Shahul Hameed Bin Hj. Mohamed Ibrahim

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Abstract:

There has been no systematic , methodical research in Islamic accounting as yet. There is a need for research of a more fundamental nature in Islamic accounting to establish its theory on a firm footing from which detailed rules can then be derived, not only for Islamic banks but all Islamic organizations whether in the business, public or voluntary sectors. This will hopefully enhance visibility and accountability in Islamic societies and lead the way to more open ‘shuracratic’ societies which avoids doubts and conflicts between Islamic organizations and its stakeholders.

This article discusses the "push" and the "pull" factors which require the development of an "Islamic Accounting " discipline. Conventional accounting is argued to be unsuitable to an Islamic society because it embraces fundamental values and principles which are in conflict with its values. Adopting or even modifying conventional accounting concepts is insufficient to develop an accounting system which provides information that will lead to behaviour consistent with Islamic norms and towards Islamic objectives. In addition, the establishment of Islamic organizations in many Muslim countries with their stated Islamic objectives reinforces the need for Islamic accounting. A survey of the literature on Islamic Accounting reveals the lack of both depth and breadth in research with some notable exceptions. This is due to a failure to enquire into the historical and philosophical basis of conventional accounting which are not always stated in mainstream accounting research. Further, focus mainly on accounting requirements of Islamic banking has led to a lack of breadth in researching Islamic accounting. However, Islamic Accounting needs to be broad based covering all Islamic business , government and voluntary organizations. In order to do this, an in-depth study based on the sources of Islamic sharia’ and an intelligent , sincere ijtihad (cumulative, continuous effort to derive laws from principles) has to be undertaken in the light of time and space requirements of the Muslim community. There also needs to be an enquiry into the philosophical and social underpinnings of conventional and the proposed Islamic accounting . I propose a methodology based on usulul fiqh (principles of Islamic jurisprudence) and empirical testing of derived principles with published financial reports of Muslim organisations as well as investigation into the environment created by accounting inside Muslim organizations. This article concludes with possible contributions and the difficulties envisaged in such research.

INTRODUCTION

In an age of globalisation, western hegemony over almost the entire planet and international harmonisation of accounting standards; searching for a religious, cultural, nationalistic or native accounting system may be viewed as parochial and infeasible. The problem is especially compounded for an enquiry into the possiblity of Islamic accounting as an effective alternative, by the image of Islam in the West as the ‘Other’ (Sardar 1998) , popularised by the media as synonymous with terrorism, barbaric laws and suppression of women . In fact, Islam has been implicated in the ‘Clash of Civilizations’ as a potential replacement for the evil empire of the USSR (Hunttington 1996).

In recent years, however the hegemony of western accounting concepts in the development or underdevelopment of ‘developing’ countries has been recognised in the literature. Hove (1986) for example, has described the influence of western accounting as the legacy of inappropriate technologies. Wallace (1990) has also questioned the international harmonisation of accounting standards and seen it as an attempt by the big eight (now the big six) and other international accounting firms to expand their influence and hegemony over the developing countries. The role of Western universities and the international accounting firms together with the examination and qualification exporting accounting bodies of the UK (e.g. ACCA, ICMA) (Briston & Kedslie 1997) has ‘pressured’ developing countries with different cultures, religion and social and business and political environment to adopt the western conventional accounting principles, standards and their underlying philosophy without any or negligible modification. Further their increasing strategic marketing posture in dissipating conventional technicist accounting education to the commonwealth and the Muslim world is worrying as such education embody a capitalistic, consumerist culture which is inconsist with the Islamic world-view.

In spite of the above globalization trend, the world is in the midst of a general religious awakening , which in the Muslim world has been termed Islamic resurgence (El-Ashker 1987). Muslim societies, after experimenting with socialism, communism and capitalism and having sufferred serious economic and social difficulties are reawakening a call to their own identity in their religion Islam, which is seen as a complete way of life. Although the governments the Muslim countries are for the most part despotic , undemocratic regimes, they have had to pay at least lip services to the Muslim sentiments of their peoples, awakened by a return to their religious roots through the work of political, social, educational and welfare organizations which spearheads the Islamic movements in the various Muslims countries. In certain cases, these movements have partially succeeded politically in creating Islamic states (eg. Sudan, Afghanistan, Iran) or at least influenced socio-economic policy creating educational (Islamic Universities) and economic institutions such as Islamic financial and commercial corporations in the process (eg. Islamic banks Malaysia, Brunei, Jordan , Dubai, Egypt etc.). In addition, government departments in charge of collection of religious taxes and administration of religious endowments and Non-Governmental Organizations such as Islamic Charities have been set up to operate according to Islamic principles. These islamic organizations and enterprises, however, are for the most part using conventional accounting without much changes, although there have been developments in the establishment of islamic banking standards. This paper argues that such blind acceptance and adoption of conventional accounting would lead to socio-economic behaviour inconsistent with the specific Islamic objectives, the attainment of which these institutions were set up in the first place. Hence a need for Islamic accounting which should be derived from the philosophy and world view and values of Islam itself, although this does not mean , the wisdom of the West in accounting cannot be incorporated.

The paper proceeds a follows; in the next section, I define and elaborate the ‘push’ and ‘pull’ factors which demonstrate the need for Islamic accounting both from a theoretical perspective and practical demand. Having thus argued for the need for Islamic accounting, in section 3, I review the literature on Islamic accounting and reveal the lack of both depth (in the understanding of the philosophical assumptions of conventional accounting) and breadth (in the coverage of accounting areas and industries). In section 4, I discuss research methodology in general and follow up this in section 5 with a discussion of usulul-fiqh (the principles of jurisprudence in Islamic law) which have been used to derive rulings from Islamic sources. I argue the use of this methodology to develop Islamic accounting. I conclude in section 6 with the possible contributions and difficulties of such research.

