You are on page 1of 43

See

discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/282124466

A theoretical framework for the development of


the Islamic perspective of accounting

Article January 2011

CITATIONS READS

19 463

2 authors:

Mohammad Hudaib Roszaini Haniffa


University of Glasgow Heriot-Watt University
30 PUBLICATIONS 681 CITATIONS 43 PUBLICATIONS 2,044 CITATIONS

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

audit tenure View project

Islamic finance View project

All content following this page was uploaded by Roszaini Haniffa on 24 September 2015.

The user has requested enhancement of the downloaded file. All in-text references underlined in blue are added to the original document
and are linked to publications on ResearchGate, letting you access and read them immediately.
A THEORETICAL FRAMEWORK FOR THE DEVELOPMENT OF THE
ISLAMIC PERSPECTIVE OF ACCOUNTING

Dr Roszaini Mohamad Haniffa*


University of Exeter, UK

and

Dr Mohammad Abdullah Hudaib


Essex University, UK

*Corresponding Author: Dr. Ros Haniffa, Department of Accounting & Finance, Bradford
University School of Management, Bradford BD9 4JL, UK.
E-mail: r.haniffa@bradford.ac.uk

Acknowledgements: We are grateful for comments and suggestions from Professor T.


Gambling, Professor M. Tippett, Professor T.E. Cooke, Dr M. Mirza and Mr M. Zaman on
earlier drafts of this paper. Comments received at the Accounting, Commerce & Finance: The
Islamic Perspective International Conference 2001 in New Zealand are also acknowledged. Last
but not least, we thank the editor, Professor Omar Zaid and the two anonymous referees whose
suggestions led to a considerable improvement in the paper.

If this modest effort is successful, it is by Allahs grace and guidance and if it falls short of the
readers expectations, we can only pray and hope that Allah will forgive our imperfect
judgements.

0
A THEORETICAL FRAMEWORK FOR THE DEVELOPMENT OF THE ISLAMIC
PERSPECTIVE OF ACCOUNTING

ABSTRACT

This paper aims to provide a holistic view of the underlying values and principles of the
Shariah Islamiiah (Islamic teachings) and its application to the Islamic perspective of
accounting (IPA), which we defined as an assurance function that seeks to establish socio-
economic justice through its formalised procedures, routines, objective measurement,
control and reporting in accordance with Shariah Islamiiah principles. The paper first
discusses the need for IPA by critically looking at two aspects of conventional accounting
which are perceived as problematic and unsuitable for Muslims viz. philosophical
foundation which excludes religion and the limited role of current accounting practice in
ensuring societys longer term well-being. Based on the limitations of conventional Western
accounting, the Shariah Islamiiah is proposed as the foundation in building a theoretical
framework for IPA. Since adherence to Shariah Islamiiah is a form of worship, the role of
IPA is thus an act of worship in fulfilling obligations to Allah (God), society and self as well
as achieving Al-Falah (rewards in this world and hereafter).

Key words: Islamic accounting, Shariah Islamiiah, Socio-economic justice.

1
A THEORETICAL FRAMEWORK FOR THE DEVELOPMENT OF THE ISLAMIC
PERSPECTIVE OF ACCOUNTING

1 Introduction
There has been an increasing interest in accounting from the Islamic perspective in recent
years. One of the aspects that has received substantial focus is on Islamic banking viz. the
applicability of conventional accounting principles to Islamic institutions (Abdel Gader,
1994; Baydoun and Willett, 1994; Gambling and Karim, 1991), its implications (Abdel
Magid, 1981) and economic consequences (Karim, 1996); the need for separate accounting
standards for Islamic banks (Karim, 1990), the rationale for a conceptual framework for
financial reporting by Islamic banks (Karim, 1995) as well as the application of accounting
techniques to Islamic financing (Abdel Gader, 1990). Some other issues that have also been
discussed in the published literature include the problem of harmonisation of international
accounting standards in Islamic countries (Hamid, Craig and Clarke, 1993), a proposal for
the formatting of Islamic corporate reports (Baydoun and Willet, 2000), the need of Islamic
Accounting Standards (Mirza and Baydoun, 2000) and also an historical account of the
development of Islamic accounting and the requirements in the appointment of Muslim
accountants in the Middle Ages (Zaid, 1999; 2000).

A review of the literature on IPA highlights some weaknesses in that there seems to be
overemphasis on Islamic banking,1 failure to recognise the political and economic
constraints that exist in the development of IPA and the neglect of a comprehensive
discussion on the aims, principles and role of accounting from the Islamic perspective at
both the micro and macro levels. In addition, and perhaps the most important is that, the
development of a coherent theoretical framework2 for IPA is significantly ignored.

1
This is understandable because the foundation of conventional banking is interest based and following
Islamic resurgence, this becomes the most important issue to be addressed as Islam strongly prohibits interest
and any form of dealings with it will be punished as mentioned in the Quran: Those who devour usury will
not stand except as stands one whom the Satan by his touch hath driven to madness. That is because they say:
Trade is like usury, But Allah hath permitted trade and forbidden usury (Al-Baqarah 2:275). For other
examples, see Quran, Al-Baqarah 2:276 & 2:278-279, Al-Imran 3:130, An-Nisaa 4:161, Ar-Rum 30:39.
2
The attempt by Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) in
developing a conceptual framework is to facilitate its standard setting process for financial institutions.
However, there are two deficiencies in the framework: adoption of Western accounting standards with limited
changes and treatment of accounting as a technical rather than socio-technical activity imbued with human
values and pattern of thinking.

2
Hence, this paper argues that instead of adapting or modifying the current conventional
accounting based on Western ideas, there is a need to build a theoretical framework for IPA
if it is going to be accepted as a new paradigm in accounting. 3 As such, the paper is
structured to achieve the following objectives: first, to address the need for an alternative
accounting system for Muslims by critically examining the appropriateness of the current
Western based conventional accounting systems; second, to provide an understanding of the
basic concepts of IPA based on Shariah Islamiiah and third, to suggest a theoretical
framework for IPA and its implications on the role of Muslim accountants. The contribution
of this paper is the attempt to provide a holistic view rather than discussing in isolation
specific issues of IPA. An elaborate reference to the Holy Quran and Hadiths is provided
because these documents contain many theories on the nature of accounting, its aims,
ideology and principles.

2 A Critical Evaluation of Conventional Western Accounting


The current conventional accounting4 ideas developed in the West have been used
worldwide not because it is recognised as the best system but mainly due to three reasons.
Firstly, accounting technology is exported through colonisation (Parker, 1989; Briston and
Kedslie, 1997). This includes techniques, institutions and concepts of which professional
accountancy associations are the most dominant. Secondly, accountants have to go through
an education system and training (Hove, 1986) that emphasise western accounting ideas
both in their native country and abroad for global economic and political reasons and finally,
international harmonisation efforts imposed in developing countries of the Muslim world
(Hamid et al., 1993). Although some countries (for example Malaysia and Pakistan) tried to
adapt rather than adopt the whole idea, the effort is still minimal. Similarly, despite the
recognition that some underlying concepts and values of current conventional accounting are

3
Most Islamic countries either adopt or adapt with little changes the accounting system developed in the West
mainly due to the support of the political establishments controlling such countries and also, the powerful
Western accounting profession. In other words, the implementation of western accounting is from top-to-
bottom rather than bottom-to-top which should be the case if accounting is accepted as a social tool or
phenomenon. As such, implementation of the Islamic perspective of accounting will be difficult without the
proper support from the Governments and the profession.
4
This refers to accounting system that can be used both as ammunition machines to promote and articulate
particular interested positions and rationalisation machines to justify, legitimise and rationalise earlier
decisions (Burchell et al., 1980), thus playing a purely technical role based on rationalism and reflecting the
dominant functional values of the organisation rather than the values and impacts it has on society.

3
contradictory to that of Islam, at most, only those parts related to riba (usury), haram
(unlawful) dealings in alcohol, pork and those with elements of gharar (uncertainty) have
been addressed. Many other issues, such as the role expected of Muslim accountants, the
effectiveness of current Shariah Supervisory Boards as control mechanism in protecting
societal interest, the degree of awareness of the contracting parties of their rights and
obligations, and the reform in accounting education needed to serve accounting needs of
Muslims, which are all significant from an Islamic point of view still remain to be tackled.

Hence in this section, the paper attempts to present arguments for the need for IPA, which
we defined as an assurance function that seeks to establish socio-economic justice through
its formalised procedures, routines, objective measurement, control and reporting in
accordance with Shariah Islamiiah principles,5 by focusing on two basic ideas in current
conventional Western accounting perceived as problematic and unsuitable for Muslims. The
first is in terms of its philosophical foundation and the second is related to its role and
function in society.

Some societies recognised that human rationality about the universe and the way they cope
with problems facing them are restricted or limited. As such, they are capable of addressing
only some of the perceived problems and can never perceive the total reality about
themselves nor the universe (Gambling and Karim, 1991). Nevertheless, since the earliest
times, humans through their collective instinct and mental programming6 have developed
rituals and mechanisms7 to reduce this gap, solve difficulties surrounding their existence,
and acquire and generate knowledge8 to ultimately sustain and develop their civilisations.

5
Another definition of Islamic accounting was provided by Hayashi (1989, pp.42) where he defined it as
theory which thinks how it could allocate the resources justly but is not the learning of how the accounting
exists.
6
It is the capacity of a complex system for analysing and classifying data and set theories and assumptions
based on both logic and institutionalised behaviour. The former refers to human built-in basic beliefs, values,
senses and reasoning which all sensible individuals naturally have in their mental or nerve system and which
may vary from one individual to another. The latter on the other hand, is the learned, socially acquired
traditions and life-styles of the members of a society, including their patterned, repetitive ways of thinking,
feeling and acting (Kaplan and Manners, 1972).
7
These include the set of theories and systems that generally need to be abstract and flexible to cope with
environmental changes and to allow readjustments to humans senses (Kaplan and Manners, 1972).
8
When these rituals are widely accepted and used, they become known as common sense which is defined as
nothing other than the unconscious sensibilities supplied by our central nervous systems. It is quite
independent of conscious rational thought It is the mechanism by which Homo sapiens are able to bring the
total interactivity of the real Universe back into (unconscious) consideration(Gambling and Karim, 1991; p.7).

4
Accounting is such a ritual.9 It has shifted from being merely an assembly of calculative
routines or technology to an influential mechanism for economic and social management
(Burchell, Clubb, Hopwood, Hughes and Nahapiet, 1980).

