FROM CONVENTIONAL ACCOUNTING TO ISLAMIC ACCOUNTING:�

Review of the Development Western Accounting Theory and Its Implications for and Differences in the Development of Islamic Accounting

TABLE OF CONTENTS

• Introduction���

• Definitions of accounting theory������

• The need for accounting theory�������

• The purposes of accounting theory:�

• History of Accounting and the development of Accounting Theory : a) The search for accounting principles�

  b) The Development of Institutional structures of Accounting������

• The search for objectives, principles and a conceptual framework���������

• c) Consideration of accounting as a social phenomenon�����

• Schools of conventional accounting�

  : classical- inductive and true income

• Decision usefulness��

• Information Economics���������

• Critique of the decision-usefulness school��

• The Images view of accounting��������

• A historical/ constructionist view of accounting theory.������

• Accounting theory and sociological paradigms:������

• Critique of conventional accounting and the notion of accountability��������

• Accountability�����������

• Critique of the Accountability model�����������

• Problems and Limitations of the Accountability model�������

• Ethics and Accountability�����

• Islam, the Sharia' and the need for Islamic accounting.���������

• Ontology and Epistemology of an Islamic Society.�

• The Sharia� (Islamic Law), its nature, sources, methodology and objectives��������

• Objectives of the Sharia�������

• The economic objectives of the Sharia�:

  Circulation of Wealth: Wealth should be circulated widely and not held or concentrated with a few; Attainment of solidarity and prevention of disputes��������

• The need for Islamic accounting

• The framework and objectives of Islamic accounting���������

• Implications for Islamic accounting theory and practice:���

• Conclusion�����

• References:������

Although the history of accounting stretches back to when the first organised society began, accounting theory development is mainly a child of the 20^th Century. Although the profession began in the UK in 1853 in Scotland, it is in the USA accounting theory development took place with the contribution of academics and the participation of the profession. I shall first start the essay with a discussion of various of definitions of accounting theory. I then state and discuss the need for and the purposes of accounting theory. This will then be followed by a chronological outline of the development of accounting and accounting theory with a discussion of the main factors which gave rise to its development . Next the various paradigms and schools of thought in conventional accounting are examined. Conventional accounting with its tendency to increase the power of capital and the narrowing of focus of accounting to the financial concerns of shareholders, managers and creditors i.e. the financing/capitalist classes is criticised. The accountability framework is discussed ad proposed as an alternate framework. The reasons why this framework would be the most likely to be the one adopted in any Islamic accounting are given. The philosophy, ontology and epistemology of the Islamic world view are given as a background to the need for of Islamic accounting. These are then discussed in the light of objectives of the Islamic sharia� on which Islamic accounting would have to be based. The objectives of Islamic accounting are then discussed with the implication for Islamic accounting concepts, principles and reporting practices. It is concluded that Islamic accounting is part of the evolution of accountancy to a more holistic approach which takes into account the socio/political/natural environments and as an attempt to liberate accounting from its incarceration in the utilitarian economic domain.

Hendriksen (1982) has given a useful dictionary definition of theory as representing:

the coherent set of hypothetical, conceptual and pragmatic principles forming the general frame of reference for a field of inquiry................( p 1)

He is however, more original in his elaboration of accounting theory as the

logical reasoning in the form of a set of broad principles that (1) provide a general frame of reference by which accounting practice can be evaluated and (2) guide the development of new practices and procedures. .......( p 1)

Most (1982) on the other hand, seems apparently to take a more positivistic position of Watts and Zimmerman (1986, p7) in his definition of theory as:

A systematic statement of the rules or principles which underlie or govern a set of phenomena i.e. a framework for the organisation of ideas, the explanation of phenomena and the prediction of future behaviour. Accounting theory is that branch of accounting which consists of the systematic statement of principles and methodology as distinct from practice...which it underlies, explains and attempts to predict. There cannot be any basic contradiction between theory and fact or between theory and practice.������� ( p 55).

His definition, however, just falls short of a functionalist one as he goes on to argue that, the view that theory must aid in prediction is a misconception and that not all theories do. "A theory above all is an explanation."

Belkaoui (1992) follows a positivist, functionalist view of the conceptual frameworks. He adopts Kerlinger (1964)�s view of theory as " a set of interrelated constructs (concepts), definitions and propositions that present a systematic view of phenomena by specifying relations among variables with the purpose of explaining and predicting phenomena.

All these definitions seem to view accounting as a science like the natural sciences, which �truth� is an objective reality that can be explained and interrelationships predicted. In other words, they flow from a realist ontology and a positivist epistemology. They emphasise what is, to the detriment of what ought to be (that is the normative theories of earlier years). This view of accounting as an objective reality is increasingly being questioned in the �alternative accounting� literature of the critical and political economy and radical schools of thought. (See for example, Tinker et al. (1982) , Cooper and Sherer (1984) Hopper and Powell (1985), Roberts and Scapens (1985),Chua (1986), Hines, (1986) and Arrington (1990),

Most (1982, p71) differentiates between accounting theory and theories of accounting. By the former he means the group of accounting theories or sub-theories such as EMH, GAAP, deductive theories of Chambers and Sterling and situational responses of practitioners. These accounting theories are said to be primarily quantitative in nature and attempt to answer the question �what kind of information should financial reports provide?' Theories of accounting, on the other hand , are at a higher level of abstraction and these theories attempt to explain the role that accounting can and does play in society, in economic development, in allocating economic resources and in resolving social conflict.

One of the hallmarks of a profession is the need for a body of knowledge or theory as a rationale for the existence of the profession. Accounting was (and in some circles still is) viewed as a technical discipline rather like plumbing. For accountants to aspire to be a profession in their search for social acceptance of their profession as equal to that of the medical, legal and engineering professions, the search for a theory was necessary. Mathews and Perera (1996) quote Greenwood (1957) as having concluded after a "careful canvas of the sociological literature on occupations" that one of the five common attributes of a profession is systematic theory. Thus:

At present, the element of 'superior skills' is no longer regarded as the major difference between a professional and a non-professional occupation. To be recognised as a profession, these skills must be supported by a body of theory, the mastery of which, is a prerequisite to the acquisition of these skills.

