The differences of conventional and islamic accounting

The Differences of Conventional and Islamic Accounting Prof.. Corporation and Society• “Corporation have emerged as the dominant governance institution on the planet, with the largest a

The Differences of Conventional

and Islamic Accounting

Prof Sofyan S HarahapTrisakti University, Indonesia

Corporation and Society

• “Corporation have emerged as the dominant

governance institution on the planet, with the largest among them reaching into virtually every country in the world an exceeding most government in size and power, increasingly, it is the corporate interest more than the human interest that define the policy agendas

of state and international body although the reality and its implication have gone largerly unnoticed and

unaddressed” (Korten, 1995)

• Accounting Western Model contributes to this

situation

Muslim Population and

Countries

• 25% of World population (> 1 billions)

• Arab: Saudi, Kuwait, Egypt, Syria, Libanon, Yemen, Jordan, Iraq.

• SE ASIA: Indonesia, Malaysia, Brunei, Thailand.

• Africa: Mauritania, Senegal, Nigeria, Sudan, Somalia, Ethiopia, etc)

• Sub-continent: Pakistan, Bangladesh, India)

• Inner Asia: Iran, Uzbekistan, Kazakhstan,

Turkmenistan, Tajikistan, Kirgizia and China)

• Canada, Europe, East Europe, Australasia, USA.

Occident Vs Islam

• Islam

Unity of God and Power is

hold by God

• There is a judgment day in

which mankind pay

responsibility during

his/her life before the God

• There is hell and heaven

fulfilled by mankind

• Social justice

• Occident

Power hold by mankind (ratio)

• No judgment day, world is the end of life No judgment day

• No heaven and no hell

• Individual welfare

The future of Conventional

Accounting

• “The traditional Western double-entry based

accounting technology is well-suited to an

orthodox, positivist society of any kind It is not surprising that it is proving inadequate, as people are returning to more integrated world views,

whether Islamic or otherwise” (Hayashi, 1989)

• Social Interest is overlooked

• Promote the exploitation of capitalist over labor and

society.

• Promote the concentration of wealth and power o the hand

of the rich

What is Islam?

• Literally meaning:

• “Peace” (in this world and hereafter)

• “obedience” to Allah as his/her God, comply with the motivation of God’s creation of Man, which is

“to serve Allah”, to be “his viceregent on earth”.

• A comprehensive worldview, a unity of God, and

an integration between world and hereafter.

• Islamic principles: truth, justice, fair, goodwill,

honesty, benevolent, accountability before the God.

Islam’s epistemology of Devine

Unity:

• “The Islamic world view is thereby, the

comprehensive and universalizing, overreaching and complementing design of reality that is

premise on the epistemology of divine unity and is evolved into intellection through the process

orientation model of unification of knowledge in world system as derived from the primal sources

of divine unity”

Islamic Rules:

• Allah (God) gives two guidance for mankind:

• al-Quran (revealed world of God ) and

• Hadist/Sunnah: Prophet Saying, God’s inspired acts,

description of the conduct of the prophet’s companion

of which Mohammad was uncritical.

• Ijtihad/ijma’: shuratic and consensus process.

• Guidance are related to all daily life of mankind

including in business, management, and finance.

• The phenomena of nature can be also a sign of God’s power and existence.

The purpose of shariah (Islamic law) (Al-Gazali: 1058-1111)

• To promote the welfare of the people which lies on:

• Safeguarding of their faith

• Their life

• Their intellect

• Their posterity and

• Their Wealth

Quranic verse on Accounting

• i.e Albaqarah (2) ayah 282:

• “Oh you who believe! When you deal with each other, in transaction involving future obligations

in a fixed period of time, reduce them in writing Let a scribe write down faithfully as between

Islamic accounting: Hayashi

• “is an integrated discipline with social, political and economic domain ruled by Allah or “meta rule” Islamic accounting should regulate and establish a harmonious integration among the parties of these diverse domain”

Ancient Accounting Role in Islamic

State is Muhasabah, it means:

