ISLAMIC ACCOUNTING Chapter 1: Accounting and Islamic Worldview.

ISLAMIC ACCOUNTING

Chapter 1: Accounting and Islamic Worldview

Introduction

“The traditional Western double-entry based accounting technology is well-suited to an orthodox, positivist society of any kind. It is not surprising that it is proving inadequate, as people are returning to more integrated world views, whether Islamic or otherwise” (Hayashi, 1989)

Objective

1. Outline the nature of accounting and its environment

2. Fundamental principles of Islamic worldview – the development of accounting theory

3. Interaction between Islamic worldview and accounting

Accounting And Its Environment

1. Definition2. Role3. Types4. Governance – FRS/IAS/Bank Negara5. Equation

Critics on Conventional Accounting

• Externalities is not included in financial report (Lee Parker, environmental accounting)

• Intangible asset cannot be measured adequately(Lev Baruch)

• Human resources and employee reporting interest are not included.

• Social Interest is overlooked• Promote the exploitation of capitalist over

labor and society.• Promote the concentration of wealth and

power of the hand of the rich.

2. Islamic Worldview And Accounting

What is Islam?

• Literally meaning:• “Peace” (in this world and hereafter) • “obedience” to Allah as his/her God, comply

with the motivation of God’s creation of Man, which is “to serve Allah”, to be “his viceregent on earth”.

• A comprehensive worldview, a unity of Allah, and an integration between world and hereafter.

• Islamic principles: truth, justice, fair, goodwill, honesty, benevolent, accountability before the God.

Islamic Rules:• Allah (God) gives two guidance for mankind:• al-Quran (revealed word of Allah ) and• Hadist/Sunnah: Prophet Saying, Allah’s

inspired acts, description of the conduct of the prophet’s companion of which Mohammad was uncritical.

• Ijtihad/ijma’: shuratic and consensus process.• Guidance are related to all daily life of mankind

including in business, management, and finance.

• The phenomena of nature can be also a sign of Allah’s power and existence.

The purpose of shariah (Islamic law) (Al-Gazali:

1058-1111)• To promote the welfare of the

people which lies on:• Safeguarding of their faith• Their life• Their intellect• Their posterity and • Their Wealth

Islamic concepts

• Falah - to achive Allah’s pleasure• Tawhid – unity of God• Khilafah (vicegerent) – man as

trustee on the earth• Taklif – accountibility

Ancient Accounting Role in Islamic State is Muhasabah, it

means:• Calculation of one’s act• Clear the account, make neutral• To take care of, to try to find• To anticipate a reward in the hereafter• To take into account, into consideration• To order Muslim to perform their duties• To avoid fraudulent practices in business

and society, to check illegal contract, keep free market and fair price, prevent necessities from being hoarded. (Hayashi, 1989)

Examples of Unlawful Business Practices in

Islam:• There is lawful (halal) and unlawful

(haram) in business• Riba, usury or interest on credit: increment

over and above the amount of of capital loaned.

• Favor Equity financing than debt financing• Pork, Alcoholic drinks• Speculative transaction, gambling,

dishonesty, collusion, uncertainty, manipulation, fraud, free market interference, exploitation, hoarding.

3. Accounting Objectives : An Islamic

Perspectives

Accounting objective

• Conventional accounting concentrates on identifying economic events and transactions

• Islamic accounting must identify socio-economic and religious events, and transactions– Fulfill the ultimate accountability to Allah– Ensure fair and just financial transaction

between human beings

Accounting In Al Quran : Debt Contract And Accounting

Accounting In Al Quran : Debt Contract And Accounting

“ O ye who believe! When ye deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to

writing let a scribe write down faithfully as between the parties; let not the scribe refuse to write: as Allah has taught him, so let him write. Let him who incurs the liability dictate, but let him fear his Lord Allah, and not

diminish aught of what he owes. If the party liable is mentally deficient, or weak or unable himself to dictate, let his guardian dictate faithfully. And get two witnesses, out of your own men, and if there are not two men,