����������� (Mathews and Perera, 1996 , p291)

And that

the function of the theory is a groundwork for practice. It serves as a base in terms of which the professional rationalizes his operations in concrete situations������������������������������� Greenwood (1957, p6)

It is ironic, in view of the above that accounting theory is studied after all the skills are learnt in the final professional examinations or in the final years of study in a University. In some universities in Asia where the accounting curriculum is tightly coupled with the professional examinations, accounting theory is even optional or just mentioned in passing.

Another reason for the necessity of theory was , the profession was trying to ward of regulation of accounting (and status of the profession itself) by replacing self-regulation in the form of accounting standards. This started off in the form of Opinions of the Accounting Principles Board and Recommendations of the Institute of Chartered Accountants in the UK. However the standards were often inconsistent as there was no common theoretical base to them. The wide differences in accounting practices led to widespread criticism of the profession in the US and led to the formation of the Wheat and Trueblood Committees by the AICPA in 1971. The Wheat committee subsequently led to the formation of the FASB in whose organisation , the interests of the profession was protected by making sure that the professional accountants constituted the majority of the board. The Trueblood committee came out with 12 objectives of financial statements which was based on the decision-usefulness framework. These became the basis of the FASB�s conceptual framework

Another need for a theory would be the requirement for a �reservoir of reason� to base accounting standards , on which the profession could defend the choice of a particular accounting method as the standard against political and business lobbies which often resist (and win) accounting standards (Watts and Zimmerman, 1978). The profession can then claim to be fighting for the public interest. However to what extent theory can be relied on in protecting the public interest is not clear as the corporate business lobby exert a very powerful influence in not only in standard setting but in warding off environmental and social legislation which are against its interest. (Korten, 1995) bemoans this state of affairs thus:

Corporations have emerged as the dominant governance institutions on the planet, with the largest among them reaching into virtually every country in the world and exceeding most governments in size and power. Increasingly, it is the corporate interest more than the human interest that defines the policy agendas of states and international bodies, although the reality and its implication have gone largely unnoticed and unaddressed........................................................(Korten (1995), p 54)

The purpose or objective of accounting theory depends on what paradigmatic view one takes . A positive view of accounting theory states that the purpose of accounting theory is to explain and predict accounting practice as it is. This is the view of positivists such as Watts and Zimmerman (1978), Jensen and Meckling (1986) and Dopuch (1980) who criticise the value-ladenness and �unscientific� nature of normative theory. Accounting theory, in their view, should be used to describe a value-free , unbiased and neutral reality. Normative accounting theory would be prescriptive i.e. tells us what accounting ought to be or what accountants ought to do. This is the view of the normative -deductive writers such as Sweeney, MacNeal, Patton and Littleton and Alexandar whose main concern is that accounting should "record, collate and present economic truths" i.e. calculate true income.

Projectability and predictability has also been considered the main purpose of accounting theory. According to Belkaoui (1992), the purpose of accounting theory is to provide a basis for the prediction and explanation of accounting behaviour and events. He takes a positivist position similar to Watts and Zimmerman in stating that the purpose of accounting theory is to explain and predict phenomena. Predictive ability as a criterion to evaluate usefulness of accounting data was considered by Beaver et al (1968) . He mentioned two difficulties of defining the decision models and which accounting model produces the better decisions.. The mainstream positivist accounting research promotes share price research which has as its basis the ability of earnings figures to affect (and hence to predict stock prices). The conceptual frameworks have also emphasised the importance of predicting the riskiness , timing and amount of future cash flows as the object of accounting. Projectability is the ability to predict the item of interest from past values of the items e.g. in the area of corporate distress prediction (Altman and Taffler, the use of past accounting ratios and discriminant analysis of accounting data to predict financial distress has been quite productive.

It also useful for justifying the existence of the accounting profession and accountancy. This has already been discussed above.

Theory can also be used as a pedagogical device to impart knowledge. However, the way in which current accounting education leads to unethical practices have prompted calls for reforms in accounting education (see Lehman (1988), Gray et al (1994.)

Accounting theory can also be used to evaluate current accounting practice and guide the development of new accounting practice.

History of Accounting and the development of Accounting Theory

In the beginning when life was much simpler and more holistic, there was no need for a theory of accounting. Now there are too many! Although accounting dates from Babylonian times and much earlier according to Most (1982 p 31), accountancy as a discipline and profession really took off in the late 19^th Century. Whereas accounting was mainly an �internal matter� where the proprietors were close to the business, the growth of limited liability companies and the consequent separation of owners from managers led to the requirement of stewardship accounting. Further industrial development, railroad companies in the US, introduction of companies and tax legislation and audit requirements and the establishment of professional accountancy bodies led to the increase importance of accounting in modern society.

Matthews and Perera (1996) lists three main features of development of Anglo-American accounting in the twentieth century viz:

a)�������� The search for accounting principles.

b)�������� The development of the institutional structure of accounting and

c)�������� Consideration of Accounting as a social phenomenon.

I would like to review these historical developments in some depth:

�

The search for �principles� on which accounting is based began in the 1920�s led by individual researchers like Patton (1922), Hatfield (1927) and Canning (1929) amongst others.. One of the first works on accounting theory was Patton�s Accounting Theory: With Special Reference to the Corporate Enterprise in 1922, in which he identified eleven accounting postulates.