Historically, religious believe was the main source of developing and organising accounting
and financial affairs. In Islamic countries, religious requirement of zakat (religious levy)
imposed in the year 2 Hijriiah (H) (623 AD) and the increasing responsibilities of the
Islamic State established in 622 AD compelled Muslims to develop accounting records and
reports to satisfy their religious believe as well as commercial needs in accordance to
Shariah Islamiiah (Zaid, 2000). Similarly, in Medieval Europe, accounting and financial
affairs were developed and organised by the Church through its Canon law. The former
model began to decline in the Muslim world with the intrusion of Western imperialists and
colonialists which resulted in the decline of Islamic values and accounting that diverts from
Shariah Islamiiah. The latter model declined with the development of science and rapid
changes in the business environment that promotes capitalism. The primacy of God and the
irrational interpretations of the church which could not be defended following the discovery
of science, led to ideas of social contract by thinkers such as Rousseau and Locke (Cranston,
1965; 1968). Similarly, the interdiction of the church regarding riba and avarice were
discarded and replaced by the capitalist spirit of wealth accumulation which removed
spiritual values and became amoral (Tawney, 1927). In short, the failure of the religious
paradigm10 as a source of organising and controlling businesses and human acquisitive spirit
resulted in a shift to humanism (focusing on what happens in this life), which bred
secularism (excluding religion in establishing the well-being of mankind), which led to
materialism (maximising wealth at the expense of others viz. Adam Smiths invisible hand)
and ultimately to hedonism (focusing on pleasure as the purpose of life), where the basic
premise of all these ideologies is rationalism.11

9
Morgensten (1964) argues that accounting is intended for use in ritual negotiations of daily life rather than
direct indications of course of actions.
10
Kuhn (1970) defines paradigm as the entire constellation of beliefs, values, techniques, and so on, shared by
members of a given community.
11
Rationalism argues that, humans pursue self-interest to maximise their real or apparent advantages and
look to their own minds rather than the wider world (Coleman, 1995). Hence, they build accounting models for
the assessment of relative goodness i.e. maximising profit.

5
One of the problems with rationalism is its heavy emphasis on the human instinct of self-
interest in contrast with the collective interest of the community at large, and its emphasis on
wealth maximisation. The undermining of the significance of the latter instinct by
rationalism resulted in the development of accounting and financial rituals that mainly cater
for the interests of powerful groups viz. owners, managers, creditors, the profession and the
government, at the expense of society at large. Another problem with rationalism is that it
separates religion from economic activities. Man-made law and code of ethics is perceived
as an adequate mechanism in managing and controlling corporate activities but in reality,
they caused clash not only between different individuals within a group but also between
different groups in society resulting from the absence of an ethical communis opinio. In
other words, these mechanisms do not seem to work because to achieve an orderly society,
the dichotomy temporal/spiritual should be removed. Similarly, the epistemology of
conventional accounting views human existence as a purely economic phenomenon devoid
of social and spiritual considerations or has little relevance to accounting as it constitutes
only a small part of life.

The philosophy of pursuing self interest or wealth maximisation with no regard to


religious/moral foundations results in accounting rituals that do not appeal to the logical
mind. This may partly be attributed to the dual nature of accounting activities - technical and
human. The technical activity consists of methods for identifying and measuring values and
as such is related to the human logical instinct. Human activity, on the other hand, comprises
methods for communicating values (providing information), constructing accounting
theories, policies, standards and ethical/moral conduct as well as implementing wider
societal, political and economic views. Hence, it is related to the institutionalised behaviour
of societal mental programming. These two activities may sometimes be seen to contradict
one another if a decision is based solely on human logical instinct. For instance, accounting
has been irrationally employed (although this may be perceived as rational by those who
employed it) to help self-interested businessmen and powerful personalities in financial and
political domains to manipulate financial figures to assist them in raising new capitals or
loans, influencing share prices, destroying competitors and finding loopholes in the tax

6
system to reduce the tax burden etc.12 Similarly, the emphasis on shareholder value,
especially in market based economies, encourages not only creative accounting, but also
accounting which results in a craze for take-overs and mergers of questionable value which
consequently give rise to social problems such as job losses. Such activities clearly
contradict the accounting concept of fairness and the professional concept of serving the
public interest.

Another problem with economic rationalism is the narrow scope of its philosophical views
in sustaining and promoting society as a whole. Conventional Western accounting assumes
that greater social welfare will result if user needs (i.e. information to maximise wealth) are
satisfied but this has been criticised by Laughlin and Puxty (1981) and Gray, Owen and
Adams (1996). They argue that the decision-usefulness paradigm actually motivates
behaviour of self-destruction13 and suggest that it should be replaced with the fundamental
concept of accountability to society.14 Similarly, due to the strong belief in the efficient
allocation of resources by the market mechanism for increasing economic growth and
wealth creation, conventional accounting has actually caused wealth misappropriation and
conflicts between various classes in society (Lehman, 1992).

Despite the shift from pure economic (free-market) to political-economic15 and socio-
economic16 paradigms, accounting still lags behind in fulfilling its social role of preventing
certain members and parties in society in pursuing their spirit of acquisitiveness. At best,
accounting only manages to prescribe different methods and policies as rituals for daily

12
This view may seem extreme by those who believe in the concept of bounded rationality which is
characterised by satisficing rather than maximising behaviour but the philosophical foundation is still different
from the Shariah Islamiiah perspective.
13
For instance, the fascination with predicting behaviour based on financial figures has encouraged the practise
of creative accounting.
14
However, their concept of accountability to society did not address ways to solve the problem of equality in
society and above all, no mention is made on ultimate accountability to Allah which is important from the
Islamic perspective as mentioned in the Quran: Did ye then think that We had created you in jest, and that
ye would not be brought back to Us (for account)? (Al-Muminun 23:115).
15
This paradigm focuses on developing the role of accounting in society and argues that self-interest can either
regulate itself (market forces) or be controlled by the superior vision of political illumination or explanation
(Gambling and Karim, 1991). This utilitarian philosophy advocates the notion of the greatest happiness of the
greatest number of men.
16
Under this paradigm, accounting recognises the social problems caused by economic activities of
corporations but could not fully develop the idea of social responsibility accounting because human rationality
still remains as the ideology upon which social, economical and political affairs in society are handled.

7
negotiation (e.g. controlling and reporting) instead of identifying a rigid course of action to
promote the interests of society at large. The continued process of eliciting its role based on
rationalism has resulted not only in accounting measurements and presentations becoming
suspicious and distrustful, but also led to an increase in the number of business frauds and
bankruptcies, which in turn affects society either directly or indirectly.

In short, the pursuance of self-interest which forms the core principle of rationalism in the
current conventional accounting and the exclusion of religion, have serious implications on
society. For example, the various accounting methods for appraising projects evolve around
the economic rationality of wealth maximisation of certain groups, mainly the owners,
instead of the potential benefits to society as a whole. In other words, based on rationalism,
only projects that can generate the highest returns at lowest risk to the business rather than
potential benefits accruing to society, will be the premise of business decisions. Although
some argued that pursuing the goal of profit maximisation may lead to potential benefits to
society, in practice, this does not always happen because when faced with trade-offs,
companies usually give preference to the more powerful or dominant group e.g.
shareholders rather than employees or society at large.

The imbalance between a philosophy of wealth maximisation in a world of limited


resources17 and a philosophy of living together to preserve and enhance societal integration
adopted in current conventional accounting, results in a wide range of unjustifiable conflicts
within society viz. interests of owners, profession, government and the public.18 It has been
acknowledged that humans are by nature social animals i.e. they are born with the instinct to
socialise and as such, they build sets of shared unconscious values and norms which make

17
It should be noted that the idea of limited supply is based on the tenet of neoclassical economic theory but
Muslims believe in the concept of Rububiyyah i.e. there is sufficient sustenance for everything and everybody
to achieve Gods perfect plan for the universe (Zaid and Keen, 1999) as mentioned in the Quran: It is Allah
who has created you: further, He has provided for your sustenance (Ar-Rum, 30:40) and It is He who has
made the earth manageable for you, so traverse ye through its tracts and enjoy of the sustenance which He
furnishes: but unto Him is the resurrection (Al-Mulk 67:15). From the verses in the Quran, it can be seen that
Islam imposed limitations upon individual behaviour which subsequently reduce demand to a level at which
there is a sufficiency of resources (Zaid and Keen, 1999). For other examples, see Quran, Al-Qamar 54:49
and At-Talaq 65:3.
18
The Islamic perspective of accounting is able to adjust the various interest groups in the society because it
addresses the economic, political as well as accounting problems within the framework of Shariah Islamiiah
(Hayashi, 1989).

8
up their various institutions, organisations as well as their mutual interpretations about
unrealisable or incomprehensible phenomena (Kropotkin, 1924). This instinct leads them to
seek collectivism rather than individualism as a necessary way for sustaining and developing
their lives and civilisations. Consequently, living in a group requires each member to
compromise some of his/her self-interest for the sake of the group or society in general.
However, accounting based solely on rationalism with the exclusion of religion in the quest
to offer a proper system in dealing with these two competing instincts, individualism vs.
collectivism, is not fruitful.

Due to the inherent problems of rationalism as a basis in the development of current


accounting, three main features, which are contradictory to Islamic view, may be identified.
Firstly, it is underpinned by a renunciation of religion and metaphysics and regards the will
of the State as the supreme power. As such, the underlying views on sources of authority
and enforcement and the concept of accountability differ from that of Islam. To Muslims,
Shariah Islamiiah is the guiding force as it encompasses all aspects of human life and
accountability is ultimately to Allah, as all deeds will be appropriately accounted as stated in
the Quran: To Allah belongeth all that is in the heavens and on earth. Whether ye show
what is in your minds or conceal it, Allah calleth you to account for it (Al-Baqarah
2:284).19 In addition, any activity that conforms to Shariah Islamiiah is recognised as a
form of ibadah (worship) and the ultimate goal is to receive al-Falah (benefit for the people
in this world and hereafter). Secondly, its basic beliefs and values stem mainly from the
concept of self-interest without proper consideration towards societal interest 20 and thirdly,
it believes that men has no inherent conception of justice but are true opportunists. In fact, it
has been suggested that man is not at all the social animal but are homo homini lupus - as
wolves to one another (Kropotkin, 1924). As such, striking a balance between these two
instincts (i. e. self-interest and societal interest) is difficult, resulting in accounting becoming
a tool for the few and most powerful groups in pursuing wealth maximisation at the expense
of many others in society. This humanistic view is extreme whereas in Islam, self-interest is

19
For other examples, see Quran, Ya-Sin 36:12, Al-Muminun 23:115, Al-Anbiyaa 21:47.
20
It is important at this point to distinguish between society and ummah (community). The former refers to an
external group of individuals gathered on the basis of interest, material needs or to ensure survival and is ruled
by the laws of the fittest, subjection, and exploitation while the latter refers to an internal group of people
brought together by the feeling of belonging based on spiritual needs, aspirations and understands the concept
of justice, mutual help, solidarity and brotherhood (Izetbegovic, 1989).

9
considered as being at the lower level of the natural instinct embedded in the human selves
and that they use consciousness at a higher level to allow them to live together in a civilised
environment to distinguish them from the rest of the animal kingdom. In short, Islam
recognises man not only as homo oeconomicus but also homo ethicus and homo religiosus.

Due to the limitations of the three features in the development of accounting based on
rationalism, an alternative accounting paradigm incorporating both technical and social
aspects based on religion as well as rationality, is needed. In addition, the alternative
paradigm must also be able to strike a balance between self-interest and societal interest. To
Muslims, Shariah Islamiiah is seen as the most appropriate paradigm in the development
of IPA as it encompasses every aspect of human life by laying down principles, which are
sometimes specific and some in general terms, to allow Muslims to give a great deal of
thought to what they should do as part of their quest in understanding Allahs wisdom
(hikmah).

