Tax Avoidance in Islamic Banking: The Prominent Role of Board Director Expertise
Abstract
This study examines the effect of board director expertise, political connection, and joint audit on tax avoidance. Specifically, a joint audit is the moderating variable in that relationship. This study uses a purposive sampling method where the sample was generated from the Islamic banking industry from 2012 to 2021 with 11 companies. Further, the data was analyzed using the multiple regression method. The results showed that board director expertise could boost the company's tax avoidance practice. The high understanding of directors on accounting, particularly tax regulations, enhances their possibility of using the regulations’ loopholes to decrease the company’s payable tax. This result is highly supported by upper echelon theory, which postulates that the ability of the top management level (i.e., board of director) is created by their experience, value, and personality. Hence, their expertise is sufficient to influence tax avoidance. On the other hand, the remaining variables tested did not show a significant effect. This result highlighted the importance of the company’s consideration in choosing their expertise. Again, the board director's expertise is the most prominent factor instead of political connection and joint audit on tax avoidance.
References
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Ahmed, F., & McMillan, D. G. (2021). Capital structure and political connections: evidence from GCC banks and the financial crisis. International Journal of Emerging Markets, 18(9), 2890-2911. https://doi.org/10.1108/IJOEM-03-2020-0261
Ajili, H., & Khlif, H. (2020). Political connections, joint audit, and tax avoidance: evidence from the Islamic banking industry. Journal of Financial Crime, 27(1), 155–171. https://doi.org/10.1108/JFC-01-2019-0015
Alam, M. K., Miah, M. S., Siddiquii, M. N., & Hossain, M. I. (2020). The influences of the board of directors and management in Shariah governance guidelines of the Islamic banks in Bangladesh. Journal of Islamic Accounting and Business Research, 11(9), 1633–1647. https://doi.org/10.1108/JIABR-08-2019-0155
Alhababsah, S., & Yekini, S. (2021). Audit committee and audit quality: An empirical analysis considering industry expertise, legal expertise, and gender diversity. Journal of International Accounting, Auditing and Taxation, 42. https://doi.org/10.1016/j.intaccaudtax.2021.100377
Ali, S., Rehman, R. U., Sarwar, B., Shoukat, A., & Farooq, M. (2022). Board financial expertise and foreign institutional investment: the moderating role of ownership concentration. Review of International Business and Strategy, 32(3), 325–345. https://doi.org/10.1108/RIBS-02-2021-0032
Alkurdi, A., & Mardini, G. H. (2020). The impact of ownership structure and the board of directors’ composition on tax avoidance strategies: empirical evidence from Jordan. Journal of Financial Reporting and Accounting, 18(4), 795–812. https://doi.org/10.1108/JFRA-01-2020-0001
Alshirah, M. H., Rahman, A. A., & Mustapa, I. R. (2020). Board of directors’ characteristics and corporate risk disclosure: the moderating role of family ownership. EuroMed Journal of Business, 15(2), 219–252. https://doi.org/10.1108/EMJB-09-2019-0115
Anwar, S. M., Junaidi, J., Salju, S., Wicaksono, R., & Mispiyanti, M. (2020). Islamic bank contribution to Indonesian economic growth. International Journal of Islamic and Middle Eastern Finance and Management, 13(3), 519–532. https://doi.org/10.1108/IMEFM-02-2018-0071
Asutay, M., & Sidek, N. Z. M. (2021). Political economy of Islamic banking growth: Does political regime and institutions, governance and political risks matter? International Journal of Finance and Economics, 26(3), 4226–4261. https://doi.org/10.1002/ijfe.2011
Baatwah, S. R., Salleh, Z., & Stewart, J. (2019). Audit committee chair accounting expertise and audit report timeliness: The moderating effect of chair characteristics. Asian Review of Accounting, 27(2), 273–306. https://doi.org/10.1108/ARA-12-2017-0190