Sanders, Hatfield and Moore (1938) produced more positive empirically tested principles using interviews of preparers and users of financial statements. Patton and Littleton (1940) produced a number of basic concepts or assumptions of accounting including business entity, continuity (the predecessor of going concern), matching and periodicity

Other notable works in this period included Hatfield (1927), Canning (1929), Sweeney (1936), MacNeal (1939). These early writers had an economics background which showed in their work. The American Accounting Association (1977), classifies Patton, Sweeney and Macneal as advocates because they argued for the primacy of new theories or approaches whereas Canning and Alexander are labelled as explicators who analysed and assessed what accountants did and seek to do, explained economic models to accountants and endeavoured to adapt these models to practice. All the above (except Canning and Littleton) writers were normative-deductive theorists i.e. they theorised on what accounting ought to be, whereas Canning and Littleton were positivist inductive writers i.e. they tried to formulate theories by generalising practice.

In addition to the efforts of these individual academics there was the collective efforts of the various professional bodies of which the most important attempt to research and document practice was the that of the American Accounting Association formed in 1916 consisting of US academics and professionals. The American Accounting Association published a series of statements in accounting theory beginning with the Tentative statement of Accounting Principles in 1936. This marked a new phase in the development of accounting theory as it was the first attempt at collective research by a committee of academics and professionals (theory by committee?). This statement was revised in 1941, 1948, 1951 and 1952. In 1966, the AAA issued A Statement of Basic Accounting Theory (ASOBAT) which was �new and different kind of effort. ASOBAT redefined accounting in the decision usefulness framework as the communication of economic information to permit informed decisions and judgements by users. In 1977, the AAA published the Statement on Accounting Theory and Theory Acceptance (SOATATA). In this statement the committee it gave up trying to arrive at a universally acceptable theory of accounting and instead reviewed the various conflicting theories on accounting and suggested reasons for failing to arrive at theory closure.

The industrial revolution, tax and companies legislation led to the birth of accounting as a profession in the late 19^th Century in the UK . For example the Society of Accountants was established in Edinburgh in 1853 which later became the Institute of Chartered Accountants of Scotland. In 1880, the Institute of Chartered Accountants in England and Wales was established in London. In the US , American Association of Public Accountants established in 1887 which later merged into the American Institute of Certified Public Accountants). Despite the establishment of these bodies, the accounting bodies were not strong numerically or in political power in the beginning of the 20^th Century. From the 1920�s however, the profession in America increased its influence due to the growing economic strength of the country, the entry of university students and a body of academics who conducted research in accounting , whereas in the UK accounting was not considered not a subject worth studying at University. In fact, one can say the influence and prestige of accounting came from development of accounting theory and the study of accounting as a university discipline.

The development of stock exchanges and increased corporate activity introduced the need for standardisation and basic guiding principles on which accounting reports should be based. The search for accounting �principles� by the American Institute of Accountants representing the profession in the US, its self-regulation partially threatened by standard issuing powers of the Securities Exchange Commission under the Securities Exchange Acts of 1933 and 1934 led to the development of accounting principles and standards which can be said to be a lower level of theory.

Beginning in 1914, a series of detailed articles in the students section of the Journal of Accountancy which ran until the 1940�s, advised both students and practitioners of what was considered good practice. In 1917, a project for uniform accounting submitted by the American Association of Public Accountants was supported by bankers and was taken seriously by businessmen. The American Institute of Accountants issued a series of 33 bulletins in the form of opinions in response of specific request of members which were advisory. This was followed by the series of the �authoritative �bulletins� of the committee on Accounting Procedure which was replaced by the �Opinions� of the Accounting Principles Board established in 1959 which was in turn replaced by the Financial Accounting Standards Board in 1974 which started issuing compulsory standards.

In the UK, the English Chartered Institute started issuing � recommendations on best practice� in 1942 which was replaced by the Accounting Standards Steering Committee which issued the binding SSAP�s and later SORP�s . This was replaced by the Accounting Standards Board in 1992 which began issuing compulsory Financial Reporting Standards.

Under the �standards regime� , the professional bodies often issued standards which allowed a wide variety of alternative accounting practices and standards which conflicted with earlier standards. This was due to the lack of a theory of accounting or framework which served as a basis for the proliferating standards.. This situation was accentuated (according to Most 1982, p99) by " the new financing techniques , conglomerate acquisitions , equipment leasing, convertible securities and leaseback agreements which created problems which could not be solved from precedents. This situation led to the search for a conceptual framework , objectives and postulates of accounting.

The APB soon after its formation in 1959 commissioned Dr. Maurice Moonitz (who in turn hired Dr. Robert Sprouse) to undertake a study of the basic accounting postulates underlying accounting principles and a study of the �broad principles of accounting� to arrive at a rigorously argued study dependent on deductive reasoning. What they actually got was two polemical papers attempting to move the profession towards exit values i.e. Accounting Research Study (ARS) No. 1 in 1961 entitled "The Basic Postulates of Accounting and ARS 3 in 62 entitled "A Tentative set of Broad Accounting Principles for Business Enterprises."

These studies recommended fundamental changes to the historical cost basis of accounting such as restatement of capital for general price-level changes, recognition of specific price gains or losses and recording of monetary assets at present values. These recommendations were considered "too radically different from present generally accepted accounting principles for acceptances at this time" (JOA, May 1962) by the Accounting Principles Board (APB) and were also rejected by the AICPA.

This was later followed by APB Statement No. 4 1970, SSAP2 UK in 1971 and the Corporate Report (1975) in the UK. The professional bodies also instituted the much criticised conceptual framework projects in the 80�s and 90�s. which nevertheless contributed to the development of accounting theory , however incomplete the frameworks.

As in the case of most things, history turns full cycle in accounting. In the earliest history of accounting, accounting was a tool in the economic domain to regulate social relationships between individuals in business relationships and individuals and government and internal government management of public assets. Accounting and economics was part of human civilisations and nobody thought of separating this from the political/social, spiritual and environmental domains. Accounting developed to meet the changing needs society but in the specialisation process become detached from the other spheres of human activity and life. With the increase in the size of business and governmental organisations which consume public common human resources but do not account for them in the conventional accounting system, this separation became acute.

