To professional accountants who have been brought up on the idea of accounting as an "objective," technical and value-free discipline, the idea of attaching a religious adjective to accounting may seem embarrassing, unprofessional and even dangerous. This is especially true when the adjective is "Islamic," which is media-hyped to be synonymous with terrorism.
On the other hand, the development of Islamic banking and finance now embraced even by ardent capitalist institutions such as Citibank, HSBC and ANZ banks may interest accountants in the possibility of new opportunities for the profession (especially in the wake of layoffs and downsizing by the Big Four firms). And perhaps the Enron affair has rekindled an interest in having a more honest profession whose practitioners truly care about the public interest in addition to their pockets.
A Different Breed
Islamic accounting can be defined as the "accounting process" that provides appropriate information (not necessarily limited to financial data) to stakeholders of an entity that will enable them to ensure it is continuously operating within the bounds of the Islamic Shariah and delivering on its socioeconomic objectives. Islamic accounting is also a tool that enables Muslims to evaluate their own accountabilities to God.
The meaning of Islamic accounting is clearer if we compare it with the definition of "conventional" accounting. Conventional accounting as we know it is defined as the identification, recording, classification, interpretation and communication of economic events to permit users to make informed decisions. Both Islamic and conventional accounting are in the business of providing information.
But there are differences:
The objectives of providing the information
What type of information is identified, and how is it measured and valued, recorded and communicated
To whom is it communicated
Conventional accounting aims to permit informed decisions whose ultimate purpose is to efficiently allocate scarce resources to their most efficient (and profitable) uses by providing information efficiency in the market. Islamic accounting, on the other hand, hopes to enable users to ensure that Islamic organisations abide by the principles of the Shariah in their dealings and enables the assessment of whether the objectives of the organisation are being met. At a very basic level, it can be said that Islamic organisations (whether business or otherwise) differ from their conventional counterparts in having to adhere to certain Shariah principles and rules and also in trying to achieve certain socioeconomic objectives encouraged by Islam.
The type of information that Islamic accounting identifies and measures is different from that of conventional accounting. This is not to say that Islamic accounting is not concerned with money, especially when accounting for businesses. On the contrary, due to the prohibition of interest-based income or expense, profit determination is more important in Islamic accounting than in conventional accounting. However, Islamic accounting must be holistic in its reporting. Hence, both financial and non-financial measures regarding economic, social, environmental and religious events and transactions are measured and reported.
Conventional accounting mainly uses historic cost (or lower) to measure and value assets and liabilities. The profession is well aware of the limitations of the stable unit of measure assumption of the monetary unit and to its credit, has tried inflation accounting initiatives. However, the idea of using current values was given up due to its complexity and presumed lack of objectivity. From an Islamic point of view, at least for the purpose of computation of zakat, current valuation is obligatory, prompting calls for a current value balance sheet. Islamic accounting may require a different statement altogether to de-emphasize the focus on profits by the income statement provided by conventional accounting.
Another category of difference concerns the users of the information. Although the profession has recognised various stakeholders as users of accounting information, the users on which it focuses are shareholders and creditors. This is obvious from the fact that a Financial Accounting Standards Board's statement of financial accounting concepts dismisses a whole range of stakeholders by the term "and others." Accounting seems to serve an elite group of financiers: market players, banks and other financial institutions. It has been accused of helping a group of rich people get richer, a grave charge since the profession always justifies its monopoly on audit services by virtue of the public interest.
Islamic accounting serves the whole gamut of stakeholders recognised by the corporate report, not so that each group can best serve its own interest, but so that society as a whole can make corporations accountable for their actions. Islamic accounting ensures that corporations comply with Shariah principles and do not harm others, while making money ethically and achieving a equitable allocation and distribution of wealth among members of society, especially the stakeholders of the concerned corporation.
Religion and Accounting: An Explosive Mix?
Now we come to the question of whether it is wise to add the adjective "Islamic" to accounting. Why not "accounting for Islamic organisations" or "accounting from the Islamic perspective?" The worry is that the addition of any religious adjective may compromise the objectivity of the discipline, as religion is mostly seen as an unchanging dogma and code not subject to pragmatic or logical considerations.
But what are the implicit assumptions behind the theory and practice of conventional accounting? In other words, what is the worldview behind conventional accounting? Some years back, European and communist states adopted different systems of accounting. In a centrally planned or a socialist state, there is a lack of profit motive. Hence, the conventional accounting balance sheet (profit and loss account) did not make much sense in that economic system. This is why the accounting profession never developed in the communist countries. It is only after conversion to capitalism that these states are trying to catch up with the West.