Basiruddin, R., & Ahmed, H. (2020). Corporate governance and Shariah non-compliant risk in Islamic banks: evidence from Southeast Asia. Corporate Governance (Bingley), 20(2), 240–262. https://doi.org/10.1108/CG-05-2019-0138
Cho, M., Kwon, S. Y., & Krishnan, G. v. (2021). Audit fee lowballing: Determinants, recovery, and future audit quality. Journal of Accounting and Public Policy, 40(4). https://doi.org/10.1016/j.jaccpubpol.2020.106787
El-Ammari, A. (2022). Does political connection affect corporate financial performance? The moderating role of directors’ financial expertise. Journal of Financial Reporting and Accounting, 21(5), 1073-1099. https://doi.org/10.1108/JFRA-08-2021-0257
Fakhfakh, M. (2017). The harmonization of audit reports of Islamic banks: An advanced and original empirical investigation. Journal of Islamic Accounting and Business Research, 8(2), 203–228. https://doi.org/10.1108/JIABR-05-2014-0016
Fan, H., & Chen, L. (2022). Political connections, business strategy, and tax aggressiveness: evidence from China. China Accounting and Finance Review, 25(2), 125-144. https://doi.org/10.1108/cafr-07-2022-0086
Firmansyah, A., Arham, A., Qadri, R. A., Wibowo, P., Irawan, F., Kustiani, N. A., Wijaya, S., Andriani, A. F., Arfiansyah, Z., Kurniawati, L., Mabrur, A., Dinarjito, A., Kusumawati, R., & Mahrus, M. L. (2022a). Political connections, investment opportunity sets, tax avoidance: does corporate social responsibility disclosure in Indonesia have a role? Heliyon (8, Issue 8). Elsevier Ltd. https://doi.org/10.1016/j.heliyon.2022.e10155
Folorunso, D., & Lokanan, M. E. (2022). Tax avoidance in banking institutions: an analysis of the top seven Nigerian banks. Journal of Financial Crime, 30(1), 167-204. https://doi.org/10.1108/JFC-11-2021-0238
Giosi, A., & Caiffa, M. (2020). Political connections, media impact, and state-owned enterprises: an empirical analysis on corporate financial performance. Journal of Public Budgeting, Accounting and Financial Management, 33(3), 261–288. https://doi.org/10.1108/JPBAFM-12-2019-0188
Gorshunov, M. A., Armenakis, A. A., Harris, S. G., & Walker, H. J. (2021). Quad-qualified audit committee director: Implications for monitoring and reducing financial corruption. Journal of Corporate Finance, 66. https://doi.org/10.1016/j.jcorpfin.2020.101854
Hambrick, D. C. (2007). Upper Echelon Theory: An Update. Academy of Management Review, 32(2), 334-343.
Hoseini, M., Safari Gerayli, M., & Valiyan, H. (2019a). Demographic characteristics of the board of directors structure and tax avoidance: Evidence from Tehran Stock Exchange. International Journal of Social Economics, 46(2), 199–212. https://doi.org/10.1108/IJSE-11-2017-0507
Jizi, M., & Nehme, R. (2018). Board monitoring and audit fees: the moderating role of CEO/chair dual roles. Managerial Auditing Journal, 33(2), 217–243. https://doi.org/10.1108/MAJ-10-2016-1464
Khalil, A. (2021). The impact of the board of directors and the Shariah board on the financial soundness of Islamic banks. Journal of Islamic Accounting and Business Research, 12(5), 646–660. https://doi.org/10.1108/JIABR-01-2019-0011
Kharuddin, K. A. M., Basioudis, I. G., & Farooque, O. al. (2021). Effects of the Big 4 national and city-level industry expertise on audit quality in the United Kingdom. Journal of International Accounting, Auditing and Taxation, 43. https://doi.org/10.1016/j.intaccaudtax.2021.100398
Khelil, I., Khlif, H., & Amara, I. (2022). Political connections, political corruption, and auditing: a literature review. In Journal of Financial Crime, 29(1), 159–170. https://doi.org/10.1108/JFC-12-2020-0257
Kovermann, J., & Velte, P. (2019). The impact of corporate governance on corporate tax avoidance—A literature review. Journal of International Accounting, Auditing and Taxation, 36. https://doi.org/10.1016/j.intaccaudtax.2019.100270
Nagar, N., Desai, N., & Jacob, J. (2021). Do Big 4 auditors limit classification shifting? Evidence from India. Journal of International Accounting, Auditing and Taxation, 42. https://doi.org/10.1016/j.intaccaudtax.2021.100376