In recent years, it has been recognised that accounting itself has social (mostly undesirable) consequences i.e. accounting itself constructs social reality (Hines 1988). Consequently, there has been calls for measures to redress the problems, hence the consideration (in my view actually a re-consideration) of accounting as a social phenomenon. These calls and arguments have been advanced by a new group of radical theorists who have challenged mainstream accounting using Marxists, Critical Theorists and Deconstructionist perspectives. (See for example, Tinker et al (1982) , Cooper and Sherer (1984) Hopper and Powell 1985,. Chua (1986), Hines, (1986), Lehman (1987) and Arrington (1990). Although these radical theorists have not prevailed in changing the profession or management , they receive increasing academic support and the recent shift in the political spectrum in UK may signal a turn towards the left by citizens who are sick of the degrading effects of modern privatised societies. There are still others in the middle right and centre left such as Parker (1991) and Gray et al (1996) who prefer an evolutionary approach by extending accounting disclosures to take into account the externalities (i.e. social and environmental impacts of organisations) which are currently ignored in conventional accounting.

Schools of conventional accounting

Perhaps the best review of accounting theory development and classification of accounting theories into its various �paradigms� has been the one by the AAA in its Statement of Accounting Theory and Theory Acceptance published in 1977. This statement recognised that �the basic disciplines that are traditionally utilised by accounting theory (e.g. economics and business), have been altered considerably and that accounting researchers had enthusiastically employed new tools and techniques to explore a wide range of accounting issues. In fact, accounting had started drawing upon mathematics (leading to the specialised discipline of finance, psychology (behavioural research ), and sociology (e.g. the work of Giddens in studying budgeting and accounting relationships in organisations, statistics ( share price studies starting from Ball and Brown ) and recently philosophy (using critical theory and thoughts of Habermas, Foucoult etc.) . The study also noted that accounting researchers had employed new tools and analytical techniques from these disciplines resulting in a wide variety of theories instead of just one. This led the committee to prepare a Statement on Accounting Theory and Theory Acceptance (SOATATA) instead of preparing a statement of accounting theory as they had done previously in ASOBAT (1966)

The committee concluded that there was no single universally accepted accounting theory but a multiplicity of theories. Instead of specifying an accounting theory, it went on to analyse and categorise the various theories and sought to explain why the accounting community had failed to achieve theory closure.

According to SOATATA, divergent theories arose because of differences in the specification of �users� of accounting information and the �environment� in which users and producers of accounts are thought to behave. The SOATATA committee sought a theory that is general enough to cope with variety and specific enough to offer assistance to accounting policy-makers but what they found was a collection of theories which they categorised , according to how they were constructed into

������� i.����������� classical - inductive and true income

����� ii.����������� decision usefulness and

��� iii.����������� information economics:

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The true income and inductive theories arose from the "classical approach" to theory development. This classification by SOATATA arose from their analysis of early classical writers who are further sub-classified into normative-deductive and the inductive schools. .

The normative-deductive theories consists of what (accounting practices ) ought to be and logically arguing from some stated premises (which were not proved). Most of the advocates e.g. Hatfield and Patton were influenced by neo-classical economic theory of the firm as they were trained economists. For them , historical costs had little bearing on decision making and thus advocated current values. Concepts of "income" and " wealth" were borrowed from economics. They considered income based on a single valuation base would ideally meet the needs of all users- the �True Income Theory". These writers attempted to formulate globally acceptable policy recommendations. Consideration was given to asset measurement such as net realisable value (Chambers), replacement cost( Edwards & Bell, Patton) and the concept of true income as the difference between the difference in the current valuation of net assets at two different points in time.

The inductive school, on the other hand , distilled generalised knowledge from extant practice from which they induced theories which helped to explain, rationalise (Patton & Littletonand sometime justify (cf. Ijiri) practice.

The primary objective the Decision usefulness Approach on the other hand is to provide economic information useful in making decisions. There two schools of thought under this approach: decision makers and decision models. Under the decision model approach, the decision processes of decision makers are modelled and the relevant information necessary (in the form of various accounting alternatives or forms of disclosure ) to make the optimum decisions are compared with that presumed necessary in implementing the decisions. The two sub-classification here are:

������� i.����������� the predictive ability/projectability i.e. the model should help predict future numbers e.g. Cash flows, profits, dividends, corporate failure etc.

����� ii.����������� The desirable attributes approach. This is normative deductive approach in imputing desirable qualities e.g. Relevance , reliability and sub-sets of these two (objectivity, verifiability) and some others besides (e.g. Consistency, materiality, economy). This is the approach taken by the professional/regulatory bodies in the conceptual framework projects e.g. FASB, IASC, AARF and ASB.

The decision maker school stresses on the behaviour of decision makers to various accounting alternatives either individually or in the aggregate. The individual decision-maker is captured in so-called behavioural studies using techniques drawn from psychology etc. The aggregate user behaviour is captured through securities markets research using share prices and buy sell decisions of investors. Starting off from the works of Ball and Brown (1968) and Beaver (1968), this fascination with capital market research has led to the efficient market hypothesis and the separation of finance from accounting as well as to positive accounting theory.

Treats accounting information as an economic commodity in its own right as opposed to it being a free good. This implies that there is a cost to accounting and has to paid for. The price of this information is set by supply and demand i.e. Market forces in the absence of regulation.

Information is demanded because of its ability to reduce uncertainty in outcomes of alternatives, hence the demand for information is a derived demand. However , externally reported information is a public good , since provision to one at cost , provides it virtually free to all others. This results in the under provision of information in an unregulated market. Distributive effects of information differences however produce an oversupply of information. It is therefore not clear whether market inefficiency results. If it does, regulation is necessary. Cost-benefit analysis has been offered as a possible solution.