3 The Alternative Paradigm: Shariah Islamiiah


Accounting events are not static and they follow a pattern of successful evolutions from
religious to pure economic to socio-economic. Six competing paradigms21 have been
identified in the conventional Western accounting field viz. the anthropological/inductive
paradigm, the true-income/deductive paradigm, the decision usefulness/decision-
maker/aggregate-market-behaviour paradigm, the decision-usefulness/decision-model
paradigm, the decision-usefulness/decision-maker/individual-user paradigm and the
information/economics paradigm (Belkaoui, 1992). Burrell and Morgan (1979), on the other
hand, use philosophy and social theory in explaining four distinct sociological paradigms in
accounting the functionalist, interpretative, radical humanist and radical structuralist.
Laughlin and Gray (1988) reclassify accounting models based on a systems perspective
data oriented, decision usefulness and organisational resource categories, where financial
accounting is seen as gathering data from the focal organisation and moulding them into
particular information statements which are subsequently dispatched into the substantive
environment. Velayutham and Rahman (1992) use a multidimensional matrix in classifying

21
American Accounting Association (1977) categorised these six paradigms into three i.e. classical-inductive
and true income, decision-usefulness and information economics.

10
accounting theories the purpose of accounting (descriptive/normative); the approach in
theory formulation (deductive, inductive, eclectic); the underlying assumptions (economic,
sociological, ethical, human behaviour, communication) and the level of development of
accounting theory.

Each of the paradigms mentioned above determines the way in which members view
accounting research, practice and education and there is no one paradigm that is superior
than the other. In other words, the paradigms exist based on the development and
interpretation of human thoughts in constructing accounting knowledge. This in a way
attributes to the differing views on the role of accounting and subsequently to the technical
and behavioural aspects of the accounting profession.

Based on the definition of paradigm by Kuhn (1970), a new paradigm is suggested for IPA,
as there exists a community that shares and believes in it, the Muslim ummah (Arif, 1985).
Figure 1 illustrates the foundation of the Shariah Islamiiah paradigm.

22
It can be seen that Shariah Islamiiah is based on two basic sources: the Quran (the
word of Allah) and the Hadith23 (sayings, approvals and actions of the Prophet Muhammad,
peace be upon him (pbuh) during his lifetime). The third source is Ijma, a consensus of
Muslim scholars and is applied only in the absence of an explicit answer to the issue in
question. The final source is Qiyas, which is represented in the analogical deductions from
the other three sources for contemporary issues that are not directly mentioned in those
sources but have similar characteristics as those that existed in the past. Once any decision is
made by either Ijma or Qiyas, it becomes mandatory and cannot be overruled by future
generations (Zaid, 2000).

22
The Shariah Islamiiah for Muslims is the book of Allah. Three books are considered to be the books of
Allah. The other two are Torah for Jews and the New Testament for Christians as they are derived from
religious laws (Wilson, 1997).
23
The Hadith helps to clarify rules in the Quran that are revealed in general terms e.g. the Quran only
mentioned the payment of zakat to eight specific groups: Alms are for the poor and the needy, and those
employed to administer the (funds): For those whose hearts have been (recently) reconciled (to truth); for those
in bondage and in debt; in the cause of Allah; and for the wayfarer: (thus is it) ordained by Allah. And Allah is
full of knowledge and Wisdom (At-Tauba 9:60) but did not mention the rate and method of payment which
was clarified further in the Hadith.

11
Figure 1 The Foundation of the Shariah Islamiiah Paradigm
Tawhid (Unity of Allah) S
H
A

Quran R
I
I
Hadith A
H

Ijma
I
Qiyas S
L
A
Objectives of Shariah Islamiiah: M
I
* Al-adl and Al-ihsan (social justice and compassion for fellow human) I
* Barakah (Allahs blessings) A
H
* Al-Falah (Realise benefit for the people in this world and hereafter)

Ethics/Morality
Iman (Faith)
Taqwa (Piety)
Birr (Righteousness)
Ibadah (Worship)
Fardh (Responsibility)
Ikhtiyar (Free will)
Amanah (Trust)
Hablun minAllah (Believe in Allah and enjoin what Quran
recognises to be right and forbid what it considers to be wrong)
Hablun minan-nas (Striving for the good of humanity)

Politics: Economics: Social:


Shura (Consultation) Zakat (Religious levy) Ummah (Community)
Khilafa (Succession) Halal (Lawful means) Maslahah (Public interest)
Nizam (Order) Daf al-darar (Prevention of
Baya (Obedience)
Itidal (Moderation) harmful activities)
Islah (Noble) Raf al-haraf (Removal of
hardship in society)

The main objective of the Shariah Islamiiah is to educate the individual, establish justice
and realise benefits to the people in this world and in the hereafter (Kamali, 1989) and any
activity that conforms to it is recognised as a form of ibadah (worship). It governs every
aspect of a Muslims life, be it relationship with Allah or with others including politics,
economics and social24 by safeguarding their faith, life, intellect, posterity and wealth

24
Some of the basic principles in these three main areas are outlined in Appendix 1.

12
(Abdalati, 1975). Similarly, Ibn Al Qayim Al-Jawziyyah states that the basis of Shariah
Islamiiah is hikmah (wisdom) and al-Falah (welfare of the people in this world as well as
the hereafter)25 and as such, everything departing from justice to oppression, mercy to
harshness, welfare to misery and wisdom to folly, runs counter to the tenets of the Shariah
Islamiiah (Chapra, 1992). In other words, Shariah Islamiiah is concerned mainly in
promoting al-adl and al-ihsan (justice and welfare of society) and seeking barakah (Allahs
blessing) by setting the basic foundations for its moral, social, political and economic
philosophy to achieve al-Falah.

The moral aspects of Islam are underpinned by the concepts of tawhid (unity), iman (faith)
and its other interrelated concepts viz. taqwa (piety), birr (righteousness), ibadah (worship),
fardh (responsibility), ikhtiyar (free will), amanah (trust), hablun minAllah (believe in
Allah and enjoin what Quran recognises to be right and forbid what it considers to be
wrong) and hablun minan-nas (striving for the good of humanity). The most important is
iman (faith) because without it, it would be difficult to achieve the other aspects. Tawhid
(unity) is the unqualified belief and mans unconditional surrender to Allah by making his
desires, ambitions and actions subservient to His command.26 A pious Muslim believes in
the six cardinal articles of the Islamic faith.27 In addition, a true Muslim views his/her
creation and life as having a meaningful and sublime purpose beyond the physical needs and
material activities of man in accordance with his/her Covenant with Allah, which is ibadah
(to worship Allah). Thus, man cannot escape from fardh (responsibility) entrusted to him/her
as Allah has provided him/her assistance in the form of Shariah Islamiiah (Islamic
teachings), aql (intelligence) and also ikhtiyar (free will), which is the power to choose
his/her course of conduct.28 Furthermore, man has voluntarily accepted nature as amanah

25
Al-Falah is a tangible quality towards the achievement of Gods pleasure (Siddiqi, 1972).
26
The Quran states: Say: Truly, my prayer and my service of sacrifice, my life and my death, are all for
Allah, the Cherisher of the worlds (Al-Anam 6:162).
27
These are the belief in one Allah (the concept of unity or Tawhid), His angels, His Books, His messengers,
the Last Day of Judgement and the absolute knowledge and wisdom of God (Qada and Qadar). The last belief
implies that human beings are asked to think, plan and make sound choices but they should not despair or lose
faith if things do not happen as they wished/wanted it to be as Allah knows best.
28
Islam views man as having a special status in the hierarchy of all known creatures as man alone is gifted
with rational faculties, spiritual aspirations as well as powers of action. Man is Ashraful-Makhlooqat.

13
(trust) from Allah and as such must be willing to serve Gods purpose.29 In short, three
qualities as signs of sound faith and moral rectitude in Islam is hablun minAllah, hablun
minan-nas and ittminaan al-qalbi bil iman (to resent and resist returning to disbelief).

Taqwa (piety or love of Allah) demands that man acts in obedience to Allah, and hopes in
His mercy, upon a light from Him; and leaving acts of disobedience to Allah out of fear of
Him, upon a light from Him (Ibn Abee Shaybah cited in Al-Uthaymeen, 1998, p: 9). The
Quran describes some obvious benefits of taqwa, of which, achieving barakah (Allahs
blessings), is one. Some of the barakah mentioned in the Quran include making general
affairs of mankind easier,30 protecting mankind from evil harm,31 attaining guardianship
from Allah,32 distinguishing truth from falsehood and having knowledge of each one of
them,33 preventing injustice in matters of wealth,34 providing the means of attaining Allahs
mercy in this life and the hereafter35 as well as attaining knowledge.36

Birr (righteousness) comprises all kinds of good and perfection expected in man viz. his
faith should be true and sincere, he must be prepared to show kindness to his fellow man and
make saddaqa (charity), he must be a good citizen, should support charitable institutions and
social organisations, and be steadfast and unshakeable in all circumstances. 37 Besides

29
Mans willingness to accept responsibility and trust is stated in the Quran: We did offer the trust to the
heavens and the earth and the mountains; But they refused to undertake it, being afraid thereof: But man
undertook it (Al-Ahzab 33:72).
30
This is mentioned in the Quran: And for those who fear Allah, He will make things easy for them (At-
Talaq 65:4) and So he who gives (in charity) and fears (Allah), and (in all sincerity) testifies to the best, We
will indeed make smooth for him the path to ease (Al-Lail 92:5-7).
31
Those who fear Allah, when a thought of evil from satan assaults them, bring Allah to remembrance, when
lo! they see (aright)! (Al-Araf 7:201).
32
But Allah is the protector of the righteous (Al-Jathiya 45:19).
33
O ye who believe! If ye fear Allah, He will grant you a criterion (to judge between right and wrong),
remove from you (all) evil deeds and forgive you (Al-Anfal 8:29) and He will bestow on you a double
portion of His mercy: He will provide for you a light by which ye shall walk (straight In your path) (Al-Hadid
57:28).
34
It is prescribed, when death approaches any of you, if he leave any goods, that he make a bequest to parents
and next of kin. According to reasonable usage; this is due from the God-fearing (Al-Baqarah 2:180).
35
And ordain for us that which is good, in this life and in the hereafter: For we have turned unto thee. He said:
I afflict my punishment on whom I will; but my mercy extendeth to all things (Al-Araf 7:156).
36
For it is Allah that teaches you. And Allah is well acquainted with all things (Al-Baqarah 2:282).
37
But it is righteousness To believe in Allah and the last day, and the angels, and the book, and the
messengers; to spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the
wayfarer, for those who ask, and for the ransom of slaves; to be steadfast in prayer, and give Zakat, to fulfil the
contracts which ye have made; and to be firm and patient, in pain (or suffering) and adversity, and throughout
all periods of panic. Such are the people of truth, the God-fearing (Al-Baqarah, 2:177).

14
believing in the truth of Allah and life, and making proper use of his wealth by spending it in
accordance with the Shariah Islamiiah,38 the righteous man will also make a proper use of
his spiritual and physical abilities by observing prayer, controlling his anger and emotions as
well as having moral capacity for forgiveness and patience, and a conscious urge to regret
and repent when he sins.39 If this form of righteousness can be established and sustained,
then the individual and society will experience peace and security in all circumstances.

Both concepts of taqwa and birr are founded on strong faith and constant practice, and not
just convenient claims and oral confessions. Accordingly, Muslims use these concepts to
define good, unlike the rationalists who see it as what man wants more of or the neurotic
instinct of self-interest as the source of happiness in life. Thus, Islam mediates these
concepts to be the best way for all-mankind to distinguish between good and evil, as humans
have limited rationality when dealing with abstract concepts. For instance, true income or
net profit is not a natural phenomenon that can be calculated objectively. It is an abstract
concept, developed by the human mind and calculated via the application of arbitrary
conventions (Thomas, 1969) to maximise wealth whereas in Islam, it is to fulfil Allahs
obligation (e.g. zakat) based on the principles laid down by the Shariah Islamiiah.

