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And We created not the heavens, the earth and all between them, merely in (idle) sport. We created
them not except for just ends. But most of them do not understand(Al-Qur’an, 44:38-39).

The establishment of objectives is an absolutely necessary first step in the reasoned development of
any purposive human behaviour. Objectives of financial statements must be discerned if subsequent
debate over alternative standards and reporting practices is to be resolved by reason (AAA, 1975, p41)


In chapters 3, 4 and 5, the researcher discussed the need for an alternative “Islamic

accounting” which is more useful to Islamic organisations and Muslim users. These

factors which suggested the need were classified into the “Push” and “Pull Factors”.

In chapter 4, the push factors were discussed where the researcher attempted to

argue that the objectives, characteristics, consequences and behavioural effects of

conventional accounting made it unsuitable for Muslim users and Islamic

organisations. In the previous two chapters, the pull factors which make Islamic

accounting both a theoretical and a practical necessity was discussed.

In this chapter, the researcher shall attempt to define the objectives and

characteristics of this alternative “Islamic accounting”. It is hoped that Islamic

accounting will lead to Islamic organisations and other users of Islamic accounting

information to carry out tasks that will lead to achievement of the socioeconomic

objectives for which Islamic organisations were established in the first place. Further,

it is hoped that Islamic accounting will ameliorate many of the undesirable

consequences of conventional accounting

Although it is traditional to discuss a subject by defining what it is (or what it is not),

the researcher has so far avoided defining Islamic accounting. The reason for this is

that this research project is exploring an evolving discipline, which is not well defined.

In fact, part of the research project, is to explore the perception held by Muslim

Accountants and Academics regarding the objectives and characteristics of Islamic

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accounting. Hence a definition of Islamic accounting cannot be too specific.

However, a starting definition of Islamic accounting needs to be given. Islamic

accounting can be initially defined as the “accounting process” which provides

appropriate information (not necessarily limited to financial data) to stakeholders of

an entity which will enable them to ensure that the entity is continuously operating

within the bounds of the Islamic Shari’ah and delivering its socioeconomic objectives.

Islamic accounting is also a tool, which enables Muslims to evaluate their own

accountabilities to God (in respect of inter-human/environmental transactions).

The chapter proceeds as follows: in section 6.1, the methodology for constructing

accounting theories is discussed and arguments are presented for the methodology

which is adopted in this research to arrive at an Islamic accounting theory. This is

followed in section 6.2, by a discussion of ethics, which is the basis of Islamic

businesses and Islamic accounting. The objectives of Islamic accounting are then

arrived at from the ethical objective of Islamic accounting users (i.e. to attain falah,

dual world success). The operational basis and main objective of Islamic accounting

(the notion of accountability) are then discussed in section 6.3 and a model of Islamic

Accountability developed. This is followed in section 6.4, by a discussion of the

subsidiary objectives of Islamic accounting. The users of Islamic accounting

information are identified in section 6.5, and their relative importance compared to

fund providers who are given prominence in conventional accounting, are discussed.

The characteristics of Islamic accounting are then suggested in section 6.5, in terms

of the type and nature of information which should be disclosed, the general

characteristics of Islamic accounting and auditing. Finally, given the importance of

profit measurement in an Islamic context, some income measurement and valuation

problems are discussed from an Islamic perspective in section 6.6.7.

The methods used to test the proposals discussed in this chapter will be discussed in

the next chapter.

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How does one develop a theory of Islamic accounting? From the lessons of

constructing accounting theories in conventional accounting, one could pursue

various approaches such as those categorised by Belkaoui (1992).

Belkaoui (1992) categorises such attempts as the “traditional”, “regulatory” and

“other” approaches. The “other” approaches include the events, behavioural, human

information system, and the predictive and positive approaches. However, the

categorisation by Belkaoui is not unambiguous because the various categories seem

to overlap. However, three basic approaches to accounting theory construction can

be gauged from both Belakoui (1992) and AAA (1977); the empirical inductive

approach, the deductive approach and the information theory approach (Whittington,


6.1.1 The Empirical Inductive Approach:

The empirical inductive approach is an attempt to develop a theory based on

generalising from empirical phenomenon. It has been used to rationalise ex-post ,

current accounting practice. The development of principles and accounting standard

development process of the Anglo-American professional accounting bodies such as

the AICPA, and the CCAB, is one such approach; where standards are set as

guidelines to regulate accounting practice.

For the past two decades, the empirical-inductive theory has slipped into the realm of

positive accounting theory (or PAT). The proposers of this theory, Watts &

Zimmerman (1986) attempted to argue that accounting theory should be positive i.e.

attempt to explain what is and help to predict future events, instead of trying to

preach what ought to be. This has led to capital market research becoming

mainstream in accounting. Unfortunately, the regulatory approach has also followed

suit in adopting the decision-usefulness paradigm (for example FASB, 1978).

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There has been severe criticism of Positive Accounting Theory (e.g. Christenson,

1983;Tinker & Puxty, 1995). From an Islamic point of view, although what is should

be taken into account in deciding strategies, it cannot be a substitute for normative-

deductive theorising because:

a) The positive situation may reflect a deviation of the normative percepts of lslam;

hence it cannot be a basis for developing a theory. However, positive research

can be conducted to discover the actual situation, to measure the extent of the

deviation (or extent of compliance/agreement) from Islamic principles and to

formulate strategies for correcting it.

b) Islam has already eternal ethical and behavioural principles and objectives;

hence a purely positive approach that ignores the normative principles of Islam

will not lead to an Islamic society and the achievement of falah (see section

Point (a) above is especially true, as is evident from the separation of the secular and

the sacred in Western life and the spread of that phenomenon to Islamic

environments. The principles, postulates and conventions of conventional accounting

derived from an empirical inductive approach seem to conflict with Islamic principles

(Gambling & Karim, 1991;Khan, 1994a; Adnan & Gaffikin, 1998). Despite this, the

tendency to be practical and to be compatible with the current vogue, has resulted in

misanalysis of conventional accounting concepts as being suitable for Islam

(Abdelgader, 1994) and the same could happen if Islamic accounting theory is

developed through the empirical-inductive approach.

From an Islamic perspective, one possible use of the positive approach is in

determining consensus and agreement on various interpretations of Shari’ah

principles. In Islam, where principles are not explicitly stated (and therefore

commanded) in the Qur’an or Sunnah but occur only in the form of general principles,

based on the interpretation of the principles in time and space, various different

rulings on the same issue can be arrived at. Here, Muslims usually take the opinion
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of the majority of scholars (Jumhur) as the authentic one. In our times, since

knowledge is highly specialised, academicians with some knowledge of Islam, with

the cooperation of traditional religious scholars (‘ulema) could perform the same

function. Hence, positive research which intends to discover the perception of

‘ulemas, scholars and the learned ones (accountants?) would be useful to establish

majority opinion on an issue.

6.1.2 The Deductive Approach

In this approach, theoretical accounting principles are logically derived by deduction

from assumptions or axioms/first principles (Whittington, 1986). The “true income”

approach to accounting theory was the earliest form of the deductive approach. This

approach attempted to bring accounting profits in line with economic profits of the

economists, and hence depended heavily on economic theory. Gambling & Karim

(1991), however, have argued that the concept of ‘economic income’ is unacceptable

from an Islamic perspective because ‘the unacceptable features are so fundamental

to Western Deductive theory that their removal would render any contribution to

Islamic theory of minimal significance” (p95). For example, the model of ‘economic

rate of return on capital’, which forms the basis of any calculation of ex-ante income,

assumes that money has a time value, which Gambling & Karim assert does not exist

in Islam (see also Tomkins & Karim, 1987). Hence that part of deductive accounting

theory based on conventional economic theory seems to be an inappropriate model

for deriving Islamic accounting theory.