The committee sought to explain the apparent divergence in theories as stages in revolution of science following the Kuhnian view (Khun, 1970) They saw the various theories as paradigms which follow a cycle of, anomalies, doubt (insecurity), new theories and domination of new theories. Wells (1976) had earlier argued that accounting is coming out of the stage of crisis with the emergence of a new disciplinary matrix . However, SOATATA�S failure to arrive at theory closure would belie this statement unless it was meant to convey that at that time positivism was becoming mainstream accounting. If this is what was implied by Wells, it would not fit in with Kuhn�s cycle of a new theory establishing itself by reason and argument but my political pressures in the academic community in the US as what can and cannot be published (See Whittington (1986).

SOATATA�s pre-occupation with paradigms are perhaps an attempt by academics to raise the status of accounting to a science. However, Peansell (1978),using Kuhn�s argument, views accounting is at a pre-science stage due to multitude of "paradigms" in accounting since it has not reached a state of development where a dominant paradigm has been accepted. In contrast, Belkaoui (1992) applies Ritzer�s paradigm components to each subdivisions of SOATATA�S classification to prove that the various accounting theories are indeed paradigms.

Critique of the decision-usefulness school

The decision-usefulness theory or framework for accounting seem to dominate accounting mainstream. The accounting profession�s raison d��tre is that accounting should be useful to users in making economic decisions. This framework has been criticised by many writers e.g. Page (1991), Laughlin & Puxty (1981), Gray et al (1996) . Among the concerns expressed are that decision usefulness undermines the stewardship function, that it gives priority to the financial stakeholders i.e. investors and creditors instead of society as a whole and it does not take preparers and the interest of organisations into account.

Laughlin & Puxty (1981), for example questions the assumptions of decision-usefulness criterion which they say dominates all accounting theories despite the "wide gulf which divides theorists from practitioners .." They attempt to re-classify SOATATA�s categories into weak decision orientation and strong decision orientation as they argue that "user service is at the core of its concern."

The "weak user orientation" , in their view, consist of theories which stress upon reliability and verifiability (presumably because they are more audit profession oriented!). The strong user orientation are the theories that stress on the relevance criterion. They offer an alternative approach to accounting i.e. an organisational control tool . They posit that accounting information should be prepared for the preparers (!) to enable the producers to control the organisation for the benefit of the organisation. They give some examples to support their view that usefulness to certain users does not benefit the organisation and this sometimes results is a disadvantage to the community. However, in the present state of affairs where multinational corporations exploit wealth of the community and impoverish a greater part of the world , making accounting serve the preparers for the benefit of the organisation (i.e. management and finance providers) is like adding oil into the fire.

The Images view of accounting

Davis et al (1982) opine that the different accounting theories are constructed due to the different images researchers bring to bear when researching accounting processes. Images are the "set of constructs used to shape and understand the reality being investigated." These images affect what is seen and what is investigated. Further, the image of numerical reality has been the most important in shaping accounting theory . This numerical reality is responsible for the reductionism of the real world in accounting numbers which are then manipulated to describe reality. This image gives only an outline of the real world leaving out the "human and political dramas that also constitute the reality of organisational life." They proceed to posit that 4 images have shaped accounting theory i.e. the image that view accounting as a

1.����� a historical record- the function of accounting as to faithfully render a historical record/account of the organisation to the owners

1.����� a descriptor of current economic reality - concerned with using true economic/ current values instead of historical values

1.����� as an information system- views accounting as the process of interpreting and communicating information to the user

1.����� as a commodity- treats accounting information as an economic commodity produced (in the absence of regulation) in accordance with law of supply and demand

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A historical/ constructionist view of accounting theory.

Whittington (1986) classifies accounting theory according to historical periods and views its development as an evolution through time, each approach or theory representing a certain stage in its historical development ; he uses the analogy of the geological strata to describe the various theories of accounting.. He classifies accounting into empirical inductive, deductive and the new empiricism based on positivism.

According to Whittington, the empirical deductive theory is basically rationalisation of practice. This is the earliest form of theorising which attempted to explain extant practice. The deductive approach on the other hand consist of those theories which are derived logically from assumptions. The new empiricism based on positivism layer involves the new theories of the 70�s which only validates as knowledge theories which are testable against empirical evidence.

Although the author views his approach as historical, I view it as epistemological or perhaps methodological in approach. The classification schemes basically divides accounting theories by the methodologies it was derived i.e. deductive, inductive and positive-inductive. It would also be wrong to describe the chronological order as an evolution as this word usually means change to a higher form. However the fact is that today�s accounting practice uses the results of many of these approaches and theories e.g. the Balance Sheet is an amalgam of historic cost values e.g. Fixed assets, realisable values e.g. Stock and work in progress, recoverable amount e.g. Debtors and discounted value of future cash flows (bonds and capital leases ). Whittington himself admits that since current practice draws from all the approaches, the analogy of the geological strata breaks down. However, by tracing the development of the SOATATA classification under the various methodologies, one can see a gradual change of accounting due to changes in social circumstances if not an increase in academic arrogance.

Accounting theory and sociological paradigms:

The work by Burrel and Morgan (1979) brought philosophy, social theory, nature of social science and nature of society into the realm of organisation theory. As accounting is intrinsically linked to accounting, it found natural extension into accounting theory by the work of Hopper and Powell (1985). Suddenly most of the SOATATA�s classification found itself in one box out of the four paradigms proposed by Burrel and Morgan. Chua (1986) reviews these developments as follows:

According to her, despite the apparent diversity of theories and dissension in the academic community regarding the "multi-paradigm" nature of accounting theory, accounting has been shaped by one not a divergent set of assumptions. She opines that accounting researchers all share a common scientific world-view despite the apparent conflagration of theories i.e. assumptions of knowledge, beliefs about the empirical world and relationship between theory and practice which emphasises hypothetico-deductivism and technical control. Hence all the classifications I have outlined so far is grouped as functionalist because of common assumptions on society and social science. On the basis of social science, beliefs on ontology of the empirical world (nominal vs. real), epistemology (antipositivism vs. positivism), human nature (voluntarism vs. determinism) and methodology (ideographic vs. Nomothetic). The assumptions of the society is whether it is orderly and stable or in a state of conflict. These two set of assumptions yield four paradigms i.e. Radical humanist, radical structuralist , interpretative and functionalist. Mainstream accounting theories e.g. Those classified above with their belief in a real physical world and ordered society (except for dysfunctional behaviour which can be controlled) are said to follow a functionalist paradigm. Chua introduces two alternative approaches to accounting i.e. the interpretative and the critical and suggests these approaches may provide different insights of accounting. Chua has thus taken accounting theory classification to the meta-theoretical level.