The social aspect of Islam is based on the concepts of tawhid (unity), adalah (justice),
ummah (Islamic community) and maslahah (benefit for the people). Based on the concept of
tawhid, everyone is equal in the sight of Allah, to whom there is direct access (Abdalati,
1975). Based on this concept of equality of mankind by nature and origin, the role of society
as well as every individual is to be the true embodiment of the virtuous, the wholesome and
the noble (Abdalati, 1975). Further, promoting adalah (equality, justice and virtues) in
society would guarantee the achievement of al-Falah (a comprehensive human welfare in

38
Issues regarding wealth is given considerable attention in the Qur'an. It is mentioned forty-six times in
different verses in the Quran.
39
Who believe in the unseen, are steadfast in prayer, and spend out of what We have provided for them; and
who believe in the revelation sent to thee, and sent before thy time, and (in their hearts) have the assurance of
the hereafter. They are on (true guidance), from their Lord, and it is these who will prosper (Al-Baqarah 2:3-
5) and Those who spend (freely), whether in prosperity, or in adversity; who restrain anger, and pardon (all)
men; For Allah loves those who do good; and those who, having done an act of indecency or wronged their
own souls. Remember Allah and ask for forgiveness for their sins, and who can forgive sins except Allah?
and are never obstinate in persisting knowingly in (the wrong) they have done (Al-Imran 3:134-135).

15
this life and also in the hereafter).40 The concept of ummah (community) in Islam has certain
unique characteristics that are related to the foundation of a community, its historic mission
and purpose, as well as its status among other communities. The foundation of the ummah is
based on the principle of submission to the will of Allah, obedience to His law, and
commitment to His cause. In terms of its mission and purpose, al-amr bi al-maruf wa al-
nahian al-unkar (advocate what is good, demand what is right and eradicate what is wrong)
and believe in Allah, is expected of the ummah.41 In addition, the Quran also mentioned
that the Muslim ummah must play an exemplary role.42 By adhering to Shariah Islamiiah,
mankind is able to realise maslahah. This includes raf al-haraj (removal of hardship),
dafaal-darar (prevention of the forbidden) and striving for the truth (haqiqiah) before
pursuing self-interest. The pursuance of benefit for the people is a good goal as they are
concerned with the subsistence of human life, the completion of mans livelihood, and the
acquisition of what his emotional and intellectual qualities require of him i.e. protection of
interests (Masood, 1989).

The political aspect of Islam is based on the concepts of tawhid (unity), shura (consultation),
adalah (justice), khilafa (succession) and baya (obedience). Based on the concept of
tawhid, sovereignty in Islam does not belong to the ruler, nor even to the people themselves.
It belongs to Allah43 and mans role is that of khalifa (Allahs vicegerent) on earth.44 Shura
refers to free consultation at all levels45 to provide the ruler or leader with room to handle
common affairs with the aim of achieving adalah (justice), providing security and protection
to all citizens, and promoting their welfare regardless of colour, race or belief, in conformity

40
The narrow meaning of justice in Islam is that everyone should receive his/her rights in this life (adalah)
while the wider meaning is the human welfare in this life and also in the hereafter (al-Falah).
41
Let there arise out of you a band of people inviting to all that is good, enjoining what is right, and
forbidding what is wrong: They are the ones to attain felicity (Al-Imran 3:104) and Ye are the best of people,
evolved for mankind. Enjoining what is right, forbidding what is wrong, and believing in Allah (Al-Imran
3:110).
42
Thus have We made of you an ummat justly balanced. That ye might be witnesses over the nations, and the
messenger a witness over yourselves (Al-Baqarah 2:143).
43
Blessed be He in whose hands is dominion; and He over all things hath power (Al-Mulk 67:1) and Such
is Allah, your Lord and Cherisher: to Him belongs (all) dominion. There is no God but He: then how are ye
turned away (from your true Lord) (Az-Zumar 39:6).
44
Behold, thy Lord said to the angels; I will create a vicegerent on earth (Al-Baqarah 2:30).
45
And consult them in affairs (of moment). Then, when thou hast taken a decision, put thy trust in Allah (Al-
Imran 3:159) and who (conduct) their affairs by mutual consultation (Ash-Shura 42:38).

16
with the stipulations of Allah in His constitution.46 The ruler is entitled to baya (obedience
from the community) as long as that role is performed in accordance with the law of Allah.47
Thus, each citizen is enjoined to supervise the conduct of the governing administration and
question its handling of public affairs and entitled to enjoy freedom of belief, thought and
expression etc., though not in the absolute sense, for that may lead to chaos and anarchy. In
short, the ruler has dual responsibility, first to Allah and then to society. The ruler is acting
only as an executive chosen by the people to serve according to the law of Allah. Hence, the
leader must be chosen on the basis of the merits of virtue, fitness and competence,
independent of any political party of a non-Islamic platform or subjected to foreign powers,
if he is to exercise his due authority on behalf of Allah and in His cause.

Islamic economics is based on the concepts of tawhid (unity), al adl wal ihsan
(equilibrium), ikhtiyar (free will) and fardh (responsibility) as asserted in the Quran and
Hadith (Naqvi, 1994). Based on the concept of tawhid, the ultimate ownership of all wealth
is Allah and man has been given amanah (trust) to use it in the ways prescribed by the
Shariah Islamiiah.48 In addition, Islamic economics encourage Muslims not only to engage
in islah (noble) as opposed to fasad (corruption) in conducting economic activities, but also
itidal (moderation) in consumption of resources to achieve nizam (order) in society. Al adl
wal ihsan (equilibrium) in Islam is based on the normative concept of adl (justice) as
opposed to dhulm (injustice), which denotes social dis-equilibrium whereby the resources of
the society flow from the poor to the rich, which is strongly forbidden in the Quran.49
Ikhtiyar indicates that man is born with a free will i.e. having ability of making choices in
various conflicting situations.50 Fardh (responsibility) in Islam emphasises two important

46
And when ye judge between people that ye judge with justice (An-Nisaa 4:58) and O ye who believe!
Stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your partners, or your kin, and
whether it be (against) rich or poor: For Allah can best protect both. Follow not the lusts (of your hearts), lest
ye swerve, and if ye distort (justice) or decline to do justice, verily Allah is well-acquainted with all that ye do
(An-Nisaa 4:135).
47
O ye who believe! Obey Allah, and obey the Messenger, And those charged with authority among you
(An-Nisaa 4:59).
48
The Shariah Islamiiah specifies eight rules governing private ownership and use of property viz.
continuous utilisation; payment of zakat according to market value; beneficial use of resources; care not to
harm others when utilising the resources; possession is in compliance with Shariah Islamiiah; use must
neither be parsimonious nor prodigal; self due benefits to owners are permitted and property transfers are
subject to Islamic inheritance laws (Mannan, 1986).
49
In order that it may not (merely) make a circuit between the wealthy among you (Al-Hashr 59:7).
50
Verily never will Allah change the condition of people until they change what is in themselves (Al-Rad
13:11).

17
concepts first is related to mans vicegeral role on earth and the second is basically
voluntary in nature i.e. making sacrifices but not to the extent of causing hardship to
oneself.51

Accordingly, economic or business activity in Islam is a form of ibadah (worship). It


requires Muslims to earn a living through halal (lawful) means. They must also avoid riba
al-Nasiah (usury) and riba al-Fadl (interest)52 by participating in profit sharing activities.53
In addition, they are expected to honour uqud (contracts), istiqamat al-daftar (keep proper
accounts), avoid israf (extravagance), itidal (moderate) in consumption and fulfil
obligations to society by paying zakat,54 other form of taxes55 required by the state, as well
as saddaqa (charity). They must avoid ihtiyal (fraud), khiyana (dishonesty), tanajush
(collusion), qimar (gambling) and all forms of gharar (speculative) activities in any business
transactions. These are all aimed at achieving economic justice based on equality and
fairness.

4 The Islamic Perspective of Accounting Based on Shariah Islamiiah


Against the background of the preceding discussions, the basic concepts of Shariah
Islamiiah can be linked to accounting. Figure 2 illustrates the theoretical framework of IPA.

IPA acts as one of the mechanisms to assist in achieving the goals of Shariah Islamiiah
and as such, its main objectives are to help achieve socio-economic justice, fulfill rights and
obligations to Allah, ummah and individuals as a form of ibadah and to attain al-Falah.

51
Those who spend their wealth for increase in self-purification (Al-Lail 92:18).
52
Riba al-Fadl (tampering with the freedom of the market) includes monopoly and monopsony, price control,
taxation, imposed medium of exchange and exclusive rights of authors (copyrights) and inventors (patents)
while riba al-Nasiah (unequal advantage) includes renting of money, uncertainty in transactions and unfair
advantages in transactions (Vadillo and Khalid, 1992). Also see El-Ashker (1987, p.39) for explanation of
different types of riba.
53
See El-Ashker (1987, p.71-79) and Gambling and Karim (1991, p.35-38) for discussion of the different
forms of partnerships and lending arrangements in Islamic business organisations.
54
Zakat is a religious duty and type of worship levied on Muslim individuals only. The spending of the
proceeds and the beneficiaries are specified in the Quran (At-Tauba 9:60) and the rate is dependent on the
type of economic activities (see El-Ashker, 1987; p.48-49).
55
Such as taxes on income and profit, foreign trade, consumption and production and other indirect taxes such
as road tax, vehicle excise and capital transfer tax.

18
Figure 2: Theoretical Framework of the Islamic Perspective of Accounting

Shariah Islamiiah

The Islamic Perspective of Accounting


Objectives:
Al-Adl and al-ihsan (To assist in achieving socio-economic justice)
Ibadah (To assist in fulfilling obligations to Allah, society and individuals concerned)
Al-Falah (To assist in achieving rewards in this world and the hereafter)

Technical Human

Pre-Measurement Authority + Enforcement


Importance:
* Halal transactions Basis: Morality/ethics based on
56
* Careful recording and observation of the date of Divine law
occurrence of transactions for zakat purposes
Measurement * Muminoon (Believer)
Importance: * Adalah (Justice/Equitability) and
* Zakat purposes Tazkiyah (Growth & Purification)
* Determination and distribution of profit * Amanah (Trust)
* Treatment of debts and liabilities * Masuliyah (Accountability)
* Treatment of assets * Ilm (Knowledge)
* Payment of taxes * Shura (Consultation)
* Balagha (Eloquence)
* Hikmah (Wisdom)
Disclosure
Importance:
To assist users in decision-making
* Payment of zakat to beneficiaries
* Saddaqa (charities/gifts)
* Riba free resources
* Halal dealings
* Employees welfare
* Environmental protection
* Attainment of objective of business venture
* Efficient and fair use of resources

In order to achieve those objectives, the principles addressing both the technical and human
aspects must also be derived from Shariah Islamiiah. With regards to the technical aspect,
IPA addresses accounting constructs related to pre-measurement, measurement and

56
The bottom three human values viz. hikmah, ilm and balagha are largely based on discussion in the article
by Zaid (2000b).

19
disclosure, while the human aspect addresses accounting constructs related to authority and
enforcement.57

In dealing with constructs related to pre-measurement and measurement, the principles


related to zakat and halal business transactions are the two most important issue to be
addressed and the same applies to the constructs related to disclosure viz. zakat and
saddaqa,58 riba-free59 resources and halal business transactions. They are Allahs laws and
not fulfilling Allahs law will result in sin and punishment in the hereafter.