THE PUSH AND PULL FACTORS FOR ISLAMIC ACCOUNTING

The need for Islamic accounting can be categorised into ‘push’ and ‘pull’ factors. I define push factors as those philosophical norms and values which underlie conventional accounting. These values ‘pushes’ conventional accounting out of the equation in the Islamic space, as the information provided by the system are not value neutral but laden with values inconsistent with the Islamic way of life. Thus the information provided by a conventional accounting system will induce behaviour towards objectives which are not Islamic or at the very least dysfunctional in the sense they detract from achieving the Islamic objectives for which the Islamic institutions have been set up. The pull factors are magnetic factors that induce a demand for a different type of accounting in the practical world. It is true that Muslim societies are not fully Islamic. However, through the work of resurgent Islamist movements, a desire to work for a society based on Islamic values have been demonstrated by the Muslim demos. This desire has been translated into Islamic economic, social and political which have been set up with the specific objective of deviating from unIslamic behaviour eg. avoiding interest in economic transactions, and the attainment of Islamic objectives eg. co-ordinating the collection and distribution of religious tax (Zakat) to achieve social welfare and solidarity between different segments of society. Further there is an educational endeavour in the ‘Islamization of Knowledge’ movement to Islamize knowledge according to Islamic epistemology. The advocates of this movement insist that current knowledge has been Westernized i.e infused with Western philosophical values both in the natural and social sciences. Islamic societies in their effort to bring about an Islamic ethos cannot adopt this Western epistemology as it is inimical and contradictory towards their world view and objectives. Hence knowledge should be recast into the Islamic mold. Attempts have been made in sociology, economics and history to ‘Islamize’ these disciplines (IIIT 1988). The output of this project in the accounting area could be termed ‘Islamic Accounting’ is an attempt in this direction. I shall now examine the push factors:

2.1 The limitations of conventional accounting- a western critique

Although conventional accounting seeks to dominate global accountancy , not everything is well with the invader. Conventional accounting has increasingly come under attack in its home ground because of it adopting a narrow marginalist, utilitarian economic principles (Lehman 1992) and the assumption of a pristine liberal economic democracy as the basis of society (Gray et al 1996).

The objective of conventional accounting has been defined by the AAA (1966, 1977) to be the provision of useful information to permit informed decisions. This ‘decision usefulness’ framework has been consequently adopted and reified by later conceptual frameworks promulgated by Anglo-American Accountancy research and regulatory bodies (eg. Corporate Report 1975, The FASB (1978-85), IASC (19 ) and ASB 1993?). The FASB , in its statement of financial accounting concepts 1- The objective of financial statements,, has clarified that this information needed is the amount, timing and certainty of cash flows, the decisions to be made are rational investment, credit and similar business and economic decisions. Hence accounting is said to provide information which makes the market efficient by enabling market participants make effective economic decisions leading to the efficient allocation of resources , which in turn leads to economic growth and social welfare (AAA 1975). The tenuous link between useful information and social welfare has been trenchantly criticized by Gray et al (1996) and Laughlin and Puxty (1981).

Thus:

Conventional accounting (and accountants ) has also been responsible for the destruction of the environment and the promotion of consumer culture of financial greed which has led to the inequitable state of world affairs where 20% of the world’s population consumes 80% of its resources (eg. Tinker 1985). This has been brought about by its continuing resistance to account for what is termed ‘externalities’ which has social costs, not accounted for by the organization but borne by outsiders. Accounting has been said to be at least partly responsible for both the world’s bad news (i.e. widespread poverty, environmental degradation, inequitable distribution of income and wealth etc.) and the good news (high standard of living in the West and newly industrialised countries, longer life span, globalisation and developments in computer and communications technology). Hence, Gray et al (1991, 1996) opines that conventional accounting based on the decision-usefulness , functionalist paradigm is partly responsible for creating this social reality and continues to motivate behaviour in the direction of self-destruction. He therefore concludes that there is a "need to replace the user needs approach with the more fundamental concept of accountability" (Gray et al 1996 p ?).

Conventional accounting also creates its own reality and hyper-reality (Hines 1988) in that what is accounted for and the terms it creates assumes importance and significance which may not be in the interests of society. For example, the use of budgets can lead to an ‘individualizing’ form of accountablity that creates tensions and conflicts within organizations (Roberts 1991).

Far worse is the ‘capture’ of conventional accounting research into a positivist, functionalist paradigm which ensures its dominance and propogation in the mainstream accounting literature (Lee 1997). This leads to the implicit acceptance of the maxim social welfare can be enhanced by increasing economic growth and wealth creation through the efficient allocation of resources by the market mechanism as ‘revealed truth’ by mainstream researchers and the accounting profession. Critical and Marxist perpectives on accounting criticizes conventional accounting eg. Tinker (1985), Lehman (1993) for contributing to wealth appropriation and conflicts between various classes in society. There has also been calls for studying the complex interaction of accounting, organization and society rather than as a technical discipline devoid of the sociological perspectives (Burchell et al 1980). However, the society and organization has with the exception of some literature concerning culture and accounting eg. Perera (19 ) meant Western society and Western corporations. As Chua (1986) has indicated, the methodology , methods and conclusions arrived at in research depend the on the ontology and epistemological assumptions of the researcher and society. Tinker et al (198 ) has indicated that even positive theory is embedded in normative origins. Thus the relationship of accounting and society , already dynamic in a society with certain fundamental values such as ‘Western’ society would be more complex and richer if different societies with different ontologies and epistemological views are incorporated. Further even if it were possible to study the dynamics of accountancy, organization and society within one societal paradigm, the conclusions and result if applied to other societies may lead to dysfunctional and possibly disastrous results due to the inappropriate technology (Hove 1986?)

The epistemological problems of mainstream accounting research has been critcized in various studies. Conventional accounting and its research is said to be have been ‘captured’ by the positivist, ‘scientific’ reductionist view of human existence as a purely economic phenomenon devoid of social , political , spiritual and environmental considerations. The has resulted in a call for exploring and researching alternative insights of accounting (Chua1986, Tomkins & Groves 1983) . These alternative perspectives take into account both the theory of social science and structure of society ,giving various alternative paradigms such as the functionalist, critical, interpretative, radical humanist and structuralist (Burrel and Morgan 1979, Hopper & Powell 1985). In these paradigms the relationships between man and their interrelationships with one another and the internal and external environment (i.e. political, social, ecological, spiritual) is taken into ‘account’ in accounting research and practice.

