The differences of conventional and islamic accounting

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
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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)


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.