Burrel and Morgan�s work spearheaded a debate in accounting research which by the late 1980�s had been dominated by a positivist mainstream which controlled the top journals like the accounting review. Tomkins and Groves (1983) contended that research in the social sciences , based on the ontology, epistemology and methodology based on the natural sciences, may be inappropriate in most cases to undertaking research in the social sciences including accounting.

The methodology and methods of "scientific investigations" including the way in which is theory is formulated using variables, the systematic collection of data and hypothesis testing and rigorous mathematical and statistical techniques of analysis which led to the quantitative validation of the hypotheses, was more appropriate for the natural sciences . The use of the scientific method in accounting research would force data into an artificial framework that seriously limits and impairs general empirical analysis.

A more naturalistic research style consisting of exploration and inspection, using qualitative data research methods such as case study, ethnomethodology and phenomenology would lead to a better insight into accounting theory research and more ably reflect its social nature.

Abdel Khalek and Ajinkya (1983) on the other hand , based on their positivistic leanings , insist that the objective of research is to describe , explain and predict and both scientific and naturalistic research styles to them serve these same objectives and attempt to explain away the differences between the two categories of research styles as mere differences in location of theory generation and nature of the environment in which research is conducted.

This line of development and the general disgust of the positivist domination of accounting research and practice gave way to the publication of new journals such as accounting , organisations and society (AOS), Accounting, Auditing and Accountability Journal (AAAJ) and Critical Perspectives in Accounting where accounting theory development could now be more holistic taking into account the social and philosophical concerns of society and environment instead of just share markets and investors.

This has given rise to the interaction of philosophy (Arrington 1990) and sociology in accounting Roberts and Scapens, (1985) Roberts 1990)which has provided new insights into the social reality creating nature of accounting (Hines 1988).

Recent developments increasingly see accounting in a systems perspective (GST) e.g. Laughlin and Gray (1987). According to them, the essence of the problem of financial accounting is to gather data from the focal organisation and moulding it into particular information statements which are dispatched into the substantive environment. They have re-classified the categories of accounting theories in SOATATA (1977), Davies et al (1981)and Laughlin & Puxty (1982) into Data oriented, Decision usefulness and Organisational resource categories by filtering the common themes that run through these views (See figure).

Reclassification of Accounting Models by Laughlin and Gray (1987)

Velayutham and Rahman (1992) have gone further by classifying accounting theories using a multidimensional matrix. They classify the main schools of thought as to:

1.����� purpose (descriptive or normative),

1.����� approach to theory formulation (deductive, inductive, eclectical),

1.����� underlying assumptions (economic, sociological, ethical, human behaviour, communication theory) and finally

1.����� level of development viz.

They then come up with five levels of accounting theory

Level 1: According to common sense, assumptions adopted by society or personal whims not subjected to systematic empirical investigations

Level 2: A more scientific level in which a hypothesis of a narrow area of knowledge has been tested empirically, observed, and described systematically or analysed logically confirming belief.

Level 3: Hypothesis becomes a principle of law due to confirmation from many different sets of experimental tests.

Level 4: A series of facts, principles and laws forms a structured body of knowledge.

Level 5: This level attempt to account for the more general ideas about reality, existence, knowledge, values etc. i.e. ontology and epistemology , based on people�s coherent set of personal ideas and beliefs about reality.

The top level 5 strangely do not grow systematically from the other levels but are speculative systems . So when the term theory is used, any of the five levels could be intended.

Interestingly Accountability theories (see below) are classified at both level 1 and 5 simultaneously. They argue that the measurement of the influence of economic systems on the environment , employees and society is primitive (obviously they don�t seem to be aware of Prof. Gray�s work) therefore it fits the criteria for level 1. There is no theory classified at level 3 or 4 so the accountancy profession is still groping for its body of knowledge!

Critique of conventional accounting and the notion of accountability

Conventional accounting and accounting research with its functionalist /positivist paradigm and with its with its reductionist decision-usefulness approach has been soundly criticised by amongst others Laughlin & Puxty (1981) Chua (1986), Cooper & Sherer (1984), Tinker et al (1982) and Gray et al (1996) for constructing a social reality which results in an inequitable , exploitative world . Its implicitly stated goal of enhancing social welfare (AAA, 1975) by increasing economic growth and wealth which is accepted as �revealed truth� by mainstream researchers and the accounting profession have been soundly criticised (e.g. Gray et al 1996), and Laughlin & Puxty (1981)

Thus:

"..Social welfare cannot be appealed to by suggesting that if user needs (i.e. information to maximise wealth in terms of share price) are satisfied , greater welfare will result, because of the operation of the Lipsey-Lancaster theorem."

����������� (Laughlin & Puxty 1981)

The recognition that the world�s bad news (i.e. widespread poverty, environmental degradation, inequitable distribution of income and wealth etc.) is related to 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) and 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 has resulted in the "need to replace the user needs approach with the more fundamental concept of accountability" (Gray et al 1991, 1996).

Accountability

Accountability is a proposed theoretical framework for establishing corporate social reporting as a legitimate effort. It is said to enhance transparency of organisations and democracy in society (Gray et al 1996).

Accountability has been as:

"the duty to provide an account (by no means necessarily a financial account) or reckoning of those actions for which one is held responsible".