Besides those specific principles, the measurement construct must also tackle issues related
to distribution of profits, treatment of debts, liabilities and assets as well as payment of other
forms of taxes.60 These issues are all important from an Islamic perspective as they are
related to distribution of wealth. Similarly, the disclosure construct need to also address the
issue of social responsibility reporting i.e. whether other obligations and duties as prescribed
by Shariah Islamiiah have been fulfilled viz. saddaqa (charities/gifts) generously made to
society, employees received reasonable wage and their welfare given priority (e.g. housing
and transport allowances, safety, training etc.), the environment and resources are not
abused in business endeavour and that products are not harmful to society.

Table 1 provides a summary of principles related to pre-measurement and measurement


constructs of two concepts that are unique in IPA i.e. halal dealings and zakat. At the pre-
measurement stage, it is important to ensure that business transactions that are collected and
recorded are only those classified as halal and disregard and/or highlight any haram
activities. To facilitate discussion of principles related to this construct, three issues related

57
The division between human and technical constructs is made to assist in explaining the underlying
principles. Although disclosure is value-leaded, some aspects of the preparation and reporting of financial
statements are technical e.g. graphical presentation. The pointer in the diagram indicates that human values to
some extend affect the technical construct.
58
The Quran uses the word infaq, saddaqa and zakat as perfect synonyms of ways for spending in the way of
Allah with the obligatory part known as zakat, and is kept distinct from infaq and saddaqa which are both
voluntary (Hassan, 1986).
59
The moral motive for prohibiting riba revolves on the principle of not exploiting the poor/needy via interest
charges on borrowed money while the economic motive stems from the principles of justice (fairness in
dividing gains/losses in business dealing, risk sharing), encouraging hard work and accumulation of wealth via
interest (i.e. without hard work) is regarded as selfish.
60
These include taxes on income and profit, foreign trade, consumption and production and other indirect
taxes.

20
to IPA are identified: source of capital and financing, nature of contracts and forms of
business dealings. In terms of source of capital and financing, it is important for the
accountant to ensure that preference shares and riba-bearing bonds, riba leasing
transactions, notes payable and notes receivable are avoided and in their place, halal forms
of capital and financing viz. mudaraba, musharaka, murabaha, ijara and ijara wa iktina, are
utilised. The issue of contracts in business receives considerable attention in Islam. 61 Some
principles of contracts related to transactions include checking that financing contracts are
free from usurious terms, contracts of service pay fair wages, full text of all contracts put in
writing, sale and purchase contracts are based on fair pricing and business contracts are
secured fairly (e.g. not based on bribery). In addition, forms of business dealings to be
recorded and measured must not involve prohibited products i.e. gambling, alcohol, swine,
idols etc. and also speculative transactions62 such as bay al-gharar (speculative sales),
mulamasah (sale-at-a-touch), munabadah (sale-at-a- toss) and najash (false bidding).

61
This is mentioned in the Quran: O ye who believe! When ye deal with each other, in transactions involving
future obligations in a fixed period of time, reduce them to writing. Let a scribe write down faithfully as
between the parties: let not the scribe refuse to write: as Allah has taught him (Al-Baqarah 2:282).
62
The Quran prohibits any form of fraud transactions: Woe to those that deal in fraudthose who, when they
have to receive by measure, But when they have to give by measure or weight to men, give less than due. Do
they not think that they will be raised up? On a Mighty Day (Al-Mutaffifeen 83:1-5).

21
Table 1 Summary of the Islamic Perspective of Accounting Principles Regarding Measurement
Concept Aim Principles
Halal Allah has clearly stated certain things as Classification Issue:
dealings haram (prohibition) because they are Source of capital
harmful and undesirable for human - ensure sources are halal i.e. avoid preference shares and riba-bearing bonds, riba leasing transactions, notes payable and
beings and involvement in such activities notes receivable.
results in sin. Source of financing
All others are considered halal, as they - mudaraba (partnership without time limit), musharaka (partnership of limited duration and specific purpose), murabaha
are good and beneficial. (bank purchase and sell goods required by customer i.e. cost-plus pricing), ijara (capital leasing), ijara wa iktina (hire
purchase).
Contracts
- financing contract must be free from usurious terms.
- contracts of service require payment of fair wages.
- full text of all contracts must be confirmed in writing.
- sale and purchase contracts based on fair pricing.
- contracts are secured fairly i.e. securing unfair advantages in business such as bribery and cartels must be avoided.
Forms of business dealings
- avoid forms of business related to gambling, alcohol and other unlawful (haram) products.
- avoid any form of speculative transactions e.g. bay al-gharar (speculative sales), mulamasah (sale-at-a-touch),
munabadah (sale-at-a-toss) and najash (false bidding).

Zakat Three main purpose of zakat are as Accounting for zakat purposes calls for the need to keep proper accounts and use of correct weights and measurement based on
follows: the following rules:
a) to give thanks unto Allah for
blessing of wealth and to ask for Valuation Issue:
more Classification of zakatable items
b) to purify oneself from the vice of - asset items for zakat purposes must be based on current market value.
niggardliness - only actual amount of bad debts are deductible from zakat.
c) spend wealth to show ones love to - in the case of insolvency, owners are not liable for zakat if creditors remain unpaid.
Allah
Nisab (Zakatable threshold) and rate
In short, zakat (one of the five pillars of - money/cash not used (savings) for one year: 2.5% in excess of the equivalent of 86 gm worth of gold value.
Islam) should not be considered as a - income from investments: 10% in excess of the equivalent of 86 gm worth of gold value.
burden but a form of ibadah and wealth - personal income: 2.5% in excess of the equivalent of 86 gm worth of gold value.
distribution aimed at achieving al-adl and - manufacturing industry: 10% of net profit.
al-Falah . - gold and silver: 2.5% in excess of 200 dirhams (725.76 gm).
- grazing animals: 1 sheep for every 5 camels; 1 cattle for every 30 cattle and 1 sheep for every 40 sheep.
- agricultural crops: 5% for irrigated crops and 10% for non-irrigated crops that exceed 1,568 kg.
- riqaz (buried treasures) and maadin (minerals): 20% of total value.

Haol (Periodicity)
- one full lunar year of asset ownership except for agriculture and buried treasures and mines where zakat must be paid
immediately.

22
For zakat purposes, the valuation principles related to zakatable items, nisab (zakatable
threshold) and rate of payment and haol (periodicity) are important issues for IPA. For
companies, zakat is calculated based on net working capital including cash (Gambling and
Karim, 1991) i.e. current assets less liabilities. To determine the value of stocks, Muslim
scholars suggest the use of current market value less distribution expenses (El-Ashker,
1987). In terms of debts, only the actual amount of bad debts (al-munkaser min al mal) can
be deducted from the zakat base. Any provisions for bad debts and doubtful debts such as al-
mutaather (high probability of non-payment by debtors due to certain obstacles), wal-al-
mutahayyer (probability of non-payment by debtors due mainly to external factors) and wa-
al-mutaakked (probability of non-payment by debtors due mainly to internal factors), are
not deductible. In the case of insolvency, zakat is not liable on owners as payment to
creditors takes priority. Nisab (threshold of zakat) and the rate for payment of zakat has been
elaborated in the Hadith and it is only based on assets that meets the haol (periodicity)
which is one lunar year for all items except for certain products e.g. agriculture, riqaz
(hidden treasure) and maadin (minerals) which must be paid immediately.

Disclosure of accounting information in corporate reports and other media is important as it


assists users in their decision making and also for management (including accountant on
behalf of the firm) to demonstrate accountability. Unlike conventional accounting, where the
investor group is defined as the primary group whose informational needs should be
accommodated (ASB, 1999), IPA must consider the needs of all users equally, in
conformance to the spirit of justice in Islam. As such, it must not only disclose specific
items of information that are essential to assist Muslim user group in making economic and
religious decisions but also address the information need of non-Muslim user group who
may be involved directly or indirectly with the business activities.63 Table 2 presents a
summary of the principles related to the disclosure constructs.

63
Users include investors, lenders, suppliers, employees, customers, government and other agencies and the
public.

23
Table 2 Summary of the Islamic Perspective of Accounting Principles Regarding Disclosure
Concept Aim Principles

Full disclosure Disclosure of relevant and Relevant


reliable information that will assist Any information that will influence economic and religious decisions of Muslim users. Predictive information is less important.
And users in making both economic The following information are material and relevant for Muslim users:
and religious decisions and for Zakat
Social management and accountants to Disclosure of the amount and to whom zakat has been made i.e. Baitul Mal (zakat institution) or the group of beneficiaries
responsibility demonstrate fulfilment of rights mentioned in the Quran..64
and obligations to Allah, ummah Halal dealings
and oneself. Disclose any activities, products and services and percentage of profit contribution from any transactions that has the elements of
haram and doubtful which are beyond control and the way they are being handled.
Riba-free
Disclose any activities and percentage of profit contribution from any usurious and speculative transactions.
Community
Disclose type and amount of saddaqa (charity), qard al-hasan (benevolent loan) and waqf (charitable trusts).
Debtors65
Disclose amount of debts written off and debt policy.
Employees66
Disclose information related to wages and welfare of employees e.g. housing, safety, training, donation and qard al-hasan etc.
Product
Disclose nature, quality and safety of products including marketing efforts undertaken.
Environment67
Disclose amount and actions taken to alleviate the effects of pollution and other externalities.

Reliable
Information provided are free from material error and faithfully represented i.e. without distorting what is measured, the measurement
process and what is disclosed via selective process that could unintentionally damage others.

64
It is important for zakat recipients viz. faqir (poor), miskin (needy), amil (zakat collectors), al-mualafah gulubahum (those who reconciled to Islam), riqab
(captives and slaves), gharim (debtors), fi-sabilillah (in the cause of Allah) and ibn-al-sabil (travellers) to know the source of zaka. If it is not of a lawful source,
the recipients should abstain therefrom. In the modern world, it is the duty of the accountant and zakat officials in the Baitul Mal (one of the user group of Islamic
accounting information) to check the source of the zakat on behalf of the recipients.
65
The Quran encourages leniency with debtors: If the debtor is in strained circumstances, then let there be postponement to the time of case; and that ye remit
the debt as alms giving would be better for you if ye did but know (Al-Baqarah 2:280).
66
The Hadith stressed on the importance of a fair wage and welfare of employees: They (servants) are your brethren, Allah has placed them under your control,
so whoever has his brother under his control, he should feed him from what he (himself) eats and give him clothes the like of which he (himself) wears; and do
not impose on them tasks which are too hard for them and if you impose on them such a task then help them (in doing it) (Bukhari).
67
The Quran condemns exploitation of the environment: When he turns his back, his aim everywhere is to spread mischief through the earth and destroy crops
and progeny but Allah loveth not mischief. When it is said to him, Fear Allah, he is led by arrogance to (more) crime (Al-Baqarah 2:205-206).

24
Two important concepts viz. full disclosure and social responsibility disclosure are
important in IPA but the type of information emphasised are those that would aid Muslim
users in making economic and religious decisions and firms in discharging their
accountability to Allah and society.

