The Impact of Board of Directors and Islamic Shariah on Company Internal Control : Jordan Evidence

This study examines the impact of corporate governance and compliance with Shariah on internal controls over financial reporting. Three research questions are asked and answered: (i) How do corporate governance structures affect a company’s internal financial reporting controls in Jordan?; (ii) What is the effect of Shariah-compliance on internal financial reporting controls?; and (iii) How does Shariah-compliance moderate the relationship between corporate governance structures and internal reporting controls? Multiple regression model with 94 listed Jordanian companies used as the study sample reveals the following findings. Board size, board meetings, Shariah-compliance, and auditor type have a negative impact on MWIC, i.e., material weaknesses in internal controls, defined as a reasonable possibility that a deficiency, or a combination of deficiencies, in internal control over financial reporting will not be prevented or detected on a timely basis. Second, unitary leadership, where the same individual is both the chair and CEO, is positively correlated to MWIC. Third, Shariah-compliance strengthens the effect of board meetings, suggesting that Shariah-compliance and good corporate governance mechanisms reinforce each other to ensure higher-quality internal financial reporting controls