Another dimension to the critique of accounting arises form the problems of contolling the unsocial behaviour of powerful corporations whose activitieshave global social and environmental consequences not measured and disclosed by the accounting system. This has resulted in the call for and the increasing practice, of socially responsible accounting and social and environmental disclosures in the reports of corporations under an ‘accountability’ rather than decision usefulness framework ( e.g. Gray et al 1988, 1991,1996, )

In spite of differences in values (which will be discussed briefly in the next section?, the above critiques raises common concerns to Islamic society. Wealth appropriation , social and environmental exploitation is totally unacceptable from the perspective of Islamic justice as in the Western systems. In additions there are particular behaviour which is prohibited by Islamic law in its concern to mould its adherents according to its world-view. The wrong accounting may provide the wrong information which drive wrong behaviour.

Despite all these criticisms , conventional accounting is presented both to the Western and Muslim worlds as a neutral , objective system of information provision through the efforts of Western especially UK Professional accountancy bodies (ACCA, CIMA, ICA), the activities of multi-nationals and their international audit firms. With the cohort help of Western global financial institutions such as the World Bank and IMF, they have persuaded Muslim countries such as Malaysia and Egypt to open up their economies to the West and by entrapping them with so called developmental loans, held their economies hostage to their ‘structural adjustment programs’. While in a Muslim state, there must be a major role of a non-commerical, socially oriented public sector (El-Ashker 1987) the globalization has meant privatisation of publicly owned assets and companies and increasing role of the capital market. Thus economy has become or becoming the main thrust of these Muslim societies which has other prior spiritual and social values as their objectives. Accounting has been a major contributor to the acceptance process.

2.2 The philosophical values underlying conventional accounting

Although most criticisms levelled against conventional accounting, is of recent origins, the accounting principles debate has been going on since early this century. Conventional accounting in its current structure, follows what are known as Generally Accepted Accounting Principles or fundamental accounting concepts. This include, Historical Cost, Conservatism, Accrual and Matching, Substance over Form, Going Concern, Monetary Measurement, Materiality and Consistency. These principles were defined and elaborated from the beginning of this century. However, the origin of these principles reflect the historical development of Western Civilization. I shall discuss this in a comparative perspective with the values of the Islamic worldview.

Modern Western Society is the outgrowth of Judeo-Christian traditions with inputs from the Greek and Roman civilizations along with Islamic influence in the sciences (Russell 1992). This civilization is based on certain world view and historical developments of the West amongsts which are: Sovereingty, Democracy, Liberalism, Individualism and Libertaniasm, Social Contract, Materialism, Secularism, Rationalism and Scepticism.

Sovereignty implies the capacity and authority to make laws for individuals and society. From Greek roots, this has been rested with the will of the people (democracy) exercised either directly as in Athens (even though restricted to certain groups of the populace or through representatives in modern representational democracy or vesting this right with a despotic monarch who was considered above the law (monarchy). The resulting consequences are the only man can decide what is good for him and his fellow creation and this right is absolute. The West obtained its idea of rule of law from the Romans and Judaism. Whereas the Judaism was legalistic and ritualised, Pauline Christianity loosened the bonds of religious law and filled in place the ideas of grace and love. Although the Catholicism attempted to impose the Will of the Church on Europe, the inherent dichotomy between the sacred and the profane , which became a creed of the Church always relegated worldly affairs to the state , although the link was tenuous. The Renaissance and the discovery of the new world led to the gradual detachment of moral values from the state and knowledge and after the Reformation, religion became individualistic rather than the functional society advocated by Catholicism (Tawney 1927), in part due to the irrational interpretations of the Church which could not be defended after the discovery of science. The primacy of God and the Church was replaced by ideas of Social Contract (Rousseau, John Locke) and Liberty (J.S.Mill). On the economic front, the taboos of the Church regarding avarice, interest, trade and a general hostility towards wealth were discarded in favour of wealth accumulation as a sign of election by God. This capitalist spirit of wealth accumulation is said to have developed because of Protestant Ethic by Weber (1992). Protestantism led by Calvin also legalized interest. The works of Adam Smith loosened the forces of individualism in the form of market forces and self-interest. Although Adam Smith had a moral context, capitalism flew out of the spritiual cage (Tawney 1927) and became amoral. The works of Karl Marx and his historical materialism led to atheistic materialism and the subsequent elevation of economic forces and factors of production as the determinant of social systems and not as mere component of it. The subsequent growth of trade aided by the formation of limited liability corporations and stock markets enabled the mobilization and concentration of vast amounts of capital. These factors gave rise to the birth of managerial and investor capitalism (Bryer 1993) , Chandler 1977) , which in turn led to the development of modern accounting and financial reporting practices based on stewardsship and later on decision usefulness. The development of modern accounting enabled the control of geographically and culturally dispersed units of business led to the growth of multinational corporations more powerful than nations and the globalisation of capital markets.

We can summarize the results of the historical develepment of Western Civilization to compare it with the Islamic perspective:

1) The laws and values by which human society is to live is best made by men or a group of them. The idea of religion is relegated to the private affairs of individuals if they so choose to believe in it but religion do not form the basis of politics, economics or society in the public arenas except in so far as they are assimilated into the legal structure by powerful political groups and lobbying. Secularism by which the state is supposedly religiously neutral between various competing religions is advocated as the basis of political life.

2) Economic issues i.e wealth measure by material benefit and money is the primary object of life. A better standard of living is equated with more money and material wealth. Economic problems have become worthy news items and have become the most important issue in private and public life.

3). The individual is sacred and comes prior to society. Hence the beliefs of individuals have protection even if the larger part of society sees their actions as detrimental to the larger interest of society, thus the promotion and acceptance of homosexualism, the encouragement of females to compete with their male counterparts in the rat race, humanitarian and compassionate treatment of animals and criminals (call for the abolishing the death penalty) and the call for environmental protection and human population control.

4. In the economic area, the market is supreme arbiter of resource allocation via its pricing mechanism. Calls for a laissez faire approach of non-intervention by government, the privatization of public resources in the name of efficiency and the pursuit of profit as the ultimate economic and moral goal of businesses even to the extent of discarding social responsibility (eg. Friedman 1962) . The emphasis is the creation of wealth and its accumulation without consideration to the problems of its equitable distribution.