Discussion on the concepts of full disclosure and social responsibility need to be linked to
the principles of relevance and reliability. For IPA, material and relevant information are
those that would affect economic and religious decisions of users and also all information
that helps the firm (the accountant as an agent) to demonstrate its accountability to Allah and
society. As such, quantitative and qualitative information related to zakat, halal dealings,68
riba-free transactions and also those that falls under the themes of community, employees,
debtors, products and the environment should be disclosed. Although some may argue that
this may lead to information overload and perceived as being less credible (since
information are often not audited), from an Islamic perspective, it is the duty of information
providers to disclose as much as possible to clear their conscience as a trustee and for users
to filter the information and form their own opinion. As for the principle of reliability, all
information provided to users must be free from bias and truthfully represented. This means
that the figures provided are not misleading, not manipulated for specific purposes and that
vital information that may affect users economic and religious decisions have not been
concealed.

As for constructs related to authority and enforcement, Table 3 provides a summary of the
principles related to nine concepts of values derived from Shariah Islamiiah viz.
muminoon (believers), adalah (justice), amanah (trust), masuliyyah (accountability),
tazkiyah (growth and purification), shura (consultation), hikmah (wisdom), ilm (knowledge)
and balagha (eloquence), that should form the basic foundations in influencing the actions
of faithful Muslim accountants who accept Islam as a way of life. The authority who is most
appropriate in implementing and enforcing IPA must be a muminoon imbued with taqwa
(piety) and birr (righteousness). This is vital in achieving the objectives of maslahah, hablun
minAllah and hablun min annas.

68
There are five distinction in Shariah Islamiiah of human acts: halal (permitted acts), haram (forbidden
acts), mandub (recommended acts) makruh (objectionable acts) and jaiz (between recommended and
objectionable).

25
Table 3 Summary of Islamic Perspective of Accounting Principles Regarding Authority and Enforcement

Concepts Principles

Muminoon Taqwa (piety) Recognise that Allah is the Supreme power and that Allah is watching over every action which will be
(Believers) assessed on the day of Judgement.
Seek barakah (Allahs blessings).
Gain guidance from Allah in decision-making.69

Birr Vision of success and failure extends beyond worldly existence i.e. achieve Maslahah.70
(righteousness)
Hablun minAllah (believe in Allah and enjoin what Quran recognises to be right and forbid what it
considers to be wrong) and hablun min an-nas (strive to maintain good relationship with fellow human)

Adalah (Justice) Able to judge and make sound decisions.


& Fear Allah in discharging responsibilities by being objective, fair and independent.
Tazkiyah Justice to all Allahs creations, not just to man (ihsan).
(Growth &
Purification) Recognise that all material enhancement must lead to social justice and spiritual betterment for the ummah as well as the
proprietor.

Amanah (Trust) Recognise the duty to maintain the undertaking or capital in the very best physical and spiritual condition as a holder of amanah.

69
Muslims are encouraged to perform al-istikharah, a special prayer to seek Allahs guidance when having to make major decisions and should not be frustrated
later if it turned out to be not the right one as Allah knows best.
70
There are three interrelated divisions of maslahah viz. a) daruriyat (essentials) where lives of people depend on e.g. belief and religion, nafs (self), nasl
(family), mal (wealth or property) and aql (intellect); b) hajiyyat (necessities) which supplements the essential interests and if neglected may lead to hardship but
not total disruption of normal life e.g. religious obligations; c) tahsiniyyat (embellishments) which leads to improvement and attainment of that which is desirable
(Rahman, 1995).

26
Table 3 Summary of Islamic Perspective of Accounting Principles Regarding Authority and Enforcement cont.

Concepts Principles
Masuliyyah (Accountability) Not only to human superiors i.e. employer and users of accounting information but ultimately to Allah.
Strive to provide excellent service and recognise work as a form of ibadah (servitude to Allah) and amal
saleh (virtuous deed) which is the key for attaining al-Falah.
Realise purpose in life as a khalifah (vicegerent) over the earth and responsible for its well-being.

Ilm (Knowledge) Knowledge of Shariah Islamiiah helps in the justification of recommendations as well as rationalisation of
& judgements. Knowledge of Muamalat (business transactions)71 helps not only in the identification of halal
Hikmah (Wisdom) and haram transactions but other important aspects such as formation and types of business allowed,
valuation of non-monetary assets, distribution of profit and loss, documentation of transactions, calculation
and payment of zakat etc. In addition, must also possess technical competence in accounting.

Balagha (Eloquence) Able to express and present qualitative and quantitative information that are clear and understandable
because users rely on the contents of the report in making economic and religious decisions.72
Need to be careful in the selection of words and expressions and communicate only facts instead of
exaggerating information which could cause damage and provide benefits to those who did not deserve them.

Shura (Consultation) Consultative procedures should be applied to all collaborators i.e. shareholders, suppliers, customers,
employees and community.

71
Statement of Principles for Financial Reporting para 3.11 (ASB, 1999) also identified commercial awareness as one of the criteria expected of accountants.
72
The role of accountant in aiding decision making was explicitly recognised and mentioned by Imam Ash-Shafii: he who learnt accounting will make an
appropriate decision (Shahata, 1993; p. 45).

27
Besides acting as a muminoon, it is equally important for the ulu-l-amr (those charged with
authority) to be adl (just). Adalah (justice) in Islam include those related to decision
making73 and also in speech74, in accordance with Allahs saying. Khadduri (1984) states
that the standard of justice in Islam comprises of iffa (continence), rahma (compassion),75
al-nus hi li al-kull (universal benevolence) and al-ijtihad fi nafal-kull (endeavour to secure
advantages to all men), without which will give rise to injustice. In addition, the call for
justice in Islam is not only to fellow human but to all ihsan (Allahs creations). In short,
adalah is a combination of moral and social values denoting fairness,76 objectivity,77
temperance and straightforwardness. In addition, based on the concept of tazkiyah, the ulu-l-
amr should recognise that all material enhancement must lead to social justice and spiritual
betterment for the ummah besides the proprietor(s).

The ulu-l-amr must also treat his/her work as an amanah (trust) from Allah and society. This
is closely related to the concept of ownership78 in Islam where all wealth belongs to Allah
and ownership is actions which individuals take to contribute to society and to themselves.79
In other words, the ulu-l-amr must act as steward not only to parties who elected him/her but
also to society.

Another value concept required of ulu-l-amr is masuliyyah (accountability) not only to


human superiors i.e. employer and users of accounting information but ultimately to Allah.
This is in conformance to human purpose in life which is as a khalifah (vicegerent) over the
earth and responsible for its well-being. As such, the ulu-l-amr must strive to provide
excellent service and recognise work as a form of ibadah (servitude to Allah) and amal saleh
(virtuous deed) which is the key for attaining al-Falah.

73
If ye differ in anything among yourselves, refer it to Allah and His Messenger, if ye do believe in Allah and
the last day: that is best, and most suitable for final determination (Quran, An-Nisaa 4:59).
74
Whenever ye speak, speak justly, even if a near relative is concerned (Quran, Al-Anam 6:153).
75
Then will he be of those who believe, and enjoin patience, (constancy and self-restraint), and enjoin deeds
of kindness and compassion (Quran, Al-Balad 90:17).
76
Give measure and weight with (full) justice (Quran, Al-Anam 6:152).
77
But take witness whenever ye make a commercial contract; and let neither scribe nor witness suffer harm. If
ye do (such harm), it would be wickedness in you (Quran, Al-Baqarah 2:282).
78
Islam specifies public ownership (those that society collectively possess i.e. fire, water and salt), state
ownership (those that are essential for public utilisation and as such they should be controlled by the State to
ensure that public benefits from it such as minerals and gas) and private ownership.
79
Do ye not see that Allah has subjected to your (use) all things in the heavens and on earth, and has made His
bounties flow to you in exceeding measure, (both) seen and unseen? (Quran, Luqman 31:20). For other
examples, see Quran, Luqman 31:26 & Ash-Shura 42:12.

28
Ilm and hikmah are important qualities to assist the ulu-l-amr in making judgements,
recommendations and decisions. Besides technical knowledge and competence in
accounting, knowledge of Shariah Islamiiah especially those related to muamalat
(business transactions) should be the guiding force if the rights and obligations of Allah,
ummah and individuals are to be fulfilled. Besides knowledge and wisdom, the ulu-l-amr
must possess balagha (eloquence) to enable him/her to express and present qualitative and
quantitative information that are clear and understandable as well as communicating only
facts instead of exaggerating information which could cause damage to society and provide
benefits to those who did not deserve them. Lastly, shura (consultative procedures) should
be applied to all collaborators i.e. shareholders, suppliers, customers, employees and
community to ensure justice to all.

Having outlined the principles for IPA, it is appropriate to highlight its differences to
conventional Western accounting. Table 4 presents a summary of the differences. The entity
concept, which is central to accounting theory in conventional accounting, recognised
separation of entity and owners and as such, the equity of the entity is in excess of its assets
over its liabilities and the income of the entity is the excess of its revenues over its costs. In
addition, this concept is concerned with benefits (revenues) to one constituency, the
shareholders. On the other hand, IPA emphasised on benefits accruing primarily to those
outside the entitys constituencies: customers, suppliers, employees, the community in
which it is located, shareholders and society in general, with costs borne by the entity. In
other words, the concerns at the enterprise level in IPA is maslahah, thus changing the entity
concept from firm alone to owners and their affected constituencies.

29
Table 4 Summary of Differences in Underlying Postulates and Principles of Conventional and
the Islamic Perspective of Accounting

Principles Conventional Western Accounting Islamic Perspective of Accounting


Entity Postulate Views the business organization as an There is no separation as advocated by
entity separate from its owners and the proprietary theory i.e. the firm belongs to
focus of accounting is on revenues of owners and as such the assets belong to
shareholders. them and the liabilities are their obligations.
Going-concern Business continues forever i.e. entity Continuity of business depends on
Postulate will survive long enough to carry out contractual agreement between parties
its commitments and fully realise its involved in the profit-sharing activities and
existing assets and as such, prediction recognises the importance of both short and
And of the future solvency of the company long term focus in life. As such, short-term
is important. focus is on zakat and long-term focus is on
capital maintenance.

Consistency Recorded and reported in consistent Recorded and reported in consistent manner
Principle manner based on GAAP. based on principles prescribed by Shariah
Islamiiah.
Accounting Cannot afford to wait until the end of One lunar year for zakat purposes except for
Period Postulate firms life to measure success of agricultural product i.e. one season or at
operations, thus more regular harvest, and minerals and buried treasures
assessment. which must be paid immediately. For other
purposes, regular assessment is feasible.
RELEVANCE:
Full Disclosure Provision of all information either All information related to justice in pre-
Principle voluntarily or mandatory that aid measurement and actual measurement of
economic and ethical decision making business transactions and disclosure of
And of all user groups. This include social information related to zakat, halal dealings
responsibility reporting. riba-free transactions as well as information
Materiality related to social responsibility namely,
Principles community, debtors, employees and
environment that helps users in making
economic and religious decisions are
material.
Any information that would Provision of information that aid economic
significantly influence economic and and religious decision making based on the
ethical decision especially of current precepts of Shariah Islamiiah to
and potential users. demonstrate accountability to Allah, society
and individuals.
RELIABILITY:
Objectivity Information has been faithfully Information has not been distorted in terms
Principle represented and free from material of what is measured, the measurement
error i.e. has not been manipulated process and what is disclosed as part of
especially to influence economic taqwa i.e. having clear conscience with
And decisions of users. Allah in fulfilling duties related to both
financial and non-financial matters.
Conservatism Selection of accounting techniques Selection of accounting techniques that
Principle that report the most likely scenario in focus on discharge of stewardship and
the future. accountability to Allah, society and
individuals

30
Furthermore, the entity in Islam could be one of these forms: mufawada (unlimited liability)
and inan (limited liability) based on delegation or mutual agency,80 mufawada bi al-Dhaman
(partnership by guarantee),81 sharikat bi al-amal (companies based on labour),82 sharikat bi
al-shohrah (companies based on reputation)83 and mudaraba (commenda).84 All these types
of entities indicate that liabilities must be borne by owners.

