IJSSH 2013 Vol.3(2): 160-162 ISSN: 2010-3646
DOI: 10.7763/IJSSH.2013.V3.218

Income Smoothing and Islam: an Evidence from Malaysian Shariah Compliant Companies

Siti Masnah Saringat, Rosmawati Haron, and Henny Hazliza Mohd Tahir
Abstract—As repeatedly emphasized by the Prophet S.A.W, weight and measures are two of the important elements in business transactions. Pedestal on that premises, we concur to discover the existence of income smoothing in Malaysian’s Shariah compliant companies which are perceived as companies that go along with ethical Islamic precept in both business transactions and financial reporting. Even though in Islamic financial theory does not repudiate smoothing of profit, this study will examine types of smoothing behaviour that are undertaken by the executives. There are two types of income smoothing; real smoothing and artificial smoothing. Real smoothing comprises making production and speculation decisions that decrease income inconsistency. In dissimilarity, artificial smoothing is attained through accounting practices. We tested our objectives on 712 Shariah compliant companies in Malaysian capital market over the period of 2007 – 2011. By using test of artificial income as a measurement, we found that 53.6% of the companies are artificial smoothers.

Index Terms—Shariah compliant, income smoothing, Islamic teachings.

The authors are with the Universiti Teknologi MARA, Johor, Malaysia (e-mail: rosma741@johor.uitm.edu.my, sitima067@johor.uitm.edu.my, henny030@johor.uitm.edu.my).

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Cite:Siti Masnah Saringat, Rosmawati Haron, and Henny Hazliza Mohd Tahir, "Income Smoothing and Islam: an Evidence from Malaysian Shariah Compliant Companies," International Journal of Social Science and Humanity vol. 3, no. 2, pp. 160-162, 2013.

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