Naheed, R., AlHares, A., Shahab, Y., & Naheed, R. (2021). Board’s financial expertise and corporate social responsibility disclosure in China. Corporate Governance (Bingley), 21(4), 716–736. https://doi.org/10.1108/CG-08-2020-0329
Oussii, A. A., & Boulila, N. (2021). Evidence on the relation between audit committee financial expertise and internal audit function effectiveness. Journal of Economic and Administrative Sciences, 37(4), 659–676. https://doi.org/10.1108/jeas-04-2020-0041
Pratono, A. H., & Arli, D. (2020). Linking global consumer culture and ethnocentric consumerism to global citizenship: exploring the mediating effect of cultural intelligence. International Journal of Sociology and Social Policy, 40(7–8), 659–675. https://doi.org/10.1108/IJSSP-10-2019-0212
Proença, C., Augusto, M., & Murteira, J. (2020). Political connections and banking performance: the moderating effect of gender diversity. Corporate Governance (Bingley), 20(6), 1001–1028. https://doi.org/10.1108/CG-01-2020-0018
Quick, R., & Schmidt, F. (2018). Do audit firm rotation, auditor retention, and joint audits matter? – An experimental investigation of bank directors’ and institutional investors’ perceptions. Journal of Accounting Literature, 41, 1–21. https://doi.org/10.1016/j.acclit.2018.01.003
Ros, R. A. M., Ilmi, M. B., & Mohamad, M. H. S. (2022). Linking corporate governance with organizational growth: evidence from Indonesian Islamic banks. Journal of Islamic Accounting and Business Research, 13(4), 623–648. https://doi.org/108/JIABR-05-2021-0153
Sarto, F., & Saggese, S. (2022a). Board industry expertise and innovation input: evidence on the curvilinear relationship and the moderating effect of CEO. European Journal of Innovation Management, 25(6), 775–803. https://doi.org/10.1108/EJIM-07-2021-0372
Seidu, B. A., Queku, Y. N., & Carsamer, E. (2021). Financial constraints and tax planning activity: empirical evidence from the Ghanaian banking sector. Journal of Economic and Administrative Sciences. https://doi.org/10.1108/jeas-12-2020-0199
Rahman, A. R., & Haron, R. (2019). The Effect of Corporate Governance on Islamic Banking Performance: A Maqasid Shari’ah Index Approach on Indonesian Islamic Banks. Journal of Islamic Finance (Special Issue).
Taufik, M. (2022). Can Shari’ah supervisory board and Islamic bank characteristics reduce tax avoidance? Evidence in Indonesia and Malaysia. Journal of Financial Crime, 30(3), 677-701. https://doi.org/10.1108/JFC-03-2022-0059
Tessema, A. (2020). Audit quality, political connections, and information asymmetry: evidence from banks in gulf co-operation council countries. International Journal of Managerial Finance, 16(5), 673–698. https://doi.org/10.1108/IJMF-01-2020-0027
Van der Zahn, M., & Tebourbi, I. (2022). Audit quality and abolition of mandated joint audits: evidence from Kuwait. Journal of Applied Accounting Research, 24(1), 70-105. https://doi.org/10.1108/JAAR-08-2021-0228
Ahmad, F., Bradbury, M., & Habib, A. (2022). Political connections, political uncertainty, and audit fees: evidence from Pakistan. Managerial Auditing Journal, 37(2), 255–282. https://doi.org/10.1108/MAJ-06-2020-2715
Ahmed, F., & McMillan, D. G. (2021). Capital structure and political connections: evidence from GCC banks and the financial crisis. International Journal of Emerging Markets, 18(9), 2890-2911. https://doi.org/10.1108/IJOEM-03-2020-0261
Ajili, H., & Khlif, H. (2020). Political connections, joint audit, and tax avoidance: evidence from the Islamic banking industry. Journal of Financial Crime, 27(1), 155–171. https://doi.org/10.1108/JFC-01-2019-0015
Alam, M. K., Miah, M. S., Siddiquii, M. N., & Hossain, M. I. (2020). The influences of the board of directors and management in Shariah governance guidelines of the Islamic banks in Bangladesh. Journal of Islamic Accounting and Business Research, 11(9), 1633–1647. https://doi.org/10.1108/JIABR-08-2019-0155
Alhababsah, S., & Yekini, S. (2021). Audit committee and audit quality: An empirical analysis considering industry expertise, legal expertise, and gender diversity. Journal of International Accounting, Auditing and Taxation, 42. https://doi.org/10.1016/j.intaccaudtax.2021.100377