Other writers such as Tinker (1985), Gray et al. (1996) and Cooper & Sherer (1984)

take sociology, democracy ethics and political economy as sources of ideas on which

to deduce theory. Gambling & Karim (1991) are of the view, that being positive

approaches to human behaviour, these social and political sciences only produce

tentative models, which lack the normative element. The researcher does not fully

concur with this view. Gambling & Karim (1991) do not seem to review the critical
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perspective used in these studies (i.e. that of questioning the status quo or assessing

the ethical consequences of actions within the capitalist paradigm). Thus, these are

not just positive approaches to social sciences, but have normative and ethical/social

critique of the system and its consequences.

However, Gambling & Karim’s (1991) objections are not entirely unfounded. The

discussion on the Islamisation of knowledge in chapter 4 viewed the secular

perspective of knowledge in the West as problematic. The secular viewpoint itself is a

normative position just as the positive theory also has a normative content (e.g.

Tinker et al., 1982). The denial of revelation as a source of knowledge leads to

empiricism (whether in its positive or interpretative form) as the only source of

knowledge. Even in the West, the works of Berkeley and Hume denied the existence

of the material world1. Although critical writers are critical of positivism, they propose

a ‘naturalistic empiricism’ which is the interpretation of reality using methodologies of

phenomenology, semiotics etc. which seek to release man from ‘false

consciousness’ and alienation, developed from the dominating ideological

superstructures (Burrel & Morgan, 1979). The superstructures would include

capitalism or religion. However, the economic determinism by Marx (which is the

basis of the Marxist and post-Marxist critical perspective) is a normative deduction of

observed perception. It does not refer to any divine criteria for its critique of the

system but to axiomatically arrived at theories of human conflict (either radical

humanist or radical structrualist). These axioms or assumptions such as Economic

determinism, are accepted without question as if they were absolute truth. They can

thus be subjected to the same criticism, that modernist and post-modernist thinkers

subject revelation- based social structures to.

Hence, although the multidisciplinary and critical normative-deductive approach to

develop an alternative accounting (e.g ‘emancipatory’ accounting of Tinker, 1985),

See for example, the arguments against positivism (Chua, 1986)
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has attractions for the development of an Islamic accounting theory, it cannot it be

adopted without adaptation.

Gambling & Karim (1991), suggest a normative deductive approach in setting

accounting standards as Muslims have to abide by the Shari’ah in both the social and

economic aspects of their lives. This approach according to them involves deducing

the objectives of financial reporting, the postulates of accounting and the definition of

accounting concepts from Shari’ah principles. This would then constitute the

foundation for a structural framework, which would act as a reference for the

development of principles for accounting.

This is the best methodology in arriving at an Islamic accounting theory, in the

researcher’s opinion too, as any principles and rules derived would be consistent with

Islamic worldview and values. This research aims to do this to some extent.

However, the way in which Gambling & Karim use the methodology seems to be

rather narrow to the researcher for the following reasons:

• Firstly, Gambling & Karim (1991) delve straight into technical concepts after

asserting that the assessment of Zakat is a primary function of Islamic

accounting. They therefore assert that Islamic accounting should be based on the

balance sheet rather than being transaction oriented i.e. profit is the difference of

net asset values at different dates. This objective of Zakat assessment is neither

compared to the decision-user objective of conventional accounting nor are other

objectives such as accountability or stewardship considered.

• Secondly, this lack of consideration of alternatives or argument about why Zakat

is the main concern of Islamic accounting leads them directly into a critique of

some conventional accounting concepts such as historical cost, the entity

concept and the substance over firm assumption, on the basis of valuation

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• Thirdly, the authors summarise that “the conceptual framework of accounting

currently applied in the West finds its justification in a dichotomy between

business morality and private morality. As such, it cannot be implemented in

other societies which have revealed doctrines and morals that govern all social,

economic and political aspects of life.” Although, the researcher agrees with the

statement, it is an unfounded generalisation for which the authors neither present

arguments or empirical evidence to support. The authors never discuss how this

dichotomy came about and what the implications are for accounting. How they

came to this conclusion, after discussing a completely different subject i.e. the

unacceptability of historical cost valuation, is not at all clear. Their conclusion is

not consistent with their arguments and lacks coherence.

There is limited discussion on ethics and accounting in Western society and very

little on Islamic ethics although Gambling & Karim title their book “Business and

Accounting ethics in Islam.” This has led the authors to ignore the ethical

framework of Islam as a starting point in the development of Islamic accounting

theory. Instead they jump straight into criticising accounting principles and

valuation practices. Further, they also ignore the development of ethical based

developments in the West such as arguments on corporate social responsibility

(e.g. Donaldson, 1982) and the social and critical accounting literature, thereby

losing useful insights.

• Fourthly, they also come to the naive conclusion that Islamic accounting is always

managerial accounting and therefore there is no place for non-specialist financial

accounts to “rentiers”. They arrive at this view because financial accounting aims

to provide information to a population of diverse, unknown users instead of

specific known users such as managers. They assert that since there can be no

class of “rentiers” in an Islamic economy, there is no need for non-specialist

financial accounts.
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Although the researcher agrees with the authors, that in an Islamic economy, the

finance providers have to be concerned with and morally responsible for the

operations of the company in which they are investing, they need not be taking part

in administrative operations. Their duty is to monitor that the investee company does

not undertake operations in contravention of the Shari’ah, and this is where external

accounting comes in; admittedly it may not necessarily be termed financial


Further, accounting is especially important for Muslim investors, in say a

Mudharabah or a Musharakah (see chapter 5) business arrangement, since the

Islamic prohibition of interest denies him a fixed return on his capital irrespective of

the performance of the investee company. Hence the evaluation of his investment

depends upon proper (external) Islamic accounting, as they may not have any other

source of information.

Further, the interests and welfare of the community and other stakeholders, which

we have seen is the main objective of the Islamic Shari’ah (see Chapter 3), dictates

that large business or governmental organisations whose activities affect the life of

the stakeholders should disclose information, so that they can be forced to abide by

the Shari’ah.

Therefore the external accounting and reporting by large Islamic organisations,

whether private or public, is essential and should be included in the remit of Islamic

accounting. This has been the history in the government accounting of the Islamic

state, where audited, detailed accounts were produced of the revenues and

expenses of the various units of government which performed many of the functions

that have been privatised to the corporate sector these days (Hamid et al.,

1995;Zaid, 1997). In any case, the subsequent development of “Statements of

Financial Accounting” (Karim, 1995) and of Financial Accounting Standards for

Islamic Banks by the AAOIFI (Pomeranz, 1997), suggests that Islamic accounting is

much more than just managerial accounting!

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6.1.3 The Methodology of this research.

This research uses a normative-deductive approach suggested by Gambling & Karim

(1991) to develop an Islamic accounting Theory but attempts to avoid the problems

referred to in the previous section. Thus the objectives, characteristics and disclosure

requirements of Islamic accounting are considered.

As argued by Karim (1995), there are two methods whereby Islamic accounting

concepts could be arrived at:

1) Establish objectives (and concepts) based on the principles of Islam and its

teachings and consider these objectives in relation to contemporary

accounting thought.

2) Start with the objectives established in contemporary accounting thought, test

them against the Islamic Shari’ah, accept those that are consistent with

Shari’ah and reject those that are not, and develop those that are unique.

The AAOIFI (1996) has adopted the second, easier approach in the development of

their “Statements of Financial Accounting” which they claim is “consistent with the

broader view of Islamic principles- a view which does not require that a concept be

always be derived from the Sharia”, (p24 and p37). This approach is in line with the

Islamic judicial principle of ibaha or permissibility (which itself is not uncontested);it

suggests that anything is permissible unless it is prohibited clearly by the Shari’ah.

Hence, the concepts of decision useful accounting information such as relevance and

reliability are immediately embraced into Islamic accounting by the AAOIFI. This

approach has its supporters (e.g. Ahmad & Hamat 1992; Abdelgader, 1994).

However, this approach has been objected to earlier by Gambling & Karim (1991) on

the grounds that the conceptual framework of accounting currently applied in the

West is justified in a dichotomy between business morality and private morality. Thus

it cannot be implemented in other societies that have revealed doctrines and morals

that govern all social, economic and political aspects of life. Further objections to this
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method arise because neither Western accounting theory nor Western accounting

standards explicitly deal with the morality of the objectives of commercial accounting

entities or even of the methods by which they are pursued (Gambling et al., 1993 as

quoted by Karim, 1995).

