An effective internal Shariah audit function in Islamic Financial Institutions (IFIs) is imperative to ensure better management of the Shariah non-compliance risks through a more robust Shariah audit practices. The accountabilities of the Board and Shariah Committee members are also vital to provide effective oversight on the internal Shariah audit function. The primary objective of this research is to evaluate the extent of the effectiveness of the internal Shariah audit function in IFIs in Malaysia. By using contingency theory, the study also examines the antecedents of an effective internal Shariah audit function. Consequently, the impacts of an effective internal Shariah audit function on the extent of Shariah governance and Shariah compliance disclosure in the Statements by Directors and Shariah Committee Report are examined based on the accountability theory. The study adopts a quantitative research method using a survey questionnaire and content analysis of the annual reports of IFIs in Malaysia. The total population of 47 IFIs during the period of data collection, i.e. the year 2016, were observed as the unit of analysis and the targeted sample. Survey questionnaires were distributed to the Heads of Shariah audit who are the key representatives of the internal Shariah audit function in IFIs in Malaysia. The findings indicate that the majority of IFIs have established an effective level of internal Shariah audit function. The internal control system is found to be the dominant contingent factor to contribute positive and significant effects to the effective internal Shariah audit function. There are positive but not significant effects between the Shariah risk management function, management support, and the function of Shariah Committee members on the effective internal Shariah audit function. The study also found that an effective internal Shariah audit function has a positive effect on the Shariah governance and Shariah compliance disclosures in the Statements by Directors and Shariah Committee Report. However, the effects are also not significant. The majority of IFIs have disclosed a minimum level of Shariah governance and Shariah compliance information in the Statements by Directors and the Shariah Committee Report. In conclusion, an effective internal Shariah audit function indicates the robustness of the Shariah audit practices and better management of Shariah non-compliance in the IFIs. The findings contribute to the need of rigorous monitoring and more attention by Bank Negara Malaysia as the regulator on the effectiveness of the internal Shariah audit function performed by the Takaful operators and Islamic windows in commercial and investment banks. This further emphasises the crucial need for a holistic Shariah compliance culture in IFIs to enhance the effective internal Shariah audit function and ultimately, enhance the integrity and accountability of IFIs.

Shari’ah compliance is essential to enhance confidence among stakeholders of Islamic financial institutions. In this regard, the Bank Negara Malaysia (BNM) provides a comprehensive framework to ensure the operations of Islamic financial institutions fully comply with the Shari’ah and provide sound Shari’ah governance practices. This study, by using the Shari’ah Governance Framework 2010 (SGF 2010) issued by BNM as the main source instrument, first examines the extent of the quality of Shari’ah governance practices in Islamic financial institutions in Malaysia. Secondly, it evaluates the extent of the effectiveness of the Board of Directors (BOD) in influencing the quality of Shari’ah governance practices; thirdly, this study evaluates the extent of effectiveness of the Shari’ah Committee (SC) in influencing the quality of Shari’ah governance practices; and fourthly, it examines the influencing characteristics of the quality of Sharīʿah governance practices. The study employed a questionnaire survey by using the SGF 2010 as the main source to measure Shari’ah governance practices. The respondents consisted of Heads of Shari’ah Departments from 12 Islamic banks, 8 Takaful operators, 4 ReTakaful operators, and 6 Development Financial Institutions (DFIs) in Malaysia. From the findings, the study illustrates that overall, Islamic financial institutions in Malaysia have implemented reasonably good and sound Shari’ah governance practices. The study then further examined the various impacts of the types of Islamic financial institutions (IFIs), and found that Islamic banks have comparatively better Shari’ah governance practices compared to Takaful (including ReTakaful) and DFIs. The positive growth of the Islamic banking industry coupled with the nature of the industry are found to be the main factors in influencing good Shari’ah governance practices. The study found that the Shari’ah Committee is comparatively more responsible for driving Shari’ah governance practices than the management or the BODs. Furthermore, the study also found that out of four Shari’ah compliance functions as required by the SGF 2010, only two are implemented very well, which are the Shari’ah review and Shari’ah research function, while the two others (Shari’ah audit and Shari’ah risk management) are not. In addition to the above findings, among the main factors contributing towards sound Shari’ah governance practices are the size of the market and the firms. Finally, the study also found that only the Shari’ah Committee’s effectiveness has a positive and significant effect on Shari’ah governance practices. This indicates that the Shari’ah Committee members are effective in exercising their role in the implementation of SGF 2010. From the above findings, it can be concluded that the SGF 2010 has significantly enhanced Shari’ah compliance among Islamic financial institutions after 10 years since it was its implementation. Going forward, there are a few other areas that need to be improved, such as the role of the BODs and the management, as well as the functions of Shari’ah audit and Shari’ah risk management to ensure better Shari’ah governance practices.