Differences between Islamic accounting and Conventional
Accounting
To professional accountants and
those who have received a conventional accounting education and who have been
brought-up on the idea of accounting as
an ‘objective’, technical and value-free discipline, the idea of attaching a
religious adjective to accounting may seem to be embarrassing and unprofessional.
On the other hand, the development
of Islamic banking and finance now embraced even by ardent capitalist
institutions such as Citibank, HSBC and ANZ banks may interest accountants and
other job seekers to the possibility of new opportunities in this new
discipline. Perhaps, the Enron affair
has rekindled an interest in having a more honest profession who truly care
about the public interest in addition to their pockets. Whatever the interest
or curiosity, we hope readers will find this chapter (and hopefully the entire
book) interesting, informative, and profitable and yes we hope it may even lead
to a bit of soul searching.
·
Meaning of Islamic Accounting
Islamic accounting can be defined as the “accounting
process” which provides appropriate information (not necessarily limited to
financial data) to stakeholders of an entity which will enable them to ensure
that the entity is continuously operating within the bounds of the Islamic
Shari’a and delivering on its socioeconomic objectives. Islamic accounting is
also a tool, which enables Muslims to evaluate their own accountabilities to
God (in respect of inter-human/environmental transactions).
The above diagram illustrates the purpose of
Islamic accounting. Muslims believe in the hereafter. All business activities
should be in line with the shari’a or Islamic law, including business. In life,
people transact through institutions such as business. These activities are
classified, recorded and summarized using a philosophic filter (shari’a and
Islamic accounting standards) to produce accounting statements, which people
act on. If the information produced is useful and appropriate to make economic
or social decisions through a moral framework, then the users will act in ways
to correct their ‘sins’ and increase good behaviour leading to God’s pleasure
in the hereafter. If the accounting information system misinforms or does not
provide appropriate information, the business might be undertaking sinful
activities, the responsibility for which will be borne by the investor as he is
a participant. This may lead him to Hell.
The meaning of Islamic accounting would be clearer
if we compare this with the definition of “conventional” accounting. (Conventional) accounting as we know is
defined to be the identification, recording, classification, interpreting and
communication economic events to permit users to make informed decisions (AAA,
1966). From this, it can be seen that both Islamic and conventional accounting is
in the business of providing information. The differences lie in the following:
Ø The objectives of providing the
information
Ø
What type of information is
identified, and how is it measured
and valued, recorded and communicated, and
Ø To whom is it communicated (the
users)
Conventional accounting aims to permit informed
decisions by users, whose ultimate purpose is to efficiently allocate scarce
resources available to their most efficient (and profitable) uses by providing
information efficiency in the market (FASB, 1978). Apparently this is achieved
by the user making the appropriate, buy, sell or hold decisions on their
investments. Islamic Accounting, on the other hand, hopes to enable users to
ensure that Islamic organisations (whether business, government or NFP) abide
by the principles of the Shari’a or Islamic Law in its dealings and enables the
assessment of whether the objectives of the organisation are being met. At the
very basic level, it can be said that Islamic organisations (whether business or
otherwise) differ from their conventional counterparts by having to adhere to
certain Shari’a principles and rules and also try to achieve certain
socio-economic objectives encouraged by Islam.
Following from the above, the type of information
which Islamic accounting identifies and measures is different. Conventional
accounting concentrates on identifying economic events and transactions, while
Islamic accounting must identify socio-economic and religious events and
transactions. Older accountants may still remember when they first learnt accounting. They had to prepare
final accounts (i.e. balance sheet and profit and loss account). However,
Americanization of the curriculum has popularised the term financial statements.
Hence, the concentration of accounting has moved from stewardship based
manorial accounts to accounting for money (accentuated by the monetary
measurement concept).
This is not to say that Islamic accounting is not
concerned with money (especially when accounting for businesses). On the
contrary due to prohibition of interest-based income or expense, profit
determination is more important in Islamic accounting than conventional
accounting. However, Islamic accounting must be holistic in its reporting.
Hence, both financial and non-financial measures regarding the economic,
social, environmental and religious events and transactions are measured and
reported.
Conventional accounting mainly uses historic cost
(or lower) to measure and values assets and liabilities (although the new IFRS
seeks to introduce fair value measurements). The profession is well aware of
the limitations of the stable unit of measure assumption of the monetary unit
and to its credit has tried in the past in its inflation accounting
initiatives. However, despite recommendation from its own research efforts
(True blood committee?), the idea of using current values was given up due to
its complexity and presumed lack of verifiability. From an Islamic point of
view, at least for the purpose of computation of Zakat, current valuation is
obligatory (see for example, Clarke et al, 1996) prompting calls for a current
value Balance Sheet (Baydoun and Willet, 2000).
A further difference is, Islamic accounting may
require a different statement altogether to deemphasize the focus on profits by
the income statement provided by conventional accounting. Baydoun and Willlet
(2000) have suggested a Value Added Statement to replace the Income Statement
in Islamic Corporate Reports. They argue that this shows and encourages a
cooperative environment in business as opposed to a destructive competitive
environment.
The third category of differences is in the users
of the information. Although the profession has recognised various stakeholders
as users of accounting information (see for example, the Corporate Report,
1975), the users which it focuses on are shareholders and creditors (i.e.
Financiers – those who provide the funds). This is obvious from the fact the
FASB’s SFAC 1 dismisses a whole range of stakeholders by the term “and others”.
From recent developments in finance and financial markets, accounting seems to
be serving an elite group of financiers – market players and banks and other
financial institutions. It has been accused of helping a group of rich people
get richer (Gray et al., 1996)- a grave charge since the profession always
justifies its monopoly on audit services by virtue of the public interest.
Islamic accounting serves the whole gamut of
stakeholders. Society as a whole can make corporations accountable for their
actions and ensure they comply with Shari’a principles and do not harm others
while making money ethically and achieve an equitable allocation and
distribution of wealth among members of society especially the stakeholders of
the concerned corporation.