Hence, the approach of not reinventing the wheel adopted by the AAOIFI may be

indefencible. The AAOIFI has adopted this approach not because of its correctness

or intellectual apathy, but due to pragmatic considerations of its survival and

acceptance of its standards by Islamic Banks (Karim, 1995). Thus:

“In order to gain the recognition and support of Islamic banks in the
implementation of its standards, the [AAOIFI] might find it necessary to
demonstrate to Islamic Banks that it has not completely discarded the
efforts that they have exerted in setting up their own accounting policies
with the help of their SSB”. (Karim, 1995, p292)

The researcher favours a different approach, which is a hybrid of approaches 1 and 2

with some additions. This is as follows:

1. Identify the ethical and accounting principles of the Shari’ah in relation to

business and other activities which involves fiduciary or agency relationships and

then consider the implications for accounting. Compare these with the principles

under which Western businesses and other organisations operate- those of


2. Identify the main objective and subsidiary objectives of Islamic accounting based

on these Islamic ethical principles and consider these objectives in relation to

contemporary accounting thought. This should not be restricted to mainstream

accounting thought, as “the development of (socially related) narrative and non-

traditional reporting has increased to such an extent that it cannot be ignored by

modern accountants” (Mathews & Perera, 1991, p 334). The comparison with

contemporary accounting thought can serve two purposes: identify alternative

(socially responsible) accounting techniques developed in the West which can be

incorporated in Islamic accounting to achieve its purposes and identify

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conventional accounting principles which are not in conflict with Islamic


3. Identify the theoretical foundation of Islamic accounting, i.e. whether it is

accountability, stewardship or decision-usefulness. This is closely linked with the

objectives and may be inseparable from it.

4. Identify the users of Islamic accounting information and examine what they use

the information for. To a certain extent, the uses are identifiable by considering

the ethical rules of Islamic business.

5. Develop the characteristics of Islamic accounting, i.e. the information required,

valuation and disclosure principles which would incorporate Islamic business

ethical principles and will achieve the objectives of Islamic accounting to the

extent that it is not already defined by the Islamic Shari’ah.

6. Seek consensus among Scholars and Accountants on these objectives and

characteristics, as this is one method of arriving at Islamic rules which do not

exist in the Qur’an (Kamali, 1991). Further, if the researcher has correctly arrived

at the objectives and characteristics, then the majority of knowledgeable Muslims

should agree as according to the Prophet’s Hadith “My Ummah (or people as a

whole) will not agree on an error” although there might be individual


Both disagreements and conditional agreements should be investigated to gain

further insights and to establish whether the deduced principles are wrong or whether

certain factors such as education and background or professional experience led to

the disagreement.

The rest of this chapter, follows the approach outlined above:


Sir Adrian Cadbury, who was the chairman of the commission which produced the

Cadbury Report on Corporate Governance in 1992, stated that “the glue which holds
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a company together is its beliefs and values, rather than its structures and systems”.

This should be truer of Islamic organisations, which have been specifically been set

up to achieve the objectives of the “ethics-based Islamic economic system” (Naqvi,

1981;AlHabshi, 1987).

Islamic economic (business) activity is a subset of a wider human effort to ‘usher in a

just society based on the divine ethical (Qu’anic) principles of ‘al-‘adl wa’l ihsan’ i.e.

the commandment of God to establish ‘justice and equity’. Hence, ethics should

dominate economics and business (Haneef, 1995 p 53).

In fact, the distinguishing feature of Islamic Organisations (both business and non-

profit) is that they are established to operate within the ethical framework of the

Shari’ah, which prescribes the dos and the don’ts under Islamic Law. Even, in the

case of a Muslim organisation - one controlled by Muslims in which the owners

and/or Muslim employees hope to operate under Islamic ethics or at least not

contrary to it, to the extent that “commercial realities” and/or the legal system allows -

Islamic ethics is an important consideration. Hence in Islamic organisations, it is

essential (and in Muslim organisations, useful) to have a system of accounting which

incorporates the ethics, beliefs and objectives of Islam and which provides indicators

which will guide or correct behaviour.

In cases where Muslims work for or are affected by Non-Muslim organisations, it is

important that Muslim values and beliefs are recognised and respected, if the

organisation is to obtain the loyalty and effort of its employees and its stakeholders.

The organisation should not operate accounting and information systems which

results in behaviour, inconsistent with Islamic values, as this might result in goal

incongruence and dysfunctional behaviour. For example, a budgeting system, which

does not take into account Islamic cultural values, may result in behaviour

incongruent with the goals of the organisation in the long run due to tensions

between the ethical outlook and actions of Muslim managers and employees
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Hence in these three instances, it could be useful to have an accounting system, if

not entirely in line with Islamic objectives, at least not inimical to its values.

6.2.1 Ethics and Business Ethics:

Ethics has been defined as “the branch of philosophy that explores the nature of

moral virtue and (which) evaluates human actions” (White, 1993, p 1). It is the set of

moral principles on which actions are evaluated as right or wrong. The terms morals

and ethics are sometime used interchangeably and in this research, they are

assumed to be synonymous. Business ethics is ethics, which limits its frame of

reference to business or organisations.

Although Friedmann (1982) has argued that the only job of business is making profits

as long as it stays within the rules of the game, there is an increasingly vocal

objection to the amoral business in the form of intellectual arguments, the growing

power of the ethical consumer and the increasing development of ethical investor

movements. Old adages such as “business and ethics do not mix” and “the business

of business is business” are increasingly being questioned (e.g. Mintzberg, 1983;

Drucker, 1981). These adages have been dubbed as the “Myth of the Amoral

Business enterprise” and strongly refuted by DeGeorge (1990) who argues that

business activity is a human activity which involves ethics and even business expect

ethical behaviour from their employees, customers and suppliers in order to operate

properly. Despite these arguments, however conventional economics and

conventional accounting pretend to be value-free and assume that the rationalist

economic man is out to satisfy his greed.

From a Western perspective, although there are many ethical systems, the two main

approaches to ethical theory are the teleological and the deontological

approaches. The teleological approach to ethics takes the view that “whether an

action is right or wrong depends on the consequences of the action” (DeGeorge,

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1990, p 40). Utilitarianism is the main form of teleological ethics strongly represented

in Western society and of particular appeal in business ethics.

“Utilitarianism is an ethical theory that holds that an action is right, if it

produces, or tends to produce, the greatest amount of good for the
greatest number of people affected by the action. Otherwise the action is
wrong”. (DeGeorge, 1990, p43)

Utilitarianism as formulated by Jeremy Bentham (1748-1832), employs a hedonistic

calculus just like accounting. As accounting employs cost and benefit analysis to

determine profitable outcomes of an action, utilitarianism attempts to measure the

pleasure and pain associated with an action to determine its morality; an action which

leads to the least pain or the greatest pleasure is a moral action. In fact,

conventional accounting developed from marginalist neo-classical economics, which

uses utility analysis in deciding what should be produced and consumed.

Utilitarianism has been criticised as being unable to account for justice. The utilitarian

calculation can sometimes result in injustice. Hence, according to DeGeorge (1990)

utilitarianism “results in saying that to do what is obviously unjust is the morally right

thing to do” (p53). Thus, this results in the conclusion that utilitarianism cannot be an

accurate account of morality, nor can it be an appropriate way to make moral

judgements. Although DeGeorge (1990) argues that in practice both deontologists

and utilitarians agree on which actions are just, the problem is that in business, the

hedonistic calculus induces and provides a surrogate for happiness i.e. profit. This

does not consider matters of justice for all as utilitarianism claims. One of the

objections against utilitarianism is that the granting of justice and rights to people

does not depend on the consequences of an action. Further, giving people what they

are due or what they deserve may not be the best use of resources. Hence,

utilitarianism, although appealing, has to be used carefully to evaluate morality of

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The deontological approach to ethics, on the other hand, is based on the theory of

duty which is “the basic moral category” is independent of consequences (De

George, 1990, p 40). This approach denies that morality or ethics depend on the

consequences. In the West, this approach has its source in the Judeo-Christian

history and the efforts of Immanuel Kant (1724-1804) to rationalise Judeo-Christian

deontological ethics has led to its current influence in Western society despite the

post-enlightenment secularisation.