5. The rise of rationality and empricism as the only basis to base knowledge and truth claims and the stress of positivism in the pursuit of what is, rather than delving on questions of what should be. Revelation and religion has no place is the recognition of knowledge and learning. On the contrary, the empricism and positivism of natural sciences is applied to social sciences as if human nature follows certain physical laws of phenomena.

The above ideas have been embedded into accounting practice which has been pressed into service for the attainment of a materially beneficial life (at least to some sections of society). For example, the cost and conservatism concept according to MacNeal (1939) had developed from the requirements of interest based bankers who is interested to see not whether a proposed venture is profitable , but whether he gets repaid his capital and interest. Thus the need to be conservative in the valuation of assets by using historical cost but anticipating all liabilities as in the conservatism concept. The legalization of interest led to growth of interest based credit and the development of fixed interest bonds, preference shares and modern financing techniques based on interest and aleatory and contingent contracts. The insistence of monetary and material welfare led to the importance of money measurement concepts , share values and options market. Although large corporations create many social problems which are borne by society, these problems are not accounted for the in the accounts of the entity on the basis that they are externalities and not subject to accurate and objective measurement. Further the institutionalization of greed in making money quickly instead of labouring after investments has led to the sanctity of modern financial markets involved in options, futures and artificial share values. The ‘shareholder value’ phenomenon has created the need for creative accountants and accounting resulting in a mania of takeovers and mergers of questionable value. Despite the claimed public interest and ethical responsibility of the accounting profession, accounting has not been able to prevent wealth misappropriation between different classes in society by fraudulent practices of the managerial class and environmental and social problems caused by incomplete accounting and cost-reduction, downsizing philosophies. Despite the proliferation of accounting standards, the flexibility allowed in accounting practices continue to encourage creative accounting practices which misinform and mislead the public who rely on accounting information in controlling their organizations.

2.3 Islamic values and the dysfunctions of conventional accounting in an Islamic society

Although Islam today is not a major military force today, its political, social and spiritual insights influences the culture of a large part of humanity. It is a civilization with which the West has to contend with (Economist 1998). This civilization has certain fundamental values which the resurgence of Islam among Muslim societies try to incalculate. Among these are:

Allah or God, the creator and benefactor of mankind, has absolute sovereignity to make laws for his creation. He has given his Will and Laws in the Scriptures through the Messengers and Prophets throughout the ages, culminating in the final messenger, Muhammad (Pbuh). The final Scripture, the Qur’an and the sayings and actions of the Prophet ( the Sunnah constituting the practical application of and a commentary to the Qur’an, contains the principles and code of life which humans have to follow until the day of judgement when all human beings have to render accounts of their actions before his Lord. Man has been vicegrancy, a sort of trusteeship of the earth and the natural environment, which have been created for his benefit on which he has to exercise his benign authority without being cruel and unjust to other sentient beings of God’s creation. The pleasure of God in following his Will and not material welfare is the aim and purpose of this life which is a test and a means of making provisions for the life hereafter. Economics thus has to take a secondary place in the scheme of life and cannot become the preoccupation of mankind. This does not mean mankind depends on God alone for his sustenance but has to strive for it. He has to follows certain laws of Haram and Halal (allowed and forbidden) in all his actions including the economic. Among the most important ones are the prohibition of interest, the payment of a portion of one’s wealth (Zakat) to the poor and the fulfillment of contracts and complete disclosure of relevant information to parties to any economic or social contract. Thus banking cannot be undertaken on the basis of interest. There is a need for current valuation of business assets so that there is no misappropriation of wealth from the poor to the rich and there is circulation of wealth. Gambling and aleatory contracts are forbidden as those involved in alcohol, drugs, pornography and swine. There must be just payment of wages and kind treatment of employees and the environment. Pareto optimality may have to be sacrificed in the interests of society. The the locus of attention is away from the laissaize fare economy of Western society. Thus the ‘decision-useful’ accounting concerned with certainty , timing and amount of cashflows cannot be the objective of accounting in an Islamic society. Such a society can be more adventurous in its accounting by not restricting itself to the monetary measurement and going concern conventions, historical values and conservatism concepts. A richer variety of both quantitative and qualitative information need to be disclosed with the objective of providing information so that Islamic organizations can be redirected where necessary to achieve the objectives and values of Islamic societies rather than information which motivates and activates behaviour inconsistent with Islamic norms.

2.4 The Islamization of knowledge

In addition to the call to implement Islam in the political, legal, cultural, economic and social, educational and scientific, spheres of life to achieve socio-economic justice and equity which is the objective of Islamic teachings (Chapra 1992). In addition there is a movement towards Islamization of knowledge and disciplines (IIIT 1988), which basically is an attempt to ‘critically reexamine secular ‘Western’ knowledge and recasting them with the values, norms and assumptions of Islam’ (Abu Sulayman 1989a).

This movement asserts that there is a ‘crisis in the Muslim mind’ (Abu Sulayman 1989b) which has caused the stagnation of knowledge and progress of the Muslim world and the way to correct the problem is to reinterpret conventional western secular knowledge into the Islamic mold and to reintegrate human knowledge derived from the senses and reason, with revelation-the knowledge given by God through scriptures and the prophets, in other words- a whole new epistemology different from current thinking.

It is argued that the current state of knowledge, spearheaded by the West produces dichotomy between Islamic belief and action and a loss of identity (IIIT 1988) The knowledge (and accounting) constructs its own hyperreality which induces Muslims to behave in a way inconsistent to their ethical precepts of their religion. Islamizing knowledge is also seen as a ‘first step to integrate and develop the Muslim personality and Outlook by

This is to overcome the legacy of Western epistemology that alienated the Muslims’ thinking from their religion and forced them to lead a double life in their personal and societal roles. With the Islamization of knowledge, Muslim scholars hope to go back to their divine sources to extract principles which together with the aid of reason and empirical positive facts of current circumstances and place , develop new and relevant knowledge and laws in order for Islamic society to achieve its objectives. However before they do this the current disciplines need to be deconstructed before they are reconstructed on the edifice of Islam.

Islamic economics- the offspring of Islamic resurgence in the economic sphere , although it has a long way to go, is increasingly being recognised as a subject worthy of consideration especially as demonstrated by the vitality of Islamic banking and finance and its teaching even in western universities. Basically, Islamic economics changes the reductionist assumptions of conventional economics, eg. rational economic man, maximimizing to that of the Islamic man who is supposed to have a moral filter when making production, investment and consumption decisions and dual world-view (consequences in the hereafter) as a self-policing mechanism rather than just the market mechanism in regulating his economic behaviour (Chapra 1992).