Ali, S., Rehman, R. U., Sarwar, B., Shoukat, A., & Farooq, M. (2022). Board financial expertise and foreign institutional investment: the moderating role of ownership concentration. Review of International Business and Strategy, 32(3), 325–345. https://doi.org/10.1108/RIBS-02-2021-0032
Alkurdi, A., & Mardini, G. H. (2020). The impact of ownership structure and the board of directors’ composition on tax avoidance strategies: empirical evidence from Jordan. Journal of Financial Reporting and Accounting, 18(4), 795–812. https://doi.org/10.1108/JFRA-01-2020-0001
Alshirah, M. H., Rahman, A. A., & Mustapa, I. R. (2020). Board of directors’ characteristics and corporate risk disclosure: the moderating role of family ownership. EuroMed Journal of Business, 15(2), 219–252. https://doi.org/10.1108/EMJB-09-2019-0115
Anwar, S. M., Junaidi, J., Salju, S., Wicaksono, R., & Mispiyanti, M. (2020). Islamic bank contribution to Indonesian economic growth. International Journal of Islamic and Middle Eastern Finance and Management, 13(3), 519–532. https://doi.org/10.1108/IMEFM-02-2018-0071
Asutay, M., & Sidek, N. Z. M. (2021). Political economy of Islamic banking growth: Does political regime and institutions, governance and political risks matter? International Journal of Finance and Economics, 26(3), 4226–4261. https://doi.org/10.1002/ijfe.2011
Baatwah, S. R., Salleh, Z., & Stewart, J. (2019). Audit committee chair accounting expertise and audit report timeliness: The moderating effect of chair characteristics. Asian Review of Accounting, 27(2), 273–306. https://doi.org/10.1108/ARA-12-2017-0190
Basiruddin, R., & Ahmed, H. (2020). Corporate governance and Shariah non-compliant risk in Islamic banks: evidence from Southeast Asia. Corporate Governance (Bingley), 20(2), 240–262. https://doi.org/10.1108/CG-05-2019-0138
Cho, M., Kwon, S. Y., & Krishnan, G. v. (2021). Audit fee lowballing: Determinants, recovery, and future audit quality. Journal of Accounting and Public Policy, 40(4). https://doi.org/10.1016/j.jaccpubpol.2020.106787
El-Ammari, A. (2022). Does political connection affect corporate financial performance? The moderating role of directors’ financial expertise. Journal of Financial Reporting and Accounting, 21(5), 1073-1099. https://doi.org/10.1108/JFRA-08-2021-0257
Fakhfakh, M. (2017). The harmonization of audit reports of Islamic banks: An advanced and original empirical investigation. Journal of Islamic Accounting and Business Research, 8(2), 203–228. https://doi.org/10.1108/JIABR-05-2014-0016
Fan, H., & Chen, L. (2022). Political connections, business strategy, and tax aggressiveness: evidence from China. China Accounting and Finance Review, 25(2), 125-144. https://doi.org/10.1108/cafr-07-2022-0086
Firmansyah, A., Arham, A., Qadri, R. A., Wibowo, P., Irawan, F., Kustiani, N. A., Wijaya, S., Andriani, A. F., Arfiansyah, Z., Kurniawati, L., Mabrur, A., Dinarjito, A., Kusumawati, R., & Mahrus, M. L. (2022a). Political connections, investment opportunity sets, tax avoidance: does corporate social responsibility disclosure in Indonesia have a role? Heliyon (8, Issue 8). Elsevier Ltd. https://doi.org/10.1016/j.heliyon.2022.e10155
Folorunso, D., & Lokanan, M. E. (2022). Tax avoidance in banking institutions: an analysis of the top seven Nigerian banks. Journal of Financial Crime, 30(1), 167-204. https://doi.org/10.1108/JFC-11-2021-0238
Giosi, A., & Caiffa, M. (2020). Political connections, media impact, and state-owned enterprises: an empirical analysis on corporate financial performance. Journal of Public Budgeting, Accounting and Financial Management, 33(3), 261–288. https://doi.org/10.1108/JPBAFM-12-2019-0188
Gorshunov, M. A., Armenakis, A. A., Harris, S. G., & Walker, H. J. (2021). Quad-qualified audit committee director: Implications for monitoring and reducing financial corruption. Journal of Corporate Finance, 66. https://doi.org/10.1016/j.jcorpfin.2020.101854
Hambrick, D. C. (2007). Upper Echelon Theory: An Update. Academy of Management Review, 32(2), 334-343.