De George (1990 ) states:

“The Judeo-Christian tradition has nurtured the morality of the West for
centuries and of our country (USA) since its inception. It is still an
extremely potent force.... these moral rules,....and their values have, to a
large degree, been absorbed into the secular life of the West in general”.
(DeGeorge, 1990, p 63)

Kant formulated the notion of the “categorical imperative” as the highest moral

principle to rationalise Christian ethics. The categorical imperative considers an

action to be moral if it can be converted to a universal law- a rationalistic rendering

of the biblical principle of “do unto others what you would have others do unto you”.

The second condition is that the action must befits the dignity and moral autonomy of

individuals if it is to be considered moral.

According to Kant, Individuals should not be treated as means but ends in

themselves. This approach focuses on the duty of individuals and organisations to

others. What is meant by duty poses a problem according to Beekun (1997). If only

acting from duty is ethical (as opposed to self-interest), then this means that the

intention of the agent has to be taken into account. In Islamic ethics, intention is

essential for a moral/ethical action, however good intentions do not make an

unethical act ethical. For example, in Islam, a business, which has the good intention

of providing employment to the local community, cannot set up a whisky distillery.

The earlier de-ontological ethics relied on religion and can be referred to as

theological ethics. It was based on the acceptance of divine revelation of the Bible. A

similar position is taken by Islam which claims the Qur’an as the last revelation and
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Prophet Muhammad as the last Prophet. The Qur’an has been interpreted by the

Prophet through the Hadith, which is also taken as divine revelation (or rather the

exposition of revelation) although it is not believed by Muslims to be the direct words

of God. However, new circumstances warrant new interpretations of both the Qur’an

and the Hadith which are undertaken by the ‘ulemas or religious scholars. The

authority of their opinions depends on the reputation and piety of the scholar.

Consensus of a majority of the ‘ulemas or of the people in general is also sought.

DeGeorge(1990) highlights two problems with theological ethics; justification of

moral values to non-believers and the charge of absolutism. The first is true of

Islamic ethics as well as Christian ethics. However, since the number of Muslims is

sufficient to form a separate market of their own with an economic system that can

communicate with but remain separate from the western capitalistic system, the

question of justifying Islamic ethics to non Muslims may not arise, although

globalisation may present some problems. What this research attempts to do is to

explore the possibility of an accounting which is consistent with the Islamic

socioeconomic system.

White (1993) claims that philosophical ethics are rational while religious ethics being

absolute are not. While this may be true, the researcher cannot concede the author’s

assertion that only a “rational, secular” outlook on ethics grounds it in notions of

human happiness. Happiness and well being are spiritual and psychic experiences,

which throughout human history have been the domain of religion. This is especially

untrue of Islamic ethics which can be quite rational despite it authoritarian nature.

It is true, Islamic ethics based on divine revelation is authoritarian but this does not

preclude it from being rational nor is it arbitrary. The Qur’an usually gives reasons for

its prohibitions and duties in many cases. As reflection is encouraged by the Qur’an,

the scholars have always thought about the reasons for a command or a prohibition,

even when the Qur’an fails to provide reasons. Hence, a deontological approach to
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ethics based on revelation could also be rational, as is Islamic ethics. In Islam, Ethics

or Akhlaq is a branch of the Shari’ah. As quoted in chapter 3, the objective of the

Shari’ah (including ethics) have been declared by Ghazali and Ibnul Qayyim Al

Jawziah as the “wisdom and well-being of the people” (Chapra, 1992). The Shari’ah

is itself derived from the Qur’an and the Sunnah of the Prophet (pbuh) and is the

basis of Islamic ethics. The conventional economic system which underline

conventional accounting has some ethical problems including (i) the assumption of

the self-interested and greedy rational economic man despite the fact that man can

and is altruistic sometimes, (ii) utility is limited to material goods and services as can

be seen in the computation of the GDP, (iii) the price mechanism does not lead to

distributive equity, and (iv) the encouragement of material consumption to increase

aggregate demand and spur economic growth may lead to negative social and

environmental consequences which are not considered in conventional economic

theory. In short, conventional economics can be termed as value and ethics free on

the question of production and distribution of resources, which is the main objection

from the Islamic point of view (Naqvi, 1981;AlHabshi, 1987)

6.2.2 The Islamic Economic Paradigm and its objectives

Islamic economics offers an alternative paradigm to conventional economics (Presley

& Sessions, 1994). It is an ethics-based system based on the principles and rules

contained in the Qur’an and Sunnah (Al-Habshi, 1987). The Islamic economic

paradigm is derived from the Qur’an and not conventional neo-classical economics.

This paradigm is put succinctly by Professor Nejatullah Siddiqi as follows:

“The world of nature is there for man to make a living out of it, promising
sufficiency for all human beings. Man has to ensure this through his
efforts for which he has freedom of ownership and enterprise (i.e.
business). Justice, must , however, be ensured, if necessary, through law,
Co-operation and benevolence rather than self-centredness and avarice
should be the norm in economic affairs. Allah (S.W.T.) being its real
owner, property has to be handled as a trust and all economic activity
conducted in the framework of trusteeship. Poverty is an empirical reality,
hence the rich must surrender a part of what they possess to the have-
nots. Trade is lawful, but riba (interest) is prohibited. Waste is sinful and
Chapter 6 Page 239

it is imperative to economize and be sufficient. Worldly wealth should be

treated as a means to a good normal life leading to eternal bliss, rather
than an end in itself... the motto being, utilise the resources given by Allah,
including your own abilities, to live and help others live a well provisioned
life conducive to moral excellence”. (Siddiqi, 1988, p166).

From the perspective of Islamic economics, therefore, the concept of ‘Khilafah’ or

vicegerancy of man, assumes that God has provided enough resources for mankind.

Hence, any scarcity is not absolute but relative to the claims on those resources.

Chapra 1992, argues that:

“The resources with which God has endowed this world are not unlimited.
They are sufficient to cater for the well-being of all, if used efficiently and
equitably”. (Chapra, 1992, p 203).

However, man should remember that although, he has the freedom to choose

between alternative uses of the resources, he is not the only vicegerent on earth.

There are millions of vicegerents like him. Thus, the efficient and equitable utilisation

of the God given resources to attain the well-being (falah) of all is only possible if

resources are used with a sense of responsibility and constraint determined by the

Divine Guidance and the objective (maqasid) of the Shari’ah (Chapra, 1991).

The ultimate objective of Islamic Economics (and thus Islamic accounting) is to lead

man to falah, i.e. well being or success in this world and the hereafter (Khan, 1985).

Islamic accounting should similarly provide information to facilitate this

socioeconomic process which will facilitate the working of the Islamic economic


The Qur’anic concept of falah, (which occurs in more than 40 verses), is seen as a

multi-dimensional concept which has implications for both individual and collective

behaviour i.e. at micro and macroeconomic levels (Khan, 1985).

It is said to have three components Khan (1985): (i) survival (Baqa) , (ii) freedom

from want (ghana) and (iii) Honour and power (‘Izz)

From the microeconomic point of view, ghana encompasses biological (health),

economic (i.e. means of livelihood), social (brotherhood and harmonious inter-

relationships) and political survival (freedom and participation in affairs of the state).
Chapter 6 Page 240

Its macroeconomic implications are a healthy environment and medical aid for all, full

employment, inner social cohesion and independence and self-determination.

The concept of Ghana means that no one should live in abject poverty but also

assumes self-reliance and work rather than parasitic idleness. Its macroeconomic

implication includes equitable distribution of resources and intergenerational equity.

The concept of ‘Izz means self respect, civil liberties, protection of honor and life for

the individual; and economic power, freedom from debts and military power to

safeguard freedom and to enforce justice, for the community.

