Ethics and financial reporting are both topical issues that have instigated numerous debates in the academic as well as the business community (Schwartz 2004). In this study, we assess the effect of two potential sources of ethical principles, namely, CSR and membership in a Shariah index. The literature has defined CSR in various ways but in essence, it is a process by which organizations negotiate their roles within the surrounding society (Carroll 1979; McWilliams et al. 2006). Membership in a Shariah index is the adherence to an ethical code that relates to religion. The literature has also proposed this membership as another possible driver of moral activities (Weaver and Agle 2002; Conroy and Emerson 2004; Longenecker et al. 2004; Hood et al. 2014). In particular, Noreen (1988) contends that agency contracts with a religious mechanism can mitigate managers’ opportunistic behavior. Hence, we also focus on the relation between Shariah-compliant investment and the quality of financial reporting.1 This study develops the theoretical link between ethics and financial reporting by using two competing views: moral obligation and opportunistic behavior (Kim et al. 2012). First, firms benefit from conducting their business activities in a way that is honest, trustworthy, and ethical. Thus, firms have a tendency to comply with high moral standards (Jones 1995; Garriga and Melé ۲۰۰۴; Kim et al. 2012). In a similar vein, Kim et al. (2012) contend that firms that expend efforts and resources in designing and implementing ethical programs in order to serve the interests of societal stakeholders are more likely to provide transparent and reliable earnings information. However, managers might have an incentive to use ethical precepts as a strategic tool to obfuscate their opportunistic behavior, and in so doing, they can attempt to influence stakeholders’ perceptions of the firm (Hemingway and Maclagan 2004; Merkl-Davies and Brennan 2011). Thus, a firm might use an ethical practice as a label to create the perception of transparency, thereby avoiding scrutiny from stakeholders. The practice therefore assists firms in legitimizing their operations within society (Merkl-Davies and Brennan 2007). Thus far, the studies that examine the association between ethics and earnings quality provide mixed empirical results. With regard to CSR reporting, Prior et al. (2008) and Chih et al. (2008) both find that CSR firms are more likely to engage in aggressive earnings manipulation. However, Hong and Andersen (2011) and Kim et al. (2012) show that firms with higher CSR scores provide better quality information on earnings. In the case of religion and the quality of financial reporting, McGuire et al. (2011) and Dyreng et al. (2012) both show that religion-influenced firms are less involved in aggressive financial reporting and have higher accrual quality, lower restatements of financial statements, lower risk of fraudulent accounting, and lower forecast errors. In contrast, Callen et al. (2011) show that the extent of earnings management is not related to religion. Given that most of the research focuses almost exclusively on either CSR or membership in a Shariah index, this study examines the effect of both sources of ethical principles on the quality of financial reporting. Furthermore, whereas the literature that examines the link between Shariah and financial issues concentrates almost exclusively on Muslim countries, this study shifts the focus to rest of the world because Shariahcompliant investment has experienced considerable growth in recent years.