The going-concern postulate i.e. an indefinite continuation of the enterprise, support the use
of historical costing of fixed assets as prepayments of expenses matched against revenue and
justify adoption of current and non-current classification of assets and liabilities (Gambling
and Karim, 1991). In other words, the focus is more on the solvency of the business in the
future and as such, information for predicting purposes is vital. In contrast, IPA focuses on
both short and long term obligations: short-term focus is to identify the wealth subjected to
zakat and the long-term focus is on wealth procured for utilisation beyond the zakat period.
This corresponds to the spirit of Islam which encourages acts of worship and strive for
sustenance as in the Islamic conventional wisdom: Work as if you are going to live forever
and worship Allah as if you are going to die tomorrow.

Closely related to the going-concern postulate is the consistency principle. Since


conventional accounting focuses on the long run and information for prediction purposes is
needed, the consistency principle emphasises on information for comparison purposes for
economic reasons and as such, GAAP is utilised as a mechanism to achieve the objective.
On the other hand, the consistency principle in IPA is concerned with ensuring that business
conform to Shariah Islamiiah at all time.

80
Partners contribute equal capital, share profits and losses equally, assume equal liability for all debts of the
company, have equal voting rights and each partner agrees to delegate the other partner (s) the right to act as
agent both in the partners presence or absence.
81
Partners may not contribute equal capital, profits distributed in proportions agreed upon by partners, losses
distributed in the ratio of capital contribution.
82
Two or more individuals agree to participate in a business without joint investment of capital and profits are
distributed based on agreement between partners e.g. professional practices i.e. lawyers, accountants etc.
83
A type of joint venture with limited life. Partners do not contribute capital but rely on good reputation to
obtain goods on credit and sell them for cash. Any profits made are shared based on agreement between
partners and partners are liable for debts when payment has to be made.
84
Partnerships where some partners contribute capital and others participate through labour, experience or
contacts. Profits are distributed based on agreement between partners in advance but any losses are borne by
partners who have provided the capital but only to the limit of capital contribution.

31
The accounting period postulate i.e. the need to measure success of operations before the
end of a firms life, results in conventional accounting that concentrates on accruals
accounting and the principles of income recognition and matching (Gambling and Karim,
1991). In contrast, IPA prescribes one lunar year for zakat purposes except for agricultural
products where zakat is due at harvest and as such, accounting statements are prepared for
that particular period, indicating the amount on which zakat is to be levied.

As for the relevance postulate i.e. the provision of all relevant information that can make a
difference in the outcome of a decision, the underlying principles of full disclosure and
materiality in conventional and IPA differs. Unlike the principle of materiality in
conventional Western accounting which emphasises on the relative importance of the
information for economic and to some extent ethical decision making purposes, IPA views
materiality of information as all information that aid both economic and religious
judgements. The latter purpose requires that all information indicating that justice in
measurement as well as demonstration that the entity is not involved in unlawful activities
(e.g. usury, gambling, animal testing etc.), payment of zakat has been made according to
Shariah Islamiiah, fulfilment of social responsibility and the objective of establishing the
business, are relevant. This forms part of huqu-qu-Allah (fulfilment of the duties and
obligations to Allah), huqu-qul ibad (fulfilment of the duties and obligations to society) and
huqu-qul-shakhseea (fulfilment of the duties and obligations to oneself).

With regard to reliability postulate i.e. users can rely on the information provided, the
objectivity and conservatism principles under the two accounting systems differs. Although
the concept of objectivity in both conventional and IPA imply measurement that is free from
personal bias, the former is often based on human rationality. For Muslims, objectivity has a
much deeper meaning beyond establishing justice in measurement85 as it is related to having
a clear conscience with Allah (the concept of piety) when fulfilling duties regarding
financial matters such as measuring zakat, profits, debts and quantification of non-financial
information. As for conservatism principle, conventional accounting encourages the

85
We sent aforetime Our messengers with clear signs and send down with them the Book and the balance (of
right and wrong), that men may stand forth in justice (Al-Hadid 57:25).

32
selection of accounting techniques that report the most likely scenario in the future and as
such, those that is least likely to overstate assets and profit. In contrast, IPA requires the
selection of techniques that report the current position with the purpose of demonstrating
stewardship and accountability to Allah, society and individuals.

Hence, from the preceding discussions, the differences in the conventional and IPA are
obvious not only in terms of their objectives but also their underlying principles. As such,
the theoretical framework for financial reporting based on the Shariah Islamiiah paradigm
is uniquely derived from Divine law rather than man made law, and has important
implications on the role of Muslim accountants, which can be summarised as follows:
1. Imbued with world-view of tawhid (awareness of Allah) - not anti-profit86 or anti-
worldly gain - but a vision of success and failure that extends beyond worldly existence
to life in the hereafter.
2. Responsibility and accountability- not only to human superiors (management/clients) but
ultimately to Allah in his/her capacity as a servant and trustee of Allah in enhancing
socio-economic justice in this world and to assists in achieving al-Falah.
3. Relationship - need to improve and strengthen relationships with Allah (hablun
minAllah) and maintain good relationship with superiors and other fellow humans
(hablun minan-nas) by fulfilling all his/her religious obligations.
4. Motivation - provide excellent service in every undertaking as a holder of amanah
(trustee of Allah) and to recognise work as a form of ibadah (servitude to Allah) and
amal saleh (virtuous deed) in conformity with the divine norms and values as key for
the attainment of al-Falah (success in this world and in the hereafter).

5 Concluding Remarks
This paper provides a holistic view on the need for IPA and builds an appropriate theoretical
framework for Muslims. It starts by highlighting the reasons for the unsuitability of
conventional accounting in fulfilling the needs of Muslims, namely on three counts viz.
religion is often eliminated in deriving its values, its emphasis on the use of economic

86
Profits are encouraged in Islam to assist in fulfilling social obligations satisfactorily as long as it is not at the
expense of the community.

33
rationality as the basis of developing accounting theory and practice, and its narrow focus on
owner/shareholder value.

The Shariah Islamiiah is proposed as the basis in developing a theoretical framework of


IPA as it works on universal postulates, has a very stringent and evolved methodology with
answers given in terms of a strategy for action, thus, giving it universal validity (Manzoor,
1984). This explains why any theoretical Muslim thinking must pass through the objective
framework of Shariah Islamiiah in order to become operative.

IPA based on Shariah Islamiiah recognises all the different roles suggested by the different
conventional paradigms. It takes into account the concept of accountability in accounting
(the anthropological/inductive paradigm), the use of a single valuation base in determining
income (the true-income/deductive paradigm), the importance of financial accounts as an
information-providing system which forms the basis for decisions and reviewing the
consequences of those decisions (the decision-usefulness/decision-model paradigm, and the
decision-usefulness/decision-maker/aggregate-market-behaviour paradigm) as well as
consideration of human behaviour in the accounting process (the decision-
usefulness/decision-maker/individual-user paradigm). Similarly, unlike the extreme
classification based on ideology in the construction of accounting knowledge to reflect
reality by assuming that it can be analysed as a natural science, and addressing the nature of
society as related to the order-conflict debate, the Shariah Islamiiah paradigm may be seen
as striking a balance between the extreme holistic-atomistic and radical-descriptive
dimensions of sociological views (as it addresses the structure, process, meaning and
function at both micro and macro levels).87

However, it is to be noted that although IPA is considered as a multi-paradigm addressing


the different accounting ideologies, its foundation is different. The reason is that, it is based
on Shariah Islamiiah and as such, it addresses three interrelated dimensions: huqu-qu-
Allah, huqu-qul ibad and huqu-qul-shakhseea. Fulfilment of these three dimensions forms

87
The holistic-atomistic continuum seeks to understand society from top-down and from the bottom-up
while the descriptive-radical continuum is content with describing society as it is, as opposed to a form of
political practice (Roslender, 1992).

34
part of the act of worship. In other words, for accounting to qualify as an act of worship for
Muslims, the three interrelated dimensions viz. fulfilment of the rights of Allah, ummah and
individuals, based on the principles of Shariah Islamiiah must be observed. In addition, the
Shariah Islamiiah paradigm moves from a pseudo-value-neutrality to one that is more
open and manifest value-commitment and value-fulfilment devoted to the optimisation of
human well-being in all dimensions. IPA recognised equilibrium between work and
worship, mutual responsibilities in society, balanced and beneficient use of the bounty of
Allah and limited sovereignty of people in society.

It is also important to acknowledge that implementation of IPA based on the Shariah


Islamiiah paradigm is a significant part of tawhid al-ibadah (maintaining the unity of
Allahs worship). As such, continuous efforts should be made by Muslims to adhere to the
principles prescribed by Shariah Islamiiah, for acceptance of non-Islamic law lands in
shirk (worshipping other than Allah) and an act of kufr (disbeliever) (Philips, 1990; p:26).88

Some may question the validity of IPA as a mechanism to achieve socio-economic justice as
many Islamic countries are not less afflicted by corruption, extremes of wealth and poverty89
and other problems just like their non-Islamic counterparts. This problem exists because an
Islamic state as envisioned by the Messenger is absent and Shariah Islamiiah is not
adopted wholesome in the so called Islamic countries.

Meanwhile, the absence of an Islamic state should not constrain the academic development
of a model for IPA. Continuous efforts should be made to translate the framework for
business, management and accounting into methods which will increase the Islamic
goodness. In other words, IPA should not be perceived as a revolution but an evolution of
the function of accounting which enables Muslim accountants to continue making good in
private, social and religious duties to achieve al-Falah.

88
This has been mentioned in the Quran, Those who do not rule by what Allah has revealed are disbelievers
(kaafiroon) (Al-Maidah 5:44).
89
The major sources of poverty in Muslim countries include colonial exploitation and legacy (in terms of
transfer of resources from Muslim lands in the nineteenth and first half of the twentieth century and imitation
of irrelevant development models of the developed countries by Muslim countries), economic and financial
dualism in the market system and the neglect of investment in human resources (Mannan, 1988).

35
We hope this paper manages to enlighten current and future accountants and others in the
profession of an alternative accounting approach. Awareness among Muslims of their
religious roots and realisation of an Islamic alternative to conventional accounting is a
prerequisite to the development of IPA. Although our paper is normative in nature, it should
be realised that a number of issues in IPA cannot be settled solely by empirical observations
because values are inextricably bound up with the Islamic life philosophy, cultural and
religious positions. Finally, we also believe that a sweeping change in IPA can never be
brought about through legislation because real progress will have to first come from changes
in the minds of both current and future Muslim accountants.

36
References
Abdalati, H. (1975), Islam in Focus, American Trust Publications, Indiana, USA.

Abdel Gader, A.E. (1990), Islamic Banking - Distribution of Profits:Case Study (Sudan),
Unpublished PhD thesis, University of Hull.

Abdel Gader, A.E. (1994), Accounting Postulates and Principles from an Islamic
Perspective, Review of Islamic Economics, Vol. 3 No.2.