The Islamic economics movement has implemented its theoretical percepts in various Muslim and non-Muslim countries in the form of Islamic banks, Takaful (insurance companies ) and setting up other economic institutions such as Zakat collection centres and relief organizations. However, their success is not complete because in many cases the changes have been cosmetic in changing the technical terms of contract rather than an underlying change in the reality i.e the philosophy of life. Accounting has played a part in perpetuating the same reality by privileging profits and capital in its financial statements. There is a need to Islamize accounting in order to redirect the emphasis from wealth accumulation to equitable distribution and to disclose information which will enable stakeholders and the Muslim public and governmental authorities to ensure the Islamic institutions set up are achieving their Islamic objective of achieving social solidarity and socio-economic justice among the various sections of Muslim society.

2.4 The pull factors of Islamic Accounting;

2.4.1 The establishment of Islamic Institutions

The establishment of Islamic banks, insurance (takaful) companies, finance companies, relief organisations and even conventional companies headed by Muslims is the practical offshoot of Islamic economics. These organizations have been established in both Muslim and non-Muslim countries and in economic environments which have been islamicized (Pakistan) or operating in parallel to their Western counterparts (e.g Malaysia). The realization that their differenting operating and normative environments require different types of information for their control and effectivity to achieve their specific Islamic objectives, has resulted in the calls for an ‘Islamic accounting’ to meet their information of the Muslim societies in which they operate (Ali, 1997, Khan 1994). These organizations because of their different setup and goals have an interest to make their accounts more Islamic.

Islamic banks operate on an interest-free, profit sharing basis. This is the very anti-thesis of conventional banking whose many accounting procedures is based on the calculation of interest. Islamic banking should based on the equity-participation model which does not have the certainty of a pre-determined rate of return (except in a few of the financial instruments such as murabaha, which is frowned upon as techniques which opens the back-door to interest). This increases uncertainty and makes accounting for Islamic banks more complex in the areas of recognition and distribution of income, preserving equity between the deposit holders , the bank and ‘borrowers/investees’ and assessment of zakat (an Islamic religious tithe) . In a world where even the Muslims do not behave islamically where money is concerned, the monitoring and accounting of ‘equity credit contracts is very difficult and uncertain due to moral hazard and agency problems (Obiyathullah 1995). This calls for an independent Islamic auditing function as well as an independent sharia board.

Many writers have recognised that Islamic banks are not living to the spirit of Islamic teachings and therefore not making a push towards the just socio-economic systems intended in their creation (Ziauddin 1991, Zakariya 1991). This detraction is both in the financing operations as well as intra-organisational behaviour and in the discharge of their accountability to society. (Abdelgader 1990).There is an alarming complacency in Islamic banks in their lack of innovation and move towards the equity-based financing (which is the corner stone of Islamic banking) and their concentrating on credit-based financing.

Although this may be due in part to the entrenchment of conventional bankers and their educational background i.e. the capture of the process by ‘capital’, there is a real economic and social reason for not doing so i.e. the agency and moral hazard problems. To a certain extent, accounting and perhaps management auditing can help to reduce these uncertainties.

There is also the problem of inadequate disclosure in the annual reports of Islamic banks. Segmental information on the type of financing is not disclosed. I believe this information is vital to Muslim society in controlling the working of Islamic banks and its management to ensure that banks work towards the goals of an Islamic economy.

It has also been recognised that to be entitled to the label Islamic , Islamic banks must not only operate according to interest-free principles but also aim towards socio-economic justice (Ziauddin 1991)

This includes

1)prioritising finance to uplift disadvantaged sections of society,

2)prevent the financing of immoral and wasteful consumption

3) Intra organisational action i.e. a just employer-employee relationship, a good and safe working environment, fair promotion practices, a caring culture i.e. demotion of the profit motive in favour of solidarity and co-operation and caring. e.g. towards employment.

4) discharge of societal and environmental responsibilities. e.g. involvement in medium and low cost housing, environmental consciousness of its own and in the approval of financing facilities of industry, support of community and collection and payment of zakat, interest-free loans. etc.

5) Information flow to external parties on these accountabilities.

Although, standards have been instituted for Islamic banks by the Accounting and Auditing Organizations for Islamic Banks and Financial Institutions based in Bahrain, they are based on mainly decision-usefulness criteria although the socio-economic objectives are mentioned but and there is not much evidence of its adoption by Islamic banks due to the lack of an enforcing mechanism.

Besides Islamic banks, other Islamic business and governmental organizations have been set up which requires Islamic accounting. El-Ashker (1987) has done several case studies of commercial and industrial Islamic businesses in Egypt.

In the case of Governmental institutions, Zakat collections institutions have been set up in Malaysia. The PPZ is a commericialized organization set up in Malaysia to organize the collection of Zakat in the Federal Territory. The centre employs modern methods of collection including publicity, computer information systems and campaigns to efficiently collect Zakat in Kuala Lumpur. However, its accounts disclosure is dismal. The level of advice for Zakat payers is minimal and unsophisticated. It does not have the professional capacity of the inland revenue department assessors. Neither does it classify properly the source of Zakat. Its accounts show very poor disclosure practices. Further the distribution aspect of Zakat is handled by the Religious Dept and not by the Centre. Although the caution is understandable, the separation of collection and distribution authority results in lack of information disclosure which is problmatic from the public control point of view. Both payers and beneficiaries are unaware of how the collection proceeds is distributed. The Religious dept do not prepare public accounts but reports to Parliament as part of the governmental reporting process.