Hoseini, M., Safari Gerayli, M., & Valiyan, H. (2019a). Demographic characteristics of the board of directors structure and tax avoidance: Evidence from Tehran Stock Exchange. International Journal of Social Economics, 46(2), 199–212. https://doi.org/10.1108/IJSE-11-2017-0507
Jizi, M., & Nehme, R. (2018). Board monitoring and audit fees: the moderating role of CEO/chair dual roles. Managerial Auditing Journal, 33(2), 217–243. https://doi.org/10.1108/MAJ-10-2016-1464
Khalil, A. (2021). The impact of the board of directors and the Shariah board on the financial soundness of Islamic banks. Journal of Islamic Accounting and Business Research, 12(5), 646–660. https://doi.org/10.1108/JIABR-01-2019-0011
Kharuddin, K. A. M., Basioudis, I. G., & Farooque, O. al. (2021). Effects of the Big 4 national and city-level industry expertise on audit quality in the United Kingdom. Journal of International Accounting, Auditing and Taxation, 43. https://doi.org/10.1016/j.intaccaudtax.2021.100398
Khelil, I., Khlif, H., & Amara, I. (2022). Political connections, political corruption, and auditing: a literature review. In Journal of Financial Crime, 29(1), 159–170. https://doi.org/10.1108/JFC-12-2020-0257
Kovermann, J., & Velte, P. (2019). The impact of corporate governance on corporate tax avoidance—A literature review. Journal of International Accounting, Auditing and Taxation, 36. https://doi.org/10.1016/j.intaccaudtax.2019.100270
Nagar, N., Desai, N., & Jacob, J. (2021). Do Big 4 auditors limit classification shifting? Evidence from India. Journal of International Accounting, Auditing and Taxation, 42. https://doi.org/10.1016/j.intaccaudtax.2021.100376
Naheed, R., AlHares, A., Shahab, Y., & Naheed, R. (2021). Board’s financial expertise and corporate social responsibility disclosure in China. Corporate Governance (Bingley), 21(4), 716–736. https://doi.org/10.1108/CG-08-2020-0329
Oussii, A. A., & Boulila, N. (2021). Evidence on the relation between audit committee financial expertise and internal audit function effectiveness. Journal of Economic and Administrative Sciences, 37(4), 659–676. https://doi.org/10.1108/jeas-04-2020-0041
Pratono, A. H., & Arli, D. (2020). Linking global consumer culture and ethnocentric consumerism to global citizenship: exploring the mediating effect of cultural intelligence. International Journal of Sociology and Social Policy, 40(7–8), 659–675. https://doi.org/10.1108/IJSSP-10-2019-0212
Proença, C., Augusto, M., & Murteira, J. (2020). Political connections and banking performance: the moderating effect of gender diversity. Corporate Governance (Bingley), 20(6), 1001–1028. https://doi.org/10.1108/CG-01-2020-0018
Quick, R., & Schmidt, F. (2018). Do audit firm rotation, auditor retention, and joint audits matter? – An experimental investigation of bank directors’ and institutional investors’ perceptions. Journal of Accounting Literature, 41, 1–21. https://doi.org/10.1016/j.acclit.2018.01.003
Ros, R. A. M., Ilmi, M. B., & Mohamad, M. H. S. (2022). Linking corporate governance with organizational growth: evidence from Indonesian Islamic banks. Journal of Islamic Accounting and Business Research, 13(4), 623–648. https://doi.org/108/JIABR-05-2021-0153
Sarto, F., & Saggese, S. (2022a). Board industry expertise and innovation input: evidence on the curvilinear relationship and the moderating effect of CEO. European Journal of Innovation Management, 25(6), 775–803. https://doi.org/10.1108/EJIM-07-2021-0372
Seidu, B. A., Queku, Y. N., & Carsamer, E. (2021). Financial constraints and tax planning activity: empirical evidence from the Ghanaian banking sector. Journal of Economic and Administrative Sciences. https://doi.org/10.1108/jeas-12-2020-0199
Rahman, A. R., & Haron, R. (2019). The Effect of Corporate Governance on Islamic Banking Performance: A Maqasid Shari’ah Index Approach on Indonesian Islamic Banks. Journal of Islamic Finance (Special Issue).
Taufik, M. (2022). Can Shari’ah supervisory board and Islamic bank characteristics reduce tax avoidance? Evidence in Indonesia and Malaysia. Journal of Financial Crime, 30(3), 677-701. https://doi.org/10.1108/JFC-03-2022-0059
Tessema, A. (2020). Audit quality, political connections, and information asymmetry: evidence from banks in gulf co-operation council countries. International Journal of Managerial Finance, 16(5), 673–698. https://doi.org/10.1108/IJMF-01-2020-0027
Van der Zahn, M., & Tebourbi, I. (2022). Audit quality and abolition of mandated joint audits: evidence from Kuwait. Journal of Applied Accounting Research, 24(1), 70-105. https://doi.org/10.1108/JAAR-08-2021-0228
Published
2023-12-08
How to Cite
FITRIANA, Vita Elisa; SOLEHA, Salwa Sabila; MAPUASARI, Supeni Anggraeni.
Tax Avoidance in Islamic Banking: The Prominent Role of Board Director Expertise.
SAR (Soedirman Accounting Review) : Journal of Accounting and Business, [S.l.], v. 8, n. 2, p. 220 - 233, dec. 2023.
ISSN 2598-0718.
Available at: <https://jos.unsoed.ac.id/index.php/sar/article/view/10051>. Date accessed: 14 mar. 2025.
doi: https://doi.org/10.32424/1.sar.2023.8.2.10051.
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Articles
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