Abdel Magid, M.F. (1981); The Theory of Islamic Banking: Accounting Implications, The
International Journal of Accounting Education and Research, Vol. 17 No.1, p.79-102.

Al-Uthaymeen, M. (1998), From the Fruits of Taqwaa, Al-Hidaayah Publishing &


Distribution, Birmingham, UK.

American Accounting Association (1977), Statement of Accounting Theory and Theory


Acceptance (SOATATA), Sarasota, USA.

Arif, M. (1985), Toward the Shariah Paradigm of Islamic Economics: The Beginning of a
Scientific Revolution, The American Journal of Islamic Social Sciences, Vol.2 No.1.

Accounting Standards Board (1999), Statement of Principles for Financial Reporting,


ICAEW.

Baydoun, N. and Willett, R. (1994); Islamic Accounting Theory, paper presented at the
AAANZ Annual Conference, 3-6 July, Australia.

Baydoun, N. and Willett, R. (2000), Islamic Corporate Reports, Abacus, Vol.36 No.1, p.71-
90.

Belkaoui, A.R. (1992), Accounting Theory, Harcourt Brace Jovanovich Publishers, USA.

Briston, R.J. and Kedslie, M.J.M. (1997), The Internationalisation of British Professional
Accounting: The Role of the Examination Exporting Bodies, Accounting, Business and
Financial History, Vol. 7 No.2, p.175-194.

Burchell, S., Clubb, C., Hopwood, A., Hughes, J. and Nahapiet, J. (1980), The Roles of
Accounting in Organisations and Society, Accounting, Organisations and Society, Vol.5
No.1, p.5-27.

Burrell, G. and Morgan, G. (1979), Sociological Paradigms and Organisational Analysis,


London, HEB.

Chapra, U. M. (1992), Islam and the Economic Challenge, The Islamic Foundation,
Leicester, UK.

37
Coleman, W.V. (1995), Rationalism and Anti-Rationalism in the Origins of Economics: The
Philosophical Roots of 18th Century Economic Thought, Aldershot, Hampshire.

Cranston, M. (1965), Locke on Politics, Religion, and Education, Macmillan New York.

Cranston, M. (1968), The Social Contract (translated), Penguin Classics.

El-Ashker, A. A. (1987), The Islamic Business Enterprise, Croom Helm, UK.

Gambling, T. and Karim, R.A.A. (1986); Islam and Social Accounting, Journal of
Business Finance and Accounting, Vol 13 No.1, p.39-50.

Gambling, T. and Karim, R.A.A. (1991); Business and Accounting Ethics in Islam, London:
Mansell.

Gray, R., Owen, D. and Adams, C. (1996), Accounting and Accountability: Corporate
Social and Environmental Reporting in a Changing World, Prentice-Hall: London.

Hamid, S., Craig, R. and Clarke, F. (1993), Religion: A Confound Cultural Element in the
International Harmonisation of Accounting?, Abacus , Vol.29 No.2, p.131-48.

Hassan, Z. (1986), Distributional Equity in Islam, in Iqbal, M (Ed.), Distributive Justice and
Need Fulfilment in an Islamic Economy, International Institute of Islamic Economics,
Islamabad and The Islamic Foundation, Leicester, UK.

Hayashi, T. (1989), On Islamic Accounting: Its Future Impact on Western Accounting, The
Institute of Middle Eastern Studies, International University of Japan.

Hove, M. (1986), Accounting Practices in Developing Countries: Colonialisms Legacy of


Inappropriate Technologies, International Journal of Accounting, Vol.22 No.1, pp.81-
100.

Izetbegovic, A.A. (1991), Islam Between East and West, American Trust Publications, USA.

Kamali, M.H. (1989), Source, Nature and Objectives of Shariah, The Islamic Quarterly,
Vol.33 No.4, pp.215-235.

Kaplan, A. and Manners, R. A. (1972), Culture Theory, Prentice-Hall, New Jersey.

Karim, R.A.A. (1990), Standard Setting for the Financial Reporting of Religious Business
Organisations: The Case of Islamic Banks, Accounting and Business Research, Vol. 20
No.80, p.299-305.

Karim, R.A.A. (1995), The Nature and Rationale of a Conceptual Framework for Financial
Reporting by Islamic Banks, Accounting and Business Research, Vol. 25 No.100, p.285-
300.

38
Karim, R.A.A. (1996), Economic Consequences of Accounting Standards and Islamic
Banks, Research in Accounting Regulation, Vol.10 No.1, p.111-138.

Khadduri, M. (1984), The Islamic Conception of Justice, John Hopkins University Press,
London.

Kropotkin, P. (1924), Ethics Origin and Development (authorised translation), George


Harrap & Co., London.

Kuhn, T.S. (1970), The Structure of Scientific Revolutions, in International Encyclopaedia


of Unified Science, Chicago University Press.

Laughlin, R. and Gray, R. (1988), Financial Accounting: Method and Meaning, Van
Nostrand Reinhold:London.

Laughlin, R.C. and Puxty, A.G. (1981), Decision-Usefulness Orientation, Wrong Cart,
Wrong Horse, British Accounting Review, Vol.13 No.1.

Lehman. C. (1992), Accountings Changing Role in Social Conflict, Paul Chapman


Publishing: London.

Mannan, M.A. (1981), Scarcity, Choice and Opportunity Cost: Their Dimensions in Islamic
Economics, Journal of Social Science, Kuwait University Special Issue, p.270-275.

Mannan, M.A. (1986), Islamic Economics: Theory and Practice, Hodder and Stoughton.

Mannan, M.A. (1988), The Economics of Poverty in Islam with Special Reference to
Muslim Countries, in Iqbal, M (Ed.), Distributive Justice and Need Fulfilment in an
Islamic Economy, International Institute of Islamic Economics, Islamabad and The
Islamic Foundation, Leicester, UK.

Manzoor, S.P. (1984), Environment and Values: the Islamic Perspective, in Sardar, Z. (Ed.),
The Touch of Midas: Science, Values and Environment in Islam and the West,
Manchester University Press, UK.

Masood, M.K. (1989), Islamic Legal Philosophy, International Islamic Publishers, New
Delhi.

Mirza, M. and Baydoun, N. (2000), Accounting Policy Choice in a Riba-free Environment,


Accounting, Commerce & Finance: The Islamic Perspective Journal, Vol.4 No.1 & 2,
p.30-47.

Morgensten, O. (1964), On the Accuracy of Economic Observations, Princeton University


Press (2nd Ed.), Princeton, N.J.

Naqvi, S. N. H. (1994), Islam, Economics, and Society, Kegan Paul International, London.

39
Parker, R.H. (1989), Importing and Exporting Accounting: The British Experience, in
Hopwood, A.G. (ed.), International Pressures for Accounting Change, Prentice-Hall.

Philips, A.A.B. (1990), The Fundamentals of Tawheed (Islamic Monotheism), Dar Al-
Tawheed ltd., London.

Rahman, A.R.A. (1995), Accounting and Public Interest: An Islamic Reflection, paper
presented at the National Accounting Seminar, MARA Institute of Technology Malaysia.

Roslender, R. (1992), Sociological Perspectives on Modern Accountancy, Routledge,


London.

Shahata, H. (1993), Usoolul Fikr Al-Muhasabi Al-Islami, publisher unknown.

Siddiqi, M. N. (1972), The Economic Enterprise in Islam, Islamic Publications, Lahore.

Tawney, R.H. (1927), Religion and the Rise of Capitalism, John Murray & Sons: London.

The Holy Quran: English Translation of the Meanings and Commentary, Mushaf Al-
Madinah An-Nabawiyah, King Fahd Holy Qur-an Printing Complex, Saudi Arabia, no
date.

Thomas, A. L. (1969), The Allocation Problem in Financial Accounting Theory: AAA


Studies in Accounting Theory No. 3, American Accounting Association, Sarasota, USA.

Vadillo, U.I. and Khalid, F. (1992), Trade and Commerce in Islam, in Khalid, F. and
OBrien, J. (Eds.), Islam and Ecology, Cassell, UK, p.74-78.

Velayutham, S. and Rahman, A. (1992), Towards Understanding the Gap Between


Accounting Research and Practice, Asian Review of Accounting, Vol.1 No.2.

Wilson, R. (1997), Economics, Ethics and Religion: Jewish, Christian and Muslim
Economic Thought, Macmillan Press Ltd, London.

Zaid, O.A. (2000a), Were Islamic Records Precursors To Accounting Books Based On The
Italian Method?, Accounting Historians Journal, Vol.27 No.1, p.73-90.

Zaid, O.A. (2000b), The Appointment Qualifications of Muslim Accountants in the Middle
Ages, Accounting Education, Vol.9 No.4, p. 329-342.

Zaid, O.A. and Keen, S. (1999), The Appropriateness of the Term Iktisad/Economics: The
Islamic Perspective, Accounting, Commerce & Finance: The Islamic Perspective Journal,
Vol.3 No.1 & 2, pp.1-23.

40
APPENDIX 1

Basic principles in the Sharia regarding politics, economics and social life.

POLITICS ECONOMICS SOCIAL


Every deed of Muslim individual/group is Earn living through decent Believe in the unity of
inspired and guided by the Law of God (Quran) labour and avoid mankind in origin
dependence on others
Sovereignty in Islamic State does not belong to Earnings through lawful Believe in the unity of
the ruler nor the people but belongs to God i.e. means (halal) is recognised mankind in human status
ruler acting only as executive chosen by the as private possession and aims
people to serve according to the law of God
First responsibility of ruler is to God and then to Avoid usury (riba) and Fulfil public interest
the people - dual responsibility interest (maslahah)
Ruler is a representative employee chosen by the Fulfil obligations to society Individual can be contributor
people and derives his authority from obedience via zakat and charity and and society the beneficiary
to the Law of God which binds the rulers and the pay taxes to the state and vice-versa - concept of
ruled by a solemn contract over which God is the mutual responsibility and
superior concern
Rulers are chosen on the basis of own merits of Avoid extravagance (israf) Fulfil obligations and
virtue, fitness and competence and be moderate in honour treaties undertaken
consumption to reduce
scarcity
Ruler must administer justice and provide Honour contracts (uqud) and No class warfare, social
security for all citizens irrespective of their keep proper accounts castes and domination of any
beliefs individual over society
Ruler must be independent of any political party Profit sharing between those Due respect to other
of a non-Islamic platform or subjected to foreign providing and using funds as peoples interests and rights
powers if it is to exercise its due authority on alternative to avoid riba to life, honour and property
behalf of God and in His cause financing
Ruler has room to handle common affairs Gambling (qimar) and all Maintain good relationship
through consultative methods (shura) at both speculative activities are with fellow human (hablun
local, national and international level forbidden minan-nas)
Every citizen is enjoined to supervise the conduct Aim for economic justice Remove hardship in society
of the administration and question its handling of based on equality and (raf al-haraj)
public affairs fairness

Every citizen is entitled to enjoy freedom of Avoid fraudulent and Prevent harmful activities on
belief, thought and expression etc. But not in the dishonesty (khiyana) society (daf al-darar)
absolute sense as it may lead to chaos and including collusion
anarchy (tanajush) in business
transactions
The governorship is a public trust; entrusted by Business activities as form Public interest exceeds
the word of God and by the consent of the people of worship (ibadah) private interest
including that of the minorities

41

View publication stats

You might also like