A little more reflection and we come to the conclusion that the conventional accounting system in which we work is in fact capitalist accounting. The adjective "capitalist" is not used before the word accounting because then it would not appear neutral, as capitalism is a philosophy and in many ways, a religion. It has its sacred symbols of private property and its god, wealth, for the creation of which business and finance exists. Capitalism is not only an economic system that allows choices and opportunities, but a philosophy and religion that forsakes equity for efficiency and the needs of the many for the wants of a few. It can be said to be the dominant religion of the world (both in Muslim and Non-Muslim countries).
Hence, to call a spade a spade, accounting should be renamed "capitalist accounting," economics as "capitalist economics" and so forth. However, this is not the case because it is not necessary; it is assumed and implicit. Due to the inexplicitness of this assumption, we sometime forget that accounting is not as objective, neutral and value-free as it is portrayed.
The Nature of Knowledge
Ever since the so-called "Enlightenment," science has gained the upper hand and has replaced religion as the authority in defining what is knowledge. Modern research emphasises positivism, i.e., "what is." Knowledge is only what is perceptible through our senses through observation and experiment or what appears logical to our minds. Revelation is not considered a source of knowledge, as religious truths cannot be verified by our senses. Accounting is considered a science and such mixing religion with accounting may be considered unprofessional.
However, as scholar M. Umer Chapra argues, science and religion deal with different levels of reality. While sciences deal with the physical universe perceptible by the senses, religion deals with a higher level of reality that is transcendental and beyond the sense of perception. The sources of scientific knowledge are reason and its methods observation and experiment. It describes and analyses "what is" and tries to predict what will happen in the future (e.g., forecasting earnings from models). When dealing with the physical universe, science is exact in its description and analysis and more accurate in its predictive power (e.g., in physics or chemistry). However, when it deals with human beings who do not behave in a consistent manner, its analysis is less precise and its predictions less accurate.
Unlike science, religion depends on revelation as well as reason for its knowledge. Its objective is to help transform the human condition from "what is" to "what should be." It should bring about individual and social change to conform to its worldview and values and the institutions that it provides.
The ultimate objective of both science and religion is to bring about the well-being of people. One addresses the physical and material, while the other addresses the social, mental, emotional and the spiritual. Chapra further argues that if both of these are important, then both science and religion can better serve mankind by greater co-operation and co-ordination between them. Religion can help science by reminding it of its ultimate objectives and limitations, and to use the power and mastery over the universe for well-being rather than destruction. Science can help religion by helping it realise "what should be" by providing a better description of "what is," facilitating prediction and providing better technology for more efficient use of all available resources.
Rather than an explosive mix, the mixing of science and religion can be fruitful and in fact serve to stabilise society from the instability of a world dominated either by science or religion alone.
Making a Match
Accounting is a tool used to achieve certain objectives. It is common sense that one must use the right tool for the right job. Islamic institutions such as Islamic banks, Tabung Haji, etc. are established to meet the socioeconomic objectives of Shariah through the implementation of an Islamic economic system. These institutions should logically use Islamic accounting to monitor them in achieving their objectives, which are different from those of capitalist institutions. If conventional accounting is used instead in these institutions, a mismatch is likely. This will lead to the institutions not meeting their socioeconomic objectives and even worse, may turn these Islamic institutions into capitalist institutions by providing materialist profit-focused information instead of holistic information.
Finally, it must be borne in mind that accounting for Islamic banks and financial institutions is not Islamic accounting, but only a subset of it. Although the efforts of the Accounting and Auditing Organisation for Islamic Financial Institutions must be appreciated for developing standards for Islamic banks, the methodology, and hence the outcome, is questionable. Islamic accounting does not just include technicalities of accounting for Islamic financial instruments employed by Islamic banks, but much more, requiring whole new areas of performance measurement, including social, environmental, economic and Shariate.
Dr. Shahul Hameed bin Mohamed Ibrahim is assistant professor and the head of the Department of Accounting, Kulliyah of Economics and Management Sciences at the International Islamic University Malaysia, and can be contacted at shahul@iiu.edu.my
By Dr. Shahul Hameed bin Mohamed Ibrahim, PhD
© Business Islamica 2007