It can thus be seen that there is a real need to research in the area of Islamic accounting due to the push factor i.e the inapproriateness of conventional accounting with its (western) culturally defined techniques and institutions and the pull factor, i.e the establishment of Islamic financial and commerical organizations

2.4.2 The Information needs of Islamic institutional stakeholders

THE STATE OF THE ART- CURRENT ISLAMIC ACCOUNTING RESEARCH

�Early papers on Islamic accounting concentrated on the accounting problems of Islamic banks and dealt mostly on the applicability of conventional accounting principles to Islamic institutions AbdelGader (1994), Baydoun and Willet (1994). Gambling and Karim (1991), on the accounting implications of Islamic banks(Abdel Magid (1981), the need for their own accounting standards (Karim 1990) and on accounting techniques Islamic financing and profit sharing in Islamic banks. (AbdelGader 1990), Fekrat, MA (1985),), , Gambling et al (1993), Most of these papers , although recognizing the need for alternative accounting principles simply reconciled the conventional accounting principles to be in line with Islamic accounting thus:

A survey of this group of papers in Islamic accounting is presented by Adnan and Gaffikin (1997) who observe that:

Islamic accounting is not yet an established accounting sub-discipline but it is well on its way. The literature, as in any new or novel research area is dissipated and of poor quality , and focused mostly on Islamic banks. However this is slowly being rectified, thanks to the efforts of Dr. Omar Zaid ( a senior lecturer at the Univerisity of Western Sydney) who has started a series of conferences on the "Islamic perspective on Accounting, Finance and Commerce starting with the first international conference in Sydney in 1997. The second conference was held in 1998 in Jordan.

Another pioneer in Islamic Accounting is Prof. Kamal Atiya from Ummul Qura University in Makkah, Saudi Arabia. His two books on islamic accounting and company and bank accounting accounting to the islamic system published in 1984 in Arabic has been translated into Malay (Atiya 1992). This book discusses the concept of property in Islam, types of companies under Islamic law, accounting for capital in Islam , calculation and distribution of profits and company zakat adminsitration. The quality of the translation is very poor and the depth of the earlier subject is not very scholarly and not upto modern standards. However, it does start the thinking process on Islamic accounting.

One consistent writer on the Islamic accounting scene is Rifaat Abdel Karim, who probably has the most number of published articles on the subjects. Dr. Karim has a steady stream of articles since completing his Ph D at the University of Brimingham in the early 1980’s. Together with Prof. T.Gambling he has written, what is perhaps the most comprehensive work on the subject in the book titled "Business and Accounting Ethics in Islam" in 1986 which goes someway to examine and compare western and Islamic ethics and philosophy and their accounting implications. After this book, Dr. Karim has published several articles, (Karim 1990,1995),( Karim and Gambling 1986, 1993) and (Karim et al 1993) which touches on various aspects of Islamic accounting, including conceptual framework for Financial Reporting for Islamic Banks.., standard setting for Islamic banks, Islam and Social Accounting (which unfortunately is not a proper academic study of relationships between social accounting and Islam). Dr. Karim is also responsible for setting Accounting standards for Islamic banks which are by themselves a great advance in the theory and practice of Islamic accounting.

One of the best papers on Islamic accounting is by Muhammad Akram Khan (Khan 1994 ) titled "Accounting issues and concepts for Islamic banks" .This is quite a long paper discussing the relationships of accounting and society, accounting information needs of an Islamic society, Accounting issues in an Islamic framework, limited liability, valuation issues etc. This is an excellent primer as Khan has elaborated the most important issues of Islamic accounting, not only those relevant for banks. It provides an agenda for further research in specific areas of Islamic accounting. There are a few other papers in the same book but specifically dealing with accounting and auditing of Islamic banks.

Other writings in Islamic accounting includes , Accounting history (Zaid 1997, Hamid et al ,1995), harmonisation of international accounting standards (Hamid et al , 1993) and Islamic corporate Reports ( Baydoun and Willet (1997). Abdelgader (1990)’s Ph D thesis focuses the problem of recognition and allocation of profits among stakeholders in Islamic Banks. Tomkins and Karim (1987) is a good article on the implications of the Shariah for Islamic financial analysis techniques eg. discounted cash flow techniques, cost of capital and interest. Obiyathulla (1995) is a seminal paper on the agency problems of mudharaba financing as compared to conventional financing.

One of the best papers written in a high-level language of western sophistication is by Gaffikin & Triyuwono (1996) which discusses the ethical construction of accounting knowledge through the interaction of society, human nature and ethics. This is a philosophical/sociological paper presented at the Critical perspectives on Accounting seminar in 1996 and holds out the standard , depth and language to be attained if islamic accounting is to attain the standard of a respectable accounting discipline equal if not better than western academic accounting.

The only article which does a document analysis of the Quran and referring to it to extract principles concerning the qualitative and quantitative characteristics of accounting information is the paper by Askary and Clarke (1997). This type of research which this paper discusses below should be extended to cover hadis literature as well as fiqh rulings in order for Muslims to develop a really Islamic accounting based on the Quran and Sunnah.

We can conclude that there is a clear absence of empirical based research in Islamic Accounting, a lack of reference to original Islamic sources and a tendency to look at Islamic accounting through the spectacles of western concepts and institutions. The standard of the articles are not up to the mark, although this is being rectified Alhamdulillallah and there is too much focus on Islamic banking. One hopes to seem more articles on Auditing, Management Accounting and Zakah/taxation. The next five years should see the literature in this area increase in both quality and quantity with more respected journals accepting articles in this area.

Questions needing answers

Islamic accounting , however needs to answer some basic questions before it can proceed to more broader and detailed areas and rules. Some of these questions are:

What characteristics of conventional accounting defies the objectives of Islamic organizations?

Does the adoption of conventional accounting principles hinder the objective of Islamic organizations both internally and externally?

Is there such a thing as Islamic accounting?

Can accounting be derived from the sources of the sharia?

What are the characteristics and objectives of Islamic accounting?

framework

Objectives

recognition and measurement/ valuation issues

disclosures required

accounting statements

Are Islamic banks/financial institutions and other organizatons using Islamic accounting?

What lessons and principles and indications can be derived from the Qur’an and Sunnah.

Is interest-free financing as practised by the Islamic banks , "Islamic financing"?

How can equity based financing be improved?

Should accountability , stewardship or decision usefulness be the framework on which to base Islamic accounting?

To what extent can Islamic accounting use the lessons from and the practices of corporate social and environmental accounting?