Khan (1985) has categorised the conditions which lead to falah, from a perusal of the

verses in the Qur’an, into spiritual, economic, cultural and political factors. The

economic conditions are said to be:

1. Infaq: to spend in the way of God on the poor, needy, relations, neighbours and

for the socio-ecoonomic good of the community. Infaq is not restricted to charity

but includes expenditure on one’s own family. The Qur’an instructs believers to

spend what is excess to their requirements. Islam recognises a right of the poor

in the wealth of the rich (Al-Qur’an 70:24 & 51:19). The compulsory part of infaq

is Zakat or the Islamic religious tax. According to Khan (1985) infaq assumes

certain characteristics of man i.e. contentment and adoption of simple life. He

asserts that infaq would not be possible if these traits are not present as wants

multiply very quickly if there is no contentment.

The socioeconomic implication of infaq includes the collection and distribution of

Zakat and other Islamic taxes such as kharaj and the importance of the voluntary

sector in Islam represented by Endowments (Waqf) and other charities.

2. Prohibition of riba (interest). Kahn notes that riba is a subtle institution which is

exploitative and iniquitous. The Prophet (pbuh) took many measures to ensure

that riba, whether implicit or explicit, did not re-appear in another garb by

prohibiting consumer and commercial interest-based credit, unequal barter

exchange and certain contracts of land-tenure which provided a definite share for
Chapter 6 Page 241

only one party. Khan rightly observes that the road to falah will remain blocked

until riba is completely eliminated. The socioeconomic implication of this is the

replacement of pre-determined fixed return financing instruments with profit-

sharing and risk bearing instruments. These have major implications for

investment, accounting and monitoring (auditing).

3. Fulfillment of Covenants (Contracts) and Trusts. Honouring commitments and

fulfilling contracts is a condition for the achievement of falah (Al-Qur’an, 23:8).

Some interpreters of the Qur’an assert this also implies the fulfillment of the

implicit covenant (or the primordial covenant alluded to in the Qur’an) of meeting

one’s social and religious obligations to God, oneself, family, neighbours, the

ummah (community of believers), mankind and other creatures. This obligation

serves as a basis for the accountability premise of Islamic accounting.

4. Avoiding Zulm (injustice, exploitation and usurpation of others’ rights). A

perpetrator of Zulm cannot achieve falah (Al-Qur’an, 6:21, 6:135, 12:23, 28:37).

Using unlawful means of acquiring wealth (according to Islam) implies usurping

the rights of others and will lead to widespread inequalities, impaired incentives

and social waste. The socioeconomic implication includes the avoidance of

aleatory (ghrarar) contracts, information asymmetry, the prevention of hoarding

and fairness accounting.

5. Seeking God’s bounty: The believer is expected to show enterprise and effort to

achieve falah. A parasitic existence, idleness and beggary are prohibited in Islam

unless due to physical or mental disability. The socioeconomic implication is the

dignity of labour and the safeguarding of labour rights, earnings from labour and

fair wage practices.

6. Avoidance of Niggardliness: Withholding resources from society even from

spending on oneself and one’s family deprives the community of God’s bounty.

In the economic sense, this leads to low aggregate demand and a level of

employment. Sanctions are imposed on such miserly practices. For example,

Chapter 6 Page 242

Zakat is payable on idle wealth (money kept at home, in the bank or in shares

and stocks) and idle land can be taken away by the state from the owner and

given to somebody who can utilise it. Only with generosity and sacrifice as

opposed to miserliness and selfishness, can one achieve falah.

All the above five elements of falah can be seen to involve accounting and taxation.

Hence falah can be taken to be ultimate objective of Islamic accounting as well but a

more intermediate concept and objective is needed to operationalise Islamic

accounting. This intermediate objective may be served by the concept of “Islamic




Since the objective of Muslims and the Islamic economic system is to achieve falah,

Islamic businesses and Muslim businessmen should so conduct their business

activity to achieve this falah, as business activity is part of human activity and cannot

be separated from other daily activities (Beekun, 1997). Hence, the principles of profit

and wealth maximisation and the incessant concern with shareholder value, on which

capitalist businesses are based, are questionable from an Islamic framework. This is

especially so, since Islam has comprehensive ethical principles for business.

Accounting should support this activity by providing information to achieve falah.

Since accounting cannot achieve falah directly but only by directing user behaviour

towards activities (mainly in the economic arena) which will lead them to achieve

falah, there needs to be an intervening variable, especially related to accounting,

which Islamic accounting is based on. Since, the researcher has already considered,

decision-usefulness of conventional accounting in the chapter three and, within the

context and meaning it is now used, found it unsuitable for the purposes of Islamic

accounting, the researcher will not consider it further as an objective of Islamic

accounting. Instead, the researcher suggests “Islamic accountability” as the concept,

which can help operationalise falah in the socio-economic arena. This is an extension
Chapter 6 Page 243

of the concept of accountability and primary stewardship developed in the

conventional accounting literature (Gray et al., 1996;Chen, 1975).

6.3.1 Stewardship

Stewardship is said to be the duty to provide an account of the use(s) to which the

resources entrusted to a steward have been put (Gray et al., 1991, p 3). It has often

been confused with the notion of accountability (eg. Gjesdal, 1981). Stewardship can

be said to be a subset of accountability. Gray et al. (1991) suggests that the

difference between stewardship and accountability is that the former “says nothing

about the effects of those uses or about purposes behind entrusting of the resources

to the steward”. Chen (1975) offers a broader view of stewardship as encompassing

both financial and social stewardship.

Chen (1975) asserts that the concept of stewardship arose from the religious, mainly

Christian, teachings that man is a steward of God for the resources given to him (a

concept akin to the Islamic concept of Khilafah (vicegerancy) and Amanah

(trusteeship)). Stewardship is said to arise in relation to property rights, i.e. the right

to own and use property. Man as God’s steward owes a responsibility to use the

property effectively not only for himself (which Chen defines as secondary

stewardship function) but also has a social responsibility for others around him (the

primary stewardship function). This concept later developed in the feudal and

manorial versions of stewardship, where resources especially lands were given to the

serfs to manage on the landlord’s behalf. Here, the serf was responsible for the

‘secondary stewardship function’ of taking care of the land for the landlord, whereas

the landlord had to take care of the primary stewardship function of responsibility to

the community.

With the development of capitalistic businesses, which absorbed the new social

philosophies of individualism, the classical form of stewardship developed. In this

form, the managers (stewards) who were effectively servants of the new capitalist
Chapter 6 Page 244

owners recognised only the secondary stewardship to their masters; the primary

stewardship function was abandoned. In accounting, this is reflected in the

proprietary theory, where the business was the property of the owners and stewards

were responsible to them only. Chen (1975) further observes that the development of

managerial capitalism (after the depression of 1929) and the world wars, led to the

acceptance of the entity theory and the managerial model of stewardship, where the

managers felt responsible, not only to the shareholders but to other parties as well.

Hence the primary stewardship function (i.e. the social responsibility) was recognised

and the secondary stewardship function was dropped.

Chen (1975) concludes that both forms of stewardship must be recognised i.e. the

primary stewardship to society and the secondary financial stewardship to the

owners. She suggests that a dual accounting system needs be developed and

regulated by the profession, who should provide guidelines to measure, report and

audit, both financial and social information in two separate reports, a financial

accounting for the owners and a social account to meet the needs of society.

The recognition of a social responsibility, the designation of it as the primary

stewardship function and the relegation of the financial stewardship function as

secondary is completely compatible, in my view with the Islamic perspective of

preferring the social over the self. However, Chen’s suggestion of having two

separate accounts cannot be accepted because:

• The owners are part of society, and as Muslims, their falah as well as that of

society are both concerns of Islam and Islamic accounting. The owner, especially

an ethically driven Muslim owner, would be interested to make sure that the

business activities are not only conducted within the letter of the Shari’ah but

within its spirit also thereby ensuring ihsan (equity and magnanimity).

• Further, it is difficult to separate the economic and financial implications and

effects of the business from the social ones e.g. downsizing may increase short-

term profits but create unemployment for the local community. Reporting this
Chapter 6 Page 245

separately, would imply, the owners do not care for the social impact of their

activities and can only be forced to act in the social interest through legislation

presumably brought about by public reaction to the social report.