• Calculation of one’s act

• Clear the account, make neutral

• To take care of, to try to find

• To anticipate a reward in the hereafter

• To take into account, into consideration

• To order Muslim to perform their duties

• To avoid fraudulent practices in business and society,

to check illegal contract, keep free market and fair price, prevent necessities from being hoarded

(Hayashi, 1989)

Islamic Accounting

• 1 To report accurate income determination

• 2 To promote efficiency and leadership

• 3 To comply with the shariah (Islamic principles)

• 4 Commitment to justice

• 5 To report a good things

• 6 To adapt to positive social change (Khan, in Harahap, 1992)

Accounting and Culture

• Culture (i.e religion) influences accounting

(Hofstede, 1983, Gray, 1998)

• Culture: “all those social, political, and other factors which influence individual’s behavior” (Hamid, et al, 1993)

• Different culture, different economico-sociol-politico systems demand different accounting system

• Islam is different from Occident (Capitalist ideology),

so it must have its own accounting system (Gambling and Karim, 1986: Triyuwono, 2001: Hameed, 2001)

(Islamic law, As-Sunnah)

• Full disclosure (to satisfy

any reasonable demand for information in accordance with the Shari’a)

• Public accountability

(focus on the community who participate in exploiting resources)

Conventional vs Islamic Accounting:

(Boudyn and Willet, Islamic Corporate Reports, Abacus, Vol

apart from others, to compete, to

manipulate and to amass surplus”)

Toshikazu Hayashi, “On Islamic Accounting,

IMES Working Paper Series No.18.

• Accounting Law and Ethics

• Secular

Hayashi (Continued)

• Islamic Accounting

• No differentiation between

Normative and Descriptive

Accounting (They always

• Measure as saleable value

• Market (selling) price rather

than historical cost

• Conventional Accounting

• The normative accounting always influencing descriptive accounting or individuality interest

•

• In operational, they permit everything to reach the highest profit

• Measure as highest possible profit

• Historical Cost

Haniffa and Hudaib (2001)

making process

information for decision making

GAAP

impact on owners

financial obligation (I.e profit sharing scheme)

between party

(zakat calculation)

and obligation to God, society and individual.

fulfilling all duties.

Problems of Rationalism

• The supreme power lies on human or power

holder not on God

• Man guided by the concept of self interest and overlook the social interest

• Man has no inherent justice but true opportunists

• Social imbalance and social conflicts due to

concentration of wealth and power in a few elites

• Global ecological destruction

Examples of Unlawful Business

• Favor Equity financing than debt financing

• Pork, Alcoholic drinks

• speculative transaction, gambling, dishonesty,

collusion, uncertainty, manipulation, fraud, free market interference, exploitation, hoarding

Altruism and Mankind’s

Records

• Islam advocates altruism and ethical behavior

• Allah is aware of what mankind do in his/her

everyday life

• All activities of mankind are recorded in siijin

(bad deeds) and illiyin (good deeds)

• Mankind is responsible for what he/she did in the world Mankind can be go to hell or heaven, it

depends on his/her records

• Allah provides a true justice in hereafter

Zakat and Social Accountability

• Zakat is one out of five Islamic pillars

(Recognition, Prayer, Zakat, fasting in ramadhan month and doing haj)

• Zakat is levied on wealth and on rich people

Calculated on business transactions, on assets and

on revenues

• Zakat is used to help the needy

• Zakat is calculated based on current price

International/National Body on

Islamic accounting

• AAOIFI (Accounting Auditing Organization for Islamic Financial Institution based in Bahrain

• In 2002, Indonesia has a financial accounting

standard on Islamic banking reporting

What next?

• The Islamic accounting which has implicit

economic, political and religious meaning (an integrated world view system, author), has the possibility to show the key to a post Newtonian Accounting (Western Secular based accounting, author)” (Hayashi, 1989)

Religious (Cultural) based

Accounting

• Japan that has a strong commitment to its

traditional culture has a strong ability to formulate,

to implement, its own accounting philosophy and principles difference from that of capitalistic

society

• Shinto for example has a potential drive to

establish a Shinto based Accounting

I hope this discussion may help

us to establish our own system comply with our traditional culture and believe, not

interfered by other believes.

Many thanks for your attention

See you in other occasions