METHODOLOGY OF ISLAMIC ACCOUNTING RESEARCH

Islamic accounting research presents unique problems of ontology, epistemology and methodology as it has to be defended in the western dominated globalised world where the ‘belief’ (see Chua , 1986 p604) system regarding the nature and sources of knowledge and the way knowledge is acquired is quite different from those of the Islamic civilisation. In the West , both rationalism and empiricism rejects revelation as a source of knowledge. Epistemology, i.e. what is to count as acceptable truth, in the West is based on the philosophy of science, empiricism and Poppers falsification theory which states that a theory which is not capable of being rejected is not tenable. Hence revelation is not knowledge because it cannot be verified either as true or false.

There are variations in western thought on ontology i.e. whether there is an objective reality or truth out there. For examples, nominalist/idealist theorists such as Bishop Berkeley held that there is no objective reality in the absence of a perceiving mind and that apparently solid ‘things’ like chairs in a empty room appears to have permanence because of God’s perceiving mind. Realists on the other hand view that there is a mind-independent reality which impacts upon senses and forms perceptions (Ryan et al 1992 p 7). This has given rise different epistemologies and methodologies.

A realist ontology would lead to a positive epistemology which would only recognise a theory as true if it is repeatedly not falsified by empirical events. This would in turn dictate, the methodology i.e. the methods that would yield evidence which would be considered valid. In mainstream accounting, the realist/positive/nomothethic chain operates. However, this has been increasingly criticised as inappropriate for the social sciences such as accounting (Chua 1986, Tomkins & Groves (1983, Hopper and Powell (1985)). Other paradigms have been sought which is based on idealist/anti-positive /ideographic chain.

However, both these strains of western epistemology/methodology , although different in terms of the degree of stress in empirical data and the process of gathering evidence , have platonic rationalism as a base and share a common disregard and rejection of revelation.

In Islam, revelation in the form of the Qur’an as the final word of God upto the day of Judgement and its interpretation and exemplification in the life of the final messenger of God, Muhammad (peace be upon him) as recorded in the hadees (Sunnah) , forms the basis of knowledge. Although western scholarship recognises (although it does not accept it as ultimate) divine command as one of the sources of ethical theories (see appendix to Honderic 1995) it does not recognise religion in the political, economic, educational, legal and social life of man because of the secularising influence of enlightenment and modernism. (This is inspite of the present historical legacy of Christian ethic-based legislation in western countries). In Islam , the political, social, economic, legal . educational and other aspects of life will have to conform to religion based on the Qura’n and Hadees (the sayings, action and approval of Prophet Muhammad peace be upon him).

Turning to these two sources of the religion, one may be somewhat disappointed to find that they do not contain an economic or accounting manual for reference . However, the purpose of the Qur’an is to provide principles and the Hadees examples of applications of these principles , and not detailed rules for every possible event. This is to allow for changes in the conditions and requirements of various societies and various times. This however does not translate into a relativist or nihilistic philosophy as the derivation of contemporary rules must conform to the spirit if not the letter of the two sources. In the expansion and extension of human (as opposed to God’s) knowledge, the Qur’an extols man to study his environment , think and reflect upon creation and the teachings of the Qur’an itself (Al Qur’an 3:190-191). Reason is seen as the special gift of God to be used. Islamic theology is simple and is not illogical although some of its precepts may be disagreeable to some. However in matters where sensory perception cannot be used to gain evidence e.g. the nature of the Divine essence, hereafter, angels , death , soul etc. Muslims will have to stick to the Book because these are imperatives of God and not understandable by reason as there is no reference point in this worldly life, although parables are given in natural environment and the social and biological life of the human and animal kingdom for humans to reflect upon.

Thus reason and sense perception both have a place in the acquisition of knowledge in Islam. The physical world is real but temporal and God and the hereafter is the ultimate reality and this certain knowledge is only available after death. Islamic epistemology is based on the interaction of revelation and reason informed by observation. Ethics for example is mainly deontological (but not absolutist), however , teleological reasons can be studied and attributed to it and in certain cases , where the teleological reasons apparent in the Qur’an or Hadees would not be achieved, then the law can be suspended or the ‘derived law ‘ can be changed. For example, although lying is deontologically unethical in Islam, one can hide the truth or white lie to save another life. Here motivism comes into play where altruism can lead to a change in ethics in specific situations.

As far as social theory is concerned, the Qur’an is both deterministic and voluntaristic at the same time. All things happen within the will of God but society can change (or emancipate?) itself by its own efforts. "God will not change the conditions of a people until they change their own ‘selves’" (Al Qur’an, 13:11). Islam does not recognise the theory of social conflict between rich and poor although it recognises the destructiveness of wealth and power. It sees this conflict in the broader conflict between good and evil. Not all rich and powerful are corrupt although there is a strong association. It tries to regulate the tension in society due to inequalities in wealth, not by making everybody equal, but by enforcing an equitable transfer of wealth through zakah and preventing the excessive accumulation of wealth by prohibiting interest, hoarding, monopoly , limited liability and speculative and uncertain transactions.

The absence of limited liability corporation is apparent in its absence in Islamic business history, although not for profit corporations and partnerships, existed in Islamic society before colonisation. Islam promotes solidarity between labour and capital through profit/loss participation in the unique mudharaba contract which should be the basis of Islamic banking. In this contract, the owner of wealth entrusts capital to the mudharib, the entrepreneur /labourer who expends his effort. If the venture makes a profit, the ‘capitalist’ and the entrepreneur shares in it in a pre-determined ratio (of profits, not of capital). If the venture results in a loss, the ‘capitalist’ bears the whole financial loss (except in case of negligence by the labourer) and the entrepreneur/labourer loses his labour. This contract favours labour not capital and has led to severe problems in modern practice due to deteriorated moral standards of labour. Hence accounting and auditing assumes an important monitoring role in enhancing solidarity and accountability and preventing disputes .

There are very few rigid rules in the Qur’an especially in the secular temporal area of human activity. Most of the teachings are principles. New rules are not legislated, but derived from the principles and indications in the Qur’an and the Hadees of the Prophet by analogical deduction, consensus, personal reasoning and judgement (ijtihad), local customs, consideration of public welfare and the principle of equity (istihsan) and ‘blocking the means to evil’. Muslim scholars have evolved the art and science of deriving detailed rules from these two Islamic sources of law into an academic discipline known as ‘Usulul Fiqh’ often translated as "the principles of islamic Jurisprudence"

( see Kamali 1989).