Further, stewardship seems too simplistic a concept in the era of multinational

corporations and other entities which use significant community resources and

assets. It would imply that these corporations are publicly accountable for their

actions (ASSC, 1975; Gray et al., 1991). Hence, while the suggestion by Chen to

recognise social stewardship is accepted, her suggestion to do a dual reporting is not

deemed acceptable from an Islamic viewpoint. Hence, Islamic accounting must be

holistic and integrated for both forms of stewardship.

6.3.2 Accountability

Accountability is said to be a broader concept than stewardship because it requires

an account of the extent to which the objectives for which the resources were

entrusted have been achieved. Various meanings and definitions have been given to

accountability in the literature (e.g. Ijiri 1983; Roberts & Scapens, 1985; Gray et al.,


One definition of accountability, using a principal-agent contract model (see figure 6-

1), is that of Gray et al. (1996) who define accountability as “ the duty to provide an

account (by no means necessarily a financial account) or reckoning of those actions

for which one is held responsible”. In this model, an Accountee (principal) enters into

a contractual relationship with an agent (Accountor). The Accountee gives the power

over resources along with instructions about actions and rewards to the accountor.

The accountor is supposed to take certain actions and refrain from others in

managing the resources given to him, to meet certain objectives and to account to

his principal by giving information about his actions to him.

Chapter 6 Page 246

Social context

Information, reports
of performance & non- , authority, responsibilities,
performance resources, rewards &
(contract) reprimands

(Agent) Social context


(ADAPTED FROM GRAY ET AL., 1988 & 1996)

The first problem with the above definition is that it emphasises the discharge of

accountability rather than accountability itself. The actions for which the accountor is

responsible arise due to entrusting resources to him. Hence use (or misuse) of the

resources) is the action the accountee is responsible for and not merely the

accounting for it. However Gray et al. (1996) seem to have recognised this problem

in their elaboration of the term accountability although it is not apparent in their

definition. They suggest that it consists of two parts i.e. the responsibility to

undertake (or to refrain from) certain actions and to provide an account of these


The second problem with this definition is it is that not easy to define what actions the

accountor is responsible for to the accountee. From a Western societal perspective,

directors for example would not be responsible for investing ethically, unless

specified by contract. From an Islamic perspective, this is assumed because any

contract operates under the ethical rules of Islam.

Chapter 6 Page 247

The researcher suggests the following definition, which would perhaps, be better:

Accountability is the duty of an entity to use (and prevent the misuse of) the
resources entrusted it in an effective, efficient and economical manner, within
the boundaries of the moral and legal framework of the society, and to provide
an account of its actions to accountees who are not only the persons who
provided it with its financial resources but to groups within society and to society
at large.


In the researcher’s opinion, the accountor has a duty not only give an account (i.e.

report on the performance or non-performance of this duties) but also to act or refrain

from acting in a certain way. Since the accountee is usually not in close contact with

the accountor (except for employee-employer accountability), the reporting or the

account makes the organisation transparent as well as providing a feedback for the

accountee to enable him to control the accountor and the organisation.

The use of the terms efficient and economical in the researcher’s proposed definition

may be problematic for critical and social accounting researchers, but the researcher

did not use them in a positivist or reductionist manner. Although the term

“economical” has become value laden in the eyes of socialists and “greens”, the

researcher uses it in the sense of “the least cost “. This is due to the fact that

choosing a higher priced option (in the absence of a social/moral reason) is contrary

to the Qur’anic prohibition of waste.

Gray et al. (1996) recognise that two different categories of rights and responsibilities

exist; legal and non-legal, the latter arising from moral or natural rights and

responsibilities. They argue that the law lays down the minimum level of

responsibilities and rights and consequently the minimum level of accountability in

any given country at a given time. They note however that while law establishes

responsibility for certain actions (e.g. equal opportunities) it does not provide an
Chapter 6 Page 248

equivalent responsibility to account in all cases. Thus the legal responsibility for

action and legal responsibility to account are not equal. The disparities in the two

responsibilities, they argue, bring a moral responsibility to account. They therefore

call for mandatory regulations to cover Corporate Social Reporting.

The researcher fail to see the logic of insisting that a moral responsibility to account

exists (only) when a legal responsibility for action exists. The social contract and the

very fact that large organisations use significant community resources (see ASSC,

1975) should give rise to a moral responsibility for action even in the absence of


Following the deep green view,

“To be accountable is morally sound and spiritually uplifting thing to

do.... It is only ...the conditioning effect of large organisations that make
the idea of freely giving an account so bizarre”. (Gray et al., 1996, p 53)

If a social contract/legitimacy or moral view of business organisations is not enforced,

organisations following the cue from Friedman (1962), might insist they had no such

responsibility to account. However, in the climate of a neo-pluralist, self-interested

and utility maximising capitalist society, there might be no other choice in the short

term except through legislated “compliance with standard report.”.

Another problem with the accountability model is the nature of the

moral/philosophical rights and how they are determined. Gray et al. (1996)

distinguish absolute and relative philosophical responsibilities although in a society

where religious values do not seem to hold, even the absolute values are becoming

relative. The researcher agrees partially that debate, education and agreement can

achieve philosophical rights. However this is very difficult in view of the materialist

anti-religious philosophy, which seem to characterise capitalistic society. It is very

difficult to reach consensus and agreement when the society is so pluralist and

relativist as to morals and believes in nihilistic moral philosophies.

Chapter 6 Page 249

In an Islamic society, the ethical values are specified in the Qur’an (word of God) and

the traditions of the prophet (exemplification and interpretation the Quran in daily life).

Indeed the Prophet (peace be upon him) said “I was not sent except to perfect

character” and the Qur’an says of the prophet “In you, we have established the best

character.” The prophet is a model of virtue for the Muslim who tries to imitate his

character and his ethics (although to varying degrees of success).

Hence accountability of organisations (which is a subset of the Muslim’s

accountability to Allah or God) could possibly be re-established in Muslim societies

more easily than Western societies, because the philosophical values of a Muslim

society are derived from unchanging revelatory principles.

6.3.3 Extensions of Accountability Framework & Islamic Accountability

Gray et al. (1988 &1996) have used the accountability model as a theoretical

framework for corporate social and environmental reporting and mainly examined

disclosures in annual reports and social/environmental audits. The accountability

framework, however, is a much broader concept, which can explain the workings of

accounting systems in their organisational contexts. According to Roberts &

Scapens (1985), it may help to integrate the technical and interpersonal aspects of

accounting systems by focusing on accounting practices and the

human/organisation/system and manager/subordinate interface.

Roberts (1991) elaborates on this positive aspect of accountability as follows:

“ be held accountable for one’s actions serves to sharpen one’s sense of
self and one’s actions. The practice of accountability focuses attention
within the flow of experiencing; it acknowledges and confirms self, and the
fact that one’s actions makes a difference. Conversely, in the absence of
being held accountable, there is a possibility of a weakening and blurring
of one’s sense of self and situation”. (Roberts, 1991, p 356)

As the researcher argued earlier, accountability is not only a duty to report

performance (which is the discharge of accountability) but a duty to perform or not to

perform certain action. Even corporate social and environmental disclosures could be
Chapter 6 Page 250

for reasons other than discharging accountability (e.g. for legitimation and

stakeholder management reasons). Accountability starts from a frame of mind, from

an ‘inbuilt’ responsibility to act in a certain way according to

religious/philosophical/societal customs, ethics and values, as well as legal and

quasi-legal requirements. In this sense, discharging accountability means the actual

performance of the required actions (or the avoidance of certain actions) rather than

merely reporting the performance. However, since the ‘relevant publics’ are at a

distance and cannot observe the actions directly, the annual reports become the

important media through which accountability is observed by the accountee. Hence

‘accounting’ information can play a crucial role in the maintenance of harmonious

social relationships which is the purpose of ‘accounting’ hinted in the Qur’an2.