then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her. The witnesses should not refuse when they are called on (for evidence). Disdain not to reduce to

writing (your contract) for a future period, whether it be small or big: it is juster in the sight of Allah, more suitable as evidence, and more

convenient to prevent doubts among yourselves but if it be a transaction which ye carry out on the spot among yourselves there is no blame on

you if ye reduce it not to writing. But take witnesses whenever ye make a commercial contract; and let neither scribe nor witness suffer harm. If ye

do (such harm), it would be wickedness in you. So fear Allah; for it is Allah that teaches you. And Allah is well acquainted with all things.”

(Surah Al-Baqarah:282)

AAOIFI Standards Objectives

1. To develop accounting standards for Islamic financial institutions as harmonization of accounting practices

2. To facilitates the needs of the users of accounting information of Islamic financial institutions

Objectives developed by AAOIFI

1. Accounting for Islamic Financial institutions

2. Financial Accounting 3. Financial accounting and financial

reports of Islamic Banks

CONCLUSION

ISLAMIC ACCOUNTING can be defined as the “accounting process” which provides appropriate information (not necessarily limited to financial data) to stakeholders of an entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Shari’ah and delivering on its socioeconomic objectives.

Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to God (in respect of inter-human/environmental transactions

Islamic Accounting

• 1. To report accurate income determination

• 2. To promote efficiency and leadership• 3. To comply with the shariah (Islamic

principles)• 4. Commitment to justice• 5. To report a good things• 6. To adapt to positive social change.

(Khan, in Harahap, 1992)

Conventional Vs Islamic Accounting

• Conventional Accounting:• Based upon modern

commercial law-permissive rather than ethical

• Limited disclosure (provision of information subject to public interest)

• Personal accountability (focus on individuals who control resources)

• Islamic Accounting:• Based upon ethical law

originating in the Qur’an (Islamic law, As-Sunnah)

• Full disclosure (to satisfy any reasonable demand for information in accordance with the Shari’a)

• Public accountability (focus on the community who participate in exploiting resources)

Conventional vs Islamic Accounting:(Boudyn and Willet, Islamic Corporate Reports,

Abacus, Vol. 36, No.1, 2000).

• Conventional Acc.• Economic rationalism• Secular• Individualistic• Profit maximization• Survival of fittest• Process• Absolute ownership• (Ec. rationalism: the desire to stand

apart from others, to compete, to manipulate and to amass surplus”)

• Islamic Acct.• Unity of God• Religious• Communal • Reasonable profit• Equity • Environment• Relative ownership

Toshikazu Hayashi, “On Islamic Accounting,

IMES Working Paper Series No.18. • Islamic Accounting

• Society – oriented • Focus on society aspect • Basically Al Qur’an & As

Sunnah (Shariah)• Religious (must

responsibility to God at the Judgment Day)

• Conventional Accounting• Individuality – oriented

• Focus on individuality aspect without consider any social aspects

• Accounting Law and Ethics • Secular

Hayashi (Continued)

• Islamic Accounting• No differentiation between

Normative and Descriptive Accounting (They always going simultaneously)

• In operational, they do everything in boundaries of Islam (Shariah)

• • Measure as saleable value• Market (selling) price rather

than historical cost

• Conventional Accounting• The normative accounting

always influencing descriptive accounting or individuality interest

•

• In operational, they permit everything to reach the highest profit

• Measure as highest possible profit

• Historical Cost

Problems of Rationalism

• The supreme power lies on human or power holder not on God

• Man guided by the concept of self interest and overlook the social interest

• Man has no inherent justice but true opportunists.

• Social imbalance and social conflicts due to concentration of wealth and power in a few elites

• Global ecological destruction

Next week’s class discussion:Please prepare answers for

questions in text book page 21;–Q1.1–Q1.3–Q1.4

Many thanks for your attention

WASSALAM