	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualityti	0.6347444	0.0829376	7.65	0.000***	0.4721897	0.797299	H1 accepted
LnBankSizeti	−0.9601464	0.1532855	−6.26	0.000***	−1.26058	−.6597124	H4 accepted
LnBankAgeti	0.2752722	0.039679	6.94	0.000***	0.1975028	0.3530416	H3 accepted
BankTypeti	−0.0313351	0.0400925	−0.78	0.434	−0.1099149	0.0472448	H2 rejected
LnIInflationti	−0.3242184	0.0310019	−10.46	0.000***	−0.384981	−0.2634557	H5 accepted
Constant	3.998581	0.355863	11.24	0.000	3.301102	4.696059	—

Table 16.

Results of the impacts of EAC on the IBs’ profitability.

^***

Correlation is significant at the 1%.

NLTAtc	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualitytc	−0.036531	0.0472186	−0.77	0.439	−0.1290777	0.0560157	H1 rejected
LnBankSizetc	−0.8258304	0.0634519	−13.02	0.000***	−0.9501938	−0.701467	H4 accepted
LnBankAgetc	0.3171886	0.0384162	8.26	0.000***	0.2418943	0.392483	H3 accepted
BankTypetc	−0.2333826	0.0478806	−4.87	0.000***	−0.3272268	−0.1395384	H2 accepted
LnInflationtc	0.2884913	0.0250897	11.50	0.000***	0.2393164	0.3376662	H5 rejected
Constant	−3.082779	0.1823059	−16.91	0.000	−3.440092	−2.725467	—

Table 17.

Results of the impacts of EAC on the CBs’ efficiency.

^***

Correlation is significant at the 1%.

NLTAti	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualityti	−0.0031633	0.0011864	−2.67	0.008***	−0.0054887	−0.0008379	H1 rejected
LnBankSizeti	0.0131012	0.0035907	3.65	0.000***	0.0060635	0.0201388	H4 rejected
LnBankAgeti	0.0097473	0.0006949	14.03	0.000***	0.0083854	0.0111092	H3 accepted
BankTypeti	−0.0005261	0.0007872	−0.67	0.504	−0.002069	0.0010169	H2 rejected
LnInflationti	0.0024923	0.0005908	4.22	0.000***	0.0013343	0.0036503	H5 rejected
Constant	−0.0433005	0.0075409	−5.74	0.000	−0.0580803	−0.0285207	—

Table 18.

Results of the impacts of EAC on the IBs’ efficiency.

^***

Correlation is significant at the 1%.

ORATAtc	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualitytc	0.0247045	0.016348	1.51	0.02**	−0.007337	0.056746	H1 accepted
LnBankSizetc	−0.0531223	0.0195569	−2.72	0.007***	−0.0914531	−0.0147915	H4 accepted
LnBankAgetc	0.0279316	0.008736	3.20	0.001***	0.0108093	0.0450539	H3 accepted
BankTypetc	−0.0145894	0.009461	−1.54	0.123	−0.0331327	0.0039538	H2 rejected
LnInflationtc	−0.0712712	0.007126	−10.00	0.000***	−0.0852379	−0.0573046	H5 accepted
Constant	0.7539894	0.0597384	12.62	0.000	0.6369042	0.8710746	—

Table 19.

Results of the impacts of EAC on the CBs’ liquidity.

^**

Correlation is significant at the 5%.

^***

Correlation is significant at the 1%.

ORATAti	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualityti	0.0148074	0.0119677	1.24	0.086*	−0.0086489	0.0382637	H1 accepted
LnBankSizeti	0.2938356	0.025406	11.57	0.000***	0.2440408	0.3436305	H4 rejected
LnBankAgeti	−0.0507484	0.0083239	−6.10	0.000***	−0.067063	−0.0344338	H3 rejected
BankTypeti	−0.0647458	0.0088427	−7.32	0.000***	−0.0820771	−0.0474144	H2 accepted
LnInflationti	−0.0495386	0.00707	−7.01	0.000***	−0.0633954	−0.0356817	H5 accepted
Constant	0.2335224	0.0638224	3.66	0.000	0.1084329	0.358612	—

Table 20.

Results of the impacts of EAC on the IBs’ liquidity.

^*

Correlation is significant at the 10%.

^***

Correlation is significant at the 1%.

LnTLTDtc	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualitytc	−0.0336292	0.0292968	−1.15	0.061*	−0.0237914	0.0910498	H1 rejected
LnBankSizetc	0.129404	0.025043	5.17	0.000***	0.0803206	0.1784873	H4 rejected
LnBankAgetc	0.0293781	0.0145626	2.02	0.044**	0.0008358	0.0579203	H3 accepted
BankTypetc	−0.0674065	0.0136172	−4.95	0.000***	−0.0940958	−0.0407172	H2 accepted
LnInflationtc	−0.0806047	0.0117335	−6.87	0.000***	−0.1036019	−0.0576076	H5 accepted
Constant	−0.3079346	0.0751069	−4.10	0.000	−0.4551415	−0.1607278	—

Table 21.

Results of the impacts of EAC on the CBs’ solvency.

^*

Correlation is significant at the 10%.

^***

Correlation is significant at the 5%.

^***

Correlation is significant at the 1%.

LnTLTDti	Coefficient	Std. Err.	Z	P > |z|	[95% Conf. Interval]		Decision
AuditQualityti	0.0283128	0.1567669	0.18	0.857	0.3355703	0.2789447	H1 rejected
LnBankSizetc	1.886044	0.139794	13.49	0.000***	1.612053	2.160035	H4 rejected
LnBankAgeti	0.2530683	0.0379865	6.66	0.000***	0.3275205	0.1786161	H3 accepted
BankTypeti	−0.1369333	0.0398734	−3.43	0.001***	−0.2150838	−0.0587827	H2 accepted
LnInflationti	−0.2710539	0.0429241	−6.31	0.000***	−0.3551837	−0.1869241	H5 accepted
Constant	−2.852438	0.3140807	−9.08	0.000	−3.468025	−2.236851	—

Table 22.

Results of the impacts of EAC on the IBs’ solvency.

^***

Correlation is significant at the 1%.

Classification

JEL classification: E42, E52, F37, G20, G29, G30, G33, G39, G40