����������� (Gray et al 1996 p 38)

The above definition emphasises the discharge of accountability rather than accountability itself. The second problem with this definition is it is not easy to define what actions the accountor is responsible for to the accountee. From a western societal perspective, directors for example would not be responsible for their private lives to the accountee. The actions for which the accountor is responsible arises due to entrusting of resources to him. Hence use (or misuse of resources (not by any means only financial) is the action the accountee is responsible for.

Perhaps, a better definition would be:

Accountability is the duty of an entity to use (and prevent the misuse) of the resources entrusted it in an effective, efficient and economical manner , within the boundaries of the moral and legal framework of the society and to provide an account of its actions to accountees who are not only the persons who provided it with its financial resources but to groups within society and society at large

In the accountability model proposed by Gray et al 1996) an accountor (e.g. an individual, company, local authority etc.) is given resources to manage within certain conditions and constraints and certain objectives. This could be derived from the particular contract as well as the social contract i.e. legislation which provides the minimum requirements, quasi legislation and moral/ethical/cultural values of the society in which the organisation operations and with which it interacts.

The accountee has a duty not only to give an account i.e. report on the performance or non-performance of this duties but also to act or refrain from acting in a certain way.

Critique of the accountability model

The accountability model has been criticised e.g. Parker (1991) for resembling the principal-agent closely, Gray et al refutes this allegation by stating that the �whole raft of assumptions� i.e. self interest and greed and utility maximising conflicting behaviour, is not necessary in the accountability model. The accountability model does not assume this reductionist philosophy but works for the betterment of both the accountor and the accountee. It not only holds promise as a framework for corporate social and environmental accounting but to reform conventional accounting as well.

Roberts (1991) elaborates this positive aspect of accountability as follows:

...to be held accountable for one�s actions serves to sharpen one�s sense of self and one�s actions. The practice of accountability focuses attention within the flow of experiencing; it acknowledges and confirms self , and the fact that one�s actions makes a difference. Conversely, in the absence of being held accountable, there is a possibility of a weakening and blurring of one�s sense of self and situation........................p 356)

Accountability has been with stewardship (e.g. Parker , 1986). However, accountability assumes that the in addition to providing an account of the use of the resources entrusted , information on the effects of the use (e.g. environmental degradation) must be reported as well. Thus stewardship can be seen to be a "special , simple case of accountability" (Gray et al 1988).

However the stewardship seem too simplistic a concept in the era of multinational corporations and other entities which significantly uses community resources and assets. Thus the Corporate Report 1975 by the ASSC defined the notion of �public accountability� where an organisation uses significant community resources, it should be accountable to the community for the use of those resources, (whether priced or not). Stewardship looks like the poor relation of the decision-usefulness concept which emphasises shareholders and creditors to the (detriment?) of others..

Although accountability will not preclude decision-usefulness in the sense that information output during accountability discharge may be useful in making decision e.g. whether the accountors have behaved responsibly and if not to replace or reform them, the notion of decision-usefulness today is altogether different. Decision-usefulness in a pristine liberal economic democracy means to provide information which will enable the capitalist provider of funds to get richer. Although this is supposed to take place within the rules of the game, the fact is the rules of the game is more often then not captured by the capitalist�s cohorts in the government and profession which is supposed to safeguard the public interest.

Problems and limitations of the accountability model

In addition to the contractual relationship between the parties, the essence of the accountability model derives from the role that society ascribes to the relationship i.e. the social contract.. In effect this society or in Islam (God and society) determines responsibility and the rights to information.

Gray et al recognises that two different categories of rights and responsibilities exist i.e. legal and non-legal (moral or natural rights and responsibilities) and that the law lays down the minimum level of responsibilities and rights. They however note that while law establishes responsibility for certain actions (e.g. equal opportunities) it does not provide an equivalent responsibility to account in all cases. Thus the legal responsibility for action and legal responsibility to account or not equal. The disparities in the two responsibilities , they argue , brings a moral responsibility to account and despairing voluntary compliance call for a mandatory regulations to cover Corporate Social Reporting.

I fail to see the logic of insisting that a moral responsibility to account exists (only) when a legal responsibility for action exists. The social contract and the very fact that the organisation (of significant size ) and using significant community resources (see Corporate Report, ASSC 1975) should give rise to a moral responsibility for action even in the absence of legislation. Following the deep green view,

"to be accountable is morally sound and spiritually uplifting thing to do.... It is only ...the conditioning effect of large organisations that make the idea of freely giving an account so bizarre."

����������� (Gray et al 1996 , Chp 2, Note 25, p 53)

If a social contract/legitimacy view of business organisation is not impressed upon, organisations following the cue from Friedman (1962), would insist they had no such responsibility to account.

However, in the climate of neo-pluralist, self-interested and utility maximising capitalist society, there might be no other choice in the short term except through legislated "compliance with standard report."

Ethics and accountability

Another problem with the accountability model is the nature of the moral/philosophical rights and how they are determined. Gray et al (1996) distinguish absolute and relative philosophical responsibilities. However, in a society where religious values do not permeate its fabric, even the absolute moral/religious values are becoming relative (e.g. attitudes towards homosexuality and pre-marital sex). I do agree partially that philosophical rights can be achieved by debate, education and agreement. None the less, It is very difficult to reach consensus and agreement when large sections of society take once universal immoral values (perverted values?) as moral. This creates tension and disagreement more than consensus (e.g. anti-abortionist lobby in the USA). Further , discussion and agreement might end up in the enthronement of teleological ethics to the detriment of deontological (not absolutist) ethics which, in my opinion, will lead to a relativist moral philosophy which might encourage self-interest. In an Islamic society, however, ethics are derived from the sharia� (Islamic law) and are not subject to change although teleological reasons (altruistic not self-interest) may require the suspension of the ethics in certain situations e.g. to save a life. In such a society, the moral/philosophical rights are easier to establish.