Roberts & Scapens (1985), for example, give a broader definition of accountability

as “giving and demanding of reasons for conduct” and assert accountability (quoting

Giddens, 1979) as a long established, continuing feature of daily conduct.

Using a framework of accountability and by focusing on the accounting practice, they

suggest new insights could be gained on how accounting systems construct and are

constructed by organisational realities, as organisations themselves comprise the

interdependent social practices of skilled (knowledgeable) subjects.

Roberts & Scapens (1985), use the term “systems of accountability” to refer to the

accounting system as embodied in practice, for example, social accountability

relationships created by the abstract ’accounting system’ which is the body of rules

and resources which are drawn upon in the practice of accounting. In hierarchical

forms of accountability, accounting information provides a means of negotiating and

“O You who believe!, when you contract a debt for a fixed period, write it down. Let a scribe
(accountant?) write it down in justice between you.....Let him who incur the liability dictate...And get
two witnesses out of your own men.....You should not become weary to write it down whether it be big
or small....that is more just with Allah, more solid as evidence and more convenient to prevent
doubts among yourselves, save when it is a present trade which you carry on , on the spot among
yourselves, then there is no sin on you if do not write it down.....”., Al-Qur’an (2:282). The relevance
of this verse to accounting can be seen by references to credit and writing as antecedents of
bookkeeping. Littleton (1966, p12).
Chapter 6 Page 251

defining the significance of events (Signification), They also embody a moral order: a

complex systems of reciprocal rights and responsibilities which institutionalise the

notion of accountability. In this way, the system of accountability becomes a method

for expressing and enforcing expectations (e.g. budgeting systems).

Roberts & Scapens (1985) analyse the operations of systems of accountability by

contrasting forms of accountability in relationships characterised by face to face

contacts with forms of accountability where relationships span physical distance.

They find in the first instance, accounting information is interpreted and understood

within the shared context of extensive mutual knowledge (accounting plays a

confirmatory role, confirming results known from other sources of information).

However in situations which span physical distance such as divisions to head office,

(directors to shareholders?), the reductionist nature of the accounting and reduced

visibility of the divisions in the absence of shared mutual knowledge (as the

accounting information may be the only source of knowledge) causes problems. It

becomes difficult for head office managers to interpret the reality (the physical and

interpersonal processes) that generated the results embodied in the accounts.

According to Roberts & Scapens (1985), this distance makes trust more difficult and

attempts to invest in more intrusive accounting systems may stop it acting as a

vehicle for developing mutual understanding and encourage further manipulations.

Roberts (1991) explores how different forms of accountability produce different

senses of self and different relationships with others. Here accountability is defined


“a form of social relation which reflects symbolically against the practical

interdependence of action: an interdependence that always has a moral
and strategic dimension”. (Roberts, 1991, p 367)

He argues that the hierarchical forms of accountability which conventional

accounting perpetuate lead to an individualising form of accountability which results

Chapter 6 Page 252

in a solitary and singular sense of self which is nervously preoccupied with other

people’s perception of self.

On the other hand, socialising forms of accountability which flourishes in the informal

spaces of organisations confirm the interdependence of self and others. Obviously,

there are tensions and conflicts between the two forms of accountability and Roberts

argues that the contemporary organisational accountability (which may be

extrapolated to contemporary accounting), constructed around an untenable and

destructive split of ethical and strategic concerns to the detriments of both. He calls

for a search into the possibilities of accountability, which is oriented towards the

reconciliation of these ethical and strategic concerns.

It can thus be seen that Roberts (1991) and Roberts & Scapens (1985) use of

accountability is more in the context of internal accounting relationships. The current

researcher sees this as an important part of Islamic accounting. The second part of

this research project is designed to gain information on the internal accountabilities of

Muslims. This research project is concerned mainly with External Accounting

(conventionally financial accounting and reporting). However, the researcher believes

that concept of accountability can be extended to stakeholder relationships and form

a continuum in Islamic Accountability which proceeds from the internal to the external


6.3.4 Islamic Accountability; The Basis of Islamic Accounting

From an Islamic perspective, accountability is a basic ingrained concept in the

Muslim community (Khir, 1992) and forms one of the core concepts of belief i.e the

belief in the hereafter, heaven and hell, accounting and punishment. Accountability

arises from the amanah or primordial trust (i.e. free- will, freedom to choose,

knowledge and reason) which was given to man only (Al-Faruqi, 1992). Other

creatures including angels, animals and non-living matter have no such ability. Hence
Chapter 6 Page 253

angels, animals and other creation will not be accountable as they have no choice

but to obey God and carry out their mission and purpose in life as He decreed.

Only Man has the freedom to choose or not to choose God’s way. Further the

concept of Khilafa or Man as vicegerent of God on Earth (Al-Faruqi, 1992) means

that God has placed man in custody of the resources of not only this earth but the

entire heavens and the earth to be exercised in accordance with his instructions to

his benefit as well as all other human- beings and animals and the environment.

Besides this concept of accountability, which is common to many religions, Islam

places special emphasis on accounting i.e. recording events or actions itself. The

Qur’an declares that there are two angels recording every action of man. One angel

records rightful actions and the rewards attributed to them (sawab) and the other

records sinful actions and the sin attributed to them (ithm). The translation of actions

into units of rewards and sins is unique to Islam. In fact there is a whole area of study

in Islam regarding the benefits of actions (al-fadhail). This acts as a motivation and a

deterrent to actions of Muslims. A good act gets up to 700 reward units depending on

the intention and effort. A good intention counts as one reward unit and when it is

undertaken merits at least 10 reward units. A bad intention without action does not

merit any debit (sin) units but when carried out gets one sin unit.

Further, Islamic scholars have classified the value of all actions into five categories;

Fard (obligatory), Sunnah or Mustahab (recommended), Mubah (permitted but legally

indifferent), Makruh (disapproved) and Haram (forbidden) (Doi, 1992;Kamali, 1991).

Fard acts attract reward units and leaving them out attracts sin units. Sunnah acts

attract reward units but if left out do not attract sin units. Mubah acts do not attract

reward or sin units. Makruh acts do not attract sin units but leaving them out attracts

reward units and finally Haram acts attract sin units whereas leaving them out

attracts reward units.

Although neither the exact quantum of rewards or sins, nor their exact nature is

revealed to Muslims; it forms part of the core belief structure. On the day of
Chapter 6 Page 254

judgement, the person with more reward units will be given the book of records

(which the angel had kept) in the right hand. The person with a deficiency of reward

units will be given the book from the back (Al-Qur’an, 84:7-12) and they will be glad

or sad depending on the situation. Finally, the units will be placed on the Mizan

(measuring scale) and will be weighed. The person with more good units than bad

will be sent to heaven, whereas the person with a deficiency will land in hell. In order

to prevent a misfortune on the day of Judgement, the Muslim is asked by the Prophet

Muhammad (pbuh) “to take account before account is taken of you”. The pious

Muslim therefore makes a self-account (a sort of a confession to God) of the actions

he has undertaken during the day and asks forgiveness for his sins and praises God

for the good he has done. This activity serves as a sort of feed-forward control to

discipline behaviour. If a sin involves other persons, then restitution is an essential

pre-condition for forgiveness.

It can thus be seen that for a believing Muslim, accountability and accounting is

ingrained by his religion into his soul, as Khir (1992) asserts,

“the concept of accountability is so ingrained in the (Muslim) community.

This to me is the greatest motivation for the practical development of
(Islamic) accountancy. This is due to the fact, that Muslims hold dearly to
the concept of man as a trustee and not as holder of absolute power”.
(Khir, 1992, p 36)

Further, this accountability concept is not restricted to spiritual aspects but extends to

social, business and contractual dealings. The Qur’an declares that “And Fulfil

contract, Verily (fulfillment of) contracts will be questioned (on the day of reckoning)”

(Al-Qur’an, 17:34). Hence, it is thus logical to extend this ingrained accountability and

accounting (recording of actions by angels) concepts into the notion of “Islamic

Accountability” which can be used as the main objective of Islamic accounting.

