The Differences of Conventional
and Islamic Accounting
Prof. Sofyan S. Harahap
Trisakti 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)
Critics on Conventional
Accounting
• Externalities is not included in financial report
(Lee Parker, environmental accounting)
• Intangible asset cannot be measured
adequately(Lev Baruch)
• Human resources and employee reporting interest
are not included.
• 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 parties”.
• There is an integration between worship ritual and
socio-economy-politico and daily life of mankind.
• Allah rules out business and accounting.
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:
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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-sociolpolitico 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)
Conventional Vs Islamic
Accounting
• Conventional Accounting:
• Based
upon
modern
commercial
lawpermissive rather than
ethical
• Limited
disclosure
(provision of information
subject to public interest)
• Personal accountability
(focus on individuals who
control resources)
• Islamic Accounting:
• Based upon ethical law
originating in the Qur’an
(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.
36, No.1, 2000).
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Conventional Acc.
Economic rationalism
Secular
Individualistic
Profit maximization
Survival of fittest
Process
Absolute ownership
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(Ec. rationalism: the desire to stand
apart from others, to compete, to
manipulate and to amass surplus”)
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Islamic Acct.
Unity of God
Religious
Communal
Reasonable profit
Equity
Environment
Relative ownership
Toshikazu Hayashi, “On Islamic Accounting,
IMES Working Paper Series No.18.
• Islamic Accounting
• Society – oriented
• Focus on society aspect
•
• Basically Al Qur’an & As
Sunnah (Shariah)
• Religious (must
responsibility to God at
the Judgment Day)
• Conventional Accounting
• Individuality – oriented
• Focus on individuality
aspect without consider
any social aspects
• Accounting Law and
Ethics
• Secular
Hayashi (Continued)
• Islamic Accounting
• No differentiation between
Normative and
Descriptive Accounting
(They always going
simultaneously)
• In operational, they do
everything in boundaries
of Islam (Shariah)
•
• 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)
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[Entity]Separation between
business and owners
[going concern] Business
continues forever
[Accounting period] Periodical
measurement of performance
[unit of measure] Monetary Value
[Full disclosure principle]
Decision making process
[objectivity] Reliability of
measurement
[Materiality] Relative importance
of information for decision making
[Consistency] Consistency based
on GAAP
[Conservatism] Use least
favorable impact on owners
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Firm doses not have separate
financial obligation (I.e profit
sharing scheme)
Depend on contractual agreement
between party
One lunar year for zakat calculation
Quantity based and monetary based
(zakat calculation)
Importance for fulfillment of duties
and obligation to God, society and
individual.
Clear conscience with God in
fulfilling all duties.
Consistence to shariah rules
Most favorable to society (justice)
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
Practices in Islam:
• There is lawful (halal) and unlawful (haram) in
business
• Riba, usury or interest on credit: increment over
and above the amount of of capital loaned.
• 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.
Future
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