Islam, the Shariah and the need for Islamic accounting

Ontology and Epistemology of an Islamic Society.

The objective of an Islamic Society is are the establishment of a just society,

"We sent our messengers with the Book and the Balance, so that mankind may establish justice.��������������� (AlHadeed , Qur�an 57:25)

It has the duty of enjoining good and forbidding evil. (The criteria of good and evil is stated in the Qur�an).Its philosophy is that this life is a test and a stepping stone to the everlasting life in the hereafter. Politics, economics, arts , sciences and every human endeavour must be geared to the achievement of felicity in the hereafter and accounting is no exception.

The world view of Islam is really a dual-world view. The hereafter is as real as this world. for Muslims. This world has a reality but is temporal, it existence is not infinite.

God (Allah) is one and the unique creator of everything in the heaven and earth. He is also the sustainer, beneficent and merciful. He has no partners in creation or sustenance.

Man and women has a common origin in Adam and Eve thus therefore there is NO superrace, nationality, colour or language and there are no chosen people or race Thus Muslims have been brought forth for mankind , they are the best because they believe and enjoin right and forbid wrong. As soon as they stop doing this work, they are dropped and replaced with another group of people. Allah is NO respector of labels.

Allah endowed man with knowledge and freedom of action. Freedom of action implies a trust upon man which he has to discharge. Having created man, Allah does not leave them alone, he sends divine revelations through prophets for various places and times. The culmination of these revelations is the Quran (but God had sent other scriptures before which were either lost or corrupted).Man (and women!) is rewarded in the hereafter (with paradise and divine sight) for living in accordance with divine precepts and punished in hell for breaking the commandments but with the possibility of forgiveness and repentance of sins in this life.

Human beings are the vicegerent of Allah. All creation (humans, animal , plant and mineral) is both a trust which will have to be accounted for as well as resources which should be used in accordance with His guidance. Humans are accountable to Allah on the day of judgement and for this purpose they are given reason and knowledge (both from divine sources and through self-acquisition)

Good deeds are given a measure as well as bad deeds (credits and debits?) . Deeds are recorded and the balance sheet will be shown on his death and on judgement day. One of the endowments humans have to account for on the day of judgement to Allah (in addition to life, youth and knowledge) is wealth i.e. how they obtained it and how they spent it. We can thus see that the notion of accountability (to God and to society) is part and parcel of the Islamic way of life and would be a good basis on which Islamic accounting theory could be constructed.

The Sharia� (Islamic Law), its nature, sources, methodology and objectives

An Islamic society is based on divine guidance i.e. Qur�an as the Word of God (Allah) and its exposition in the traditions of the Prophet. The Quran is divine guidance, it has specific laws which are immutable and general principles from which further laws could be deduced. The Prophet acted as the model of how Quran should be interpreted in life. The collection of his sayings, deeds and approvals of the Prophet forms the hadees or tradition and is the second source of law in Islam. In an Islamic society, the ethical values are specified in the traditions (Hadees) of the prophet .From these two sources are derived the Muslim Law or the Sharia�. The Sharia� is to be the source of all laws in the Islamic state and no law legislated can be contrary to it.

However the sharia� is expanded through a process of analogy, consensus and consideration of equity, public interest, customs, presumption of continuity, blocking the means (to evil) and personal reasoning (see Kamali ,1989). Although this may result in varying opinions , it allows the Law to meet the requirements of various communities at various places and times . The varying opinions, has resulted in at least four schools of jurisprudence in Islam . However, differences of opinion is supposed to be a mercy to the Muslims (otherwise it will be a zombie world) . Muslims can freely switch over between schools without fear of being ex-communicated.

This process of expansion of the sharia� was successful for about a thousand years . In this period, life has always been viewed holistically with religion, politics, society, family, environment and community until certain degenerative political (e.g. conversion from consultative leadership to monarch, division of the single Muslim states into countries, the Mongol invasion of Muslim lands) and social factors ( domination of a particular school of law over others usually supported by the political establishment) caused a decay in this regenerative process. This decaying process reached its climax after western colonisation of Muslim countries and the consequent separation of Islam from politics , law and social life.

Colonisation resulted in interest-based financial institutions (interest-taking is prohibited in Islam), alien business laws and accounting practice and limited liability private legal persons being introduced into Muslim countries. The atrophied Muslim law ( which degenerated further through restriction of use in economic and social spheres) could not cope when Islamic resurgence in post-independent Muslim countries demanded Islamic solutions to their problems after tiring of socialist and capitalist experimentation which only worsened their problems.

The education process which was religious/ethics based in Islamic civilisation had been replaced by western secularised knowledge. There is now a process of islamisation of knowledge to reconcile and re-establish knowledge on revelation and reason and accounting is also one of the subjects involved.

Although Muslim countries are not Islamic due to historical, political, economic reasons, there is a re-emergence of Islam on social, economic and political scene in Muslim countries . The Muslim masses, after the disastrous experiments with various isms (socialism, communism, capitalism, bathism etc.) believes that it has to go back to its Islamic roots to solve its problems .and Islamic resurgence is the result

Since the Islamic society is supposed to base its societal relationships, its economic activity and accounting on the basis of the Sharia�, it would be good to consider the general and especially the economic objectives of the sharia in addition to surveying the specific commandments related to economics and accounting. Even where the commandments are not specific or detailed enough, we could arrive at the accounting required by Islam by following the methods discussed in the previous section and by having the sharia� objectives in mind.

Objectives of the Sharia�

The general purpose of the sharia� according to the famous philosopher and thinker Imam Al-Ghazzali ( 1058 -1111C.E. ), is

to promote the welfare of the people, which lies in safeguarding their faith, their life, their intellect, their posterity and their wealth.

According to another philosopher, Ibn Al Qayim al-Jawziyyah (Chapra 1992), the

sharia�s basis is wisdom and welfare of the people in this world as well as