As far as economics and accounting is concerned, the few rigid rules are:

I) both the giving and taking interest and usury (both personal and commercial is not allowed.

ii) gambling, alcohol and other activities considered by Islam as immoral and anti-social (e.g. pornographic) activities are not allowed.

III) uncertain contracts prone to fraud e.g. conventional insurance, futures and short selling is not allowed.

iv) solidarity and co-operation and the avoidance of disputes are encouraged

iv) the giving of equal measure for measure (cheating or misleading by giving false information is disallowed). This implies full disclosure and fair measure or valuation.

v) wastefulness and ostentatious consumption is prohibited

Although the above rules are not contradictory to early Christian ethics (Gambling and Karim 1991), post enlightenment western society, having rejected religion, do not affirm the above ethical principles in their collective behaviour although they try to follow rationalistic/teleological ethics e.g. in enlightened self interest. In Muslim countries however, these values form part of the belief system of the majority of the Muslims, although due to institutional or educational factors, their practice is not ubiquitous. Thus economics in Islam is not value free economics of the ‘rational economic man’ but the value laden Islamic economics of the Muslim man.

Islam can accept the fact that accounting is a social construction (Hines 1988) and itself constructs social reality but this social reality which the accounting constructs must conform to the dictates of Islamic belief . Further the social construction of Islamic accounting must be informed by Islamic values in order for Islamic society to achieve its socio-economic objectives.

USING THE METHODOLOGY OF USULUL-FIQH TO DEVELOP THE DISCIPLINE OF ISLAMIC ACCOUNTING

The apparent problem with Islamic law is that it is based on eternal principles in the Qur’an and Sunnah and the interpretation of religious scholars over the past 1400 years. The Qur’an and Sunnah cannot be changed. They can only be reinterpreted within strict limits in line with the requirements of time and space. Unfortunately for the Muslim world, the process of development of Islamic law stagnated around 700 years ago and the colonization of the Muslim world leading to the separation of politics and from Islam further confounded this problem. Since the law of the land was separated from Islam, Muslim scholars became completely out of touch with the realities of modern society and state and many of the derived law for a bygone age became obsolete. After independence, not only was there an absence of law to meet the requirements of modern society, the colonial masters had moulded their successors in the developing world with their own philosophies and left them with their legacy of knowledge, institutions and civilization , divorced from their Islamic past . The Muslims not only had a problem of reinterpreting laws to meet their current needs,

As we have seen, most research and publication in Islamic accounting come in the form of accounting standards for Islamic banks (see AAOIFI 1997) or a discussion of conventional accounting principles vis a viz Islamic accounting principles. However this is putting the cart before the horse. A more theoretical research need to undertaken in the philosophy and principles of Islamic accounting and the difference between conventional and islamic accounting. The researcher should undertake a review of Islamic literature in Islamic economics, business law, Islamic jurisprudence , accounting and economic/social/political objectives of the Islamic sharia including relevant verses of the Qur’an and parts of Hadees to identify the nature and objectives of Islamic accounting both from the writing as well as a distillation of principles from the Qur’an and Hadees. In addition he needs to undertake a review of conventional accounting theory, its historical development and ‘geneology’ (Miller and Napier 1993), its development in the culture of western civlization, the link between the assumptions and recognition and values used in conventional accounting measurement and the philosophy of its host culture needs to be explored. An in depth study of the critique of conventional accounting to identify limitations, problems and prospects of conventional accounting from right wing, marxist, feminine and deep green perspectives and reformative ideas suggested in western accounting literature especially, accountability, transparency, solidarity, eco-justice, eco-efficiency and sustainability and extensions to accounting in social environmental accounting and human resources accounting can help to materialise ideas of islamic accounting when combined with Islamic sources.

After having sufficient insight to conventional accounting, its critique and limitations, and the objectives and ethos of Islamic society, one could derive Islamic accounting principles from the Quran and Hadees by a content analysis, although difficulties of translations will be a problem. Perhaps by studying information and accounting concepts, certain key words can be used to search the Qur’an and Sunnah, the help of an assistant with a knowledge of Arabic, Islam and Accounting would be a great help at this stage.

Having distilled these ideas and principes from the Quran and Hadees , the researcher needs to Islamic scholars, Muslim academics, professionals, Islamic bankers and insurers, students, community members Muslim and Non Muslim scholars to test consensus on the issues that Islamic accounting should address. Either a questionnairre or the delphi method to test consensus should be used at this stage.

Once a consensus has been arrived on the principles, then content analysis of annual reports of Islamic banks, insurance companies and charitable organisations can be undertaken together with a critical review of Islamic regulatory standards, to see the extent of compliance of these organisations with these principles. These studies should establish the financial reporting principles of Islamic organizations.

The research can then be extended to internal accountability in Islamic organizations to study the intra-organisational and inter-personal accountability relationships between depositor/ management /owners/’lenders’/employees, using case studies and interview personnel in Islamic organizations. This could shed some light on how Islamic accounting can lead to a more ‘socialising’ form of accountability (Roberts, 1990), devoid of conflicts and uncertainties.

A future aspect of the research could be on implications of Islamic accounting on International accounting harmonisation and education of Islamic accountants.

CONCLUSIONS: POSSIBLE CONTRIBUTIONS AND PROBLEMS

By following the methodology and methods suggested in this paper, researchers can hope to lay the ground work for Islamic accounting and then research can diverge into the various branches of accounting . This methodology of research would lead to the following contributions which will form the basis for a conceptual framework for Islamic Accounting.

A clarification of the principles of Islamic accounting, if there is a different accounting to be followed.

A more solid theoretical base on which to base such accounting on the principle of ‘Islamic accountability’ rather than decision-usefulness.

The trend of disclosures in Islamic organisations of non-financial matters i.e. discharge of accountability in non financial areas.

Informing the organisations and the public at large , what they should expect in the way of accountabilities of these organisations.

Whether there is a wide gap between theory and practice of Islamic accounting in the lack of disclosure and lack of transparency of Islamic banks and other institutions due to:

a lack of knowledge as well as the absence of broad agreement as to what constitutes Islamic accounting, and the pervasive influence of western conventional accounting concepts in Muslim countries.

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