By Islamic accountability, the researcher means, undertaking actions (and refraining

from some) and giving account of the actions taken (and not taken) by an

organisation or person (the accountor) in discharging its Shari’ah obligations both

Chapter 6 Page 255

contractual and social as an aid to self-correction and inducing behaviour of

stakeholders towards falah. This will transform accounting into a social accountability

activity, as Schweiker (1993) puts it:

“what makes accounting an activity concerned with how we should live..

(is) giving an account of our past actions and their consequences(usually
described in a number of ways; political, economic, social and personal)
that is, of ascribing accountability ex post facto”.
(Schweiker, 1993, p 234- 241)

How would Islamic accounting influence the behaviour of stakeholders towards

falah? From the conventional accounting literature (e.g. Hines, 1988) we know

accounting can give importance to certain notions i.e. what is accounted for becomes

what is important. If profit is emphasised in conventional accounting, Islamic

accounting should disclose information about Shari’ah compliance and non-

compliance. Similarly, an alternate valuation system (in line with the Shari’ah) may

have to be conceived giving scores to events and actions which have social and

moral values encouraged by Islam. Although these units cannot be distributed to

stakeholders, they will certainly point them towards what is important. Furthermore,

the control aspect is very important. If information users know that the entity has not

followed Shari’ah actions, they can demand explanations and take actions resulting

in the entity complying with the Shari’ah in the future, thus protecting the economic,

social and spiritual future of the users. Thus:

“It is very important that accounting performs as a control tool of the

Sharia in respect of economic activities; that is, an Islamic accounting
system must conform to the Sharia verses (in the Qur’an), while
measuring , recording and reporting financial outcomes”.
(Askary & Clarke, 1997, p 143)

There is also a philosophical point to consider here. In the view of symbolic

interactionists (e.g. Blumer, 1969), the self is the most important element of the

dynamic pattern of an individual. The self experiences social interactions, which it

may internalise or reject. When an individual internalises the values of a society (or

Islam, for that matter), his covert (thinking) and overt actions will be actualised based
Chapter 6 Page 256

on the perspectives of those values (Triyuwono & Gaffikin, 1996). However, an

accounting system is like a mirror (surface) reflecting reality. Further, the

appearance of the reality depends on the surface of the mirror because as (Dillard,

1991) argues, “different surfaces (ideological frames) reflect a different reality”.

Hence for Muslims with different value sets, Islamic accountability can be attenuated

by an Islamic accounting system which reflect Shari’ahte values (Triyuwono &

Gaffikin, 1996).

Although the word, accountability is not used in the “objectives of financial accounting

for Islamic banks and financial institutions” (AAOIFI, 1996), the notion of

accountability is implicit. In noting the differences between objectives of financial

accounting for Islamic banks and other banks, it states that:

“[while] financial accounting is mainly concerned with providing

information to assist users in making decisions, those who deal with
Islamic banks are concerned in the first place to obeying and satisfying
Allah in their financial and other dealings”. (AAOIFI , 1996, p22).

Further, the AAOIFI (1996) lists four objectives of financial accounting in the same

statement and only the last seems to be decision-usefulness; the first three pertain to

Islamic accountability. The statement lists the determination of rights and obligations

of all interested parties in accordance with the principles of the Shari’ah and its

concepts of fairness, charity and compliance with Islamic business values (Para

6/1(a)). It also includes the encouragement of compliance with Islamic Shari’ah in all

transactions and events (Para 6/1 (c)). Thus the notion of Islamic accountability is

implied strongly in a prominent Islamic accounting Regulatory Institution document

(Pomeranz, 1997).

Adnan & Gaffikin (1997) advocate a slightly different view of accountability, basing

their findings from a reading of some Qur’anic verses. They assert that the primary

objective of (Islamic) accounting information is the provision of information to satisfy

an accountability obligation to the real owner (Allah). However, they assert that the

overall accountability to act within the Shari’ah would be better operationalised, if the
Chapter 6 Page 257

accountability is directed towards the fulfillment of the Zakat obligation (which is

considered God’s share of the wealth). They argue that this emphasis on accounting

for Zakat is logical because it is a prime Islamic socio-religious obligation, it will lead

to avoidance of cheating and window dressing. Consequently it will lead to a

discharging of societal responsibility, because Muslims believe that God always

watches over them and thus is aware of any wrong doing in this respect. One could

argue that God equally watches the faithful on all transactions and not only those

pertaining to Zakat. However, what the authors seem to imply is that, the

psychological affect of avoiding window dressing games in Zakat accounting is real

because both preparers and users realise that they cannot cheat God of his share.

This is a strong argument but the researcher believes that a broader concept of

accountability is better because, although Zakat is an important socio-religious

obligation, it is just as important to ensure just rights of various stakeholders of large

organisations, especially in this era of large corporations. If large businesses and

other entities are not held Islamically accountable but only Zakat accountable, they

may pay Zakat on unlawful and immoral sources of income, which is forbidden by

Islam. This may create havoc for the economic, moral and spiritual health of

stakeholders such as by instilling consumerism through their marketing activities.

The researcher proposes the Islamic accountability model, based on the dual

stewardship model of Chen (1975), Gray et al.’s (1996) accountability model and

Islamic concept of Khilafa. The proposed model is illustrated in figure 6-3 and is

elaborated next. The numbers in brackets corresponds to the numbered arrows

(information flows) in the model.

The Islamic accountability model is premised on both Islamic and Muslim

organisations (through their managers), and Muslim owners /investors having dual

accountabilities. The first or prime accountability arises through the concept of khilafa

in Islam whereby a man is also a trustee (khalifa) of Allah’s (God’s) resources

(physical and intellectual). Under the khilafa concept, he is also accountable to Allah
Chapter 6 Page 258

for the care of other human beings (specifically local community, society and

employees, in the case of organisations), animals and environment. This primary

accountability is transcendent, as it cannot be perceived through the senses and is

therefore represented by a dotted arrow (1). However, this transcendent

accountability is made visible (through the revelation of the Qur’an and Hadith) to

both investors and managers, in the form of Islamic teachings. This is represented by

the two dashed arrows (2).

The secondary accountability is established by contract between the owner/investor

and manager (e.g. through the Memorandum and Articles of Association of a

company). The solid arrows in the model represent this (3). The secondary

accountability contract between the owner/investor and manager implicitly or

explicitly embeds the primary accountability stipulations of Islam. As the company

performs its activities the Islamic accounting system identifies, records, measures

and reports these socioeconomic activities (similar to the conventional accounting

system) to the investor thus discharging the secondary accountability. This is again

shown in the model by the solid arrows (4), as these are perceivable by the senses.

The latter completes the secondary accountability cycle.

However, the Islamic accounting system also identifies, measures and reports the

socioeconomic activities pertaining to Islamic/social/economic/environmental and

other issues to both the owner/investor and the manager (5 & 6). Dashed arrows

show these information flows. The information thus disclosed enables both these

parties to monitor the activities of the organisation and ensure their primary

accountabilities (measured by Qur’anic and Hadith criteria) in their capacities as

khalifas of Allah, are discharged. The Angels of course record these actions and

account this to Allah according to Islamic belief. However, as these latter information

flows (7) are not perceptible to the senses, they are shown as dotted arrows to

indicate their metaphysical nature. These information flows complete the primary

accountability cycle.
Chapter 6 Page 259



ACCOUNTABILITY (Angelic Records)
(Angelic Records)
(Trusteeship of physical resources
and creatures arising from nature of
man as Khalifa)

2 2

(Vicegerent: Primary (Vicegerent: Primary
Accountor) 6 Accountor)
Secondary Accountee (Secondary

Managerial Contract
Chapter 6 Page 260

The Islamic accountability model can thus be seen to have two accountability cycles,

one to God and one to men. The accountability to God is partly transcendent and is

thus indicated by dotted arrows. That part of accountability relationships to God

which is perceptible, is indicated by dashed arrows. Finally, solid arrows designate

the normal physical accountability relationship between man and man.


The main objective of Islamic accountability needs to be supplemented by subsidiary

objectives to further operationalise and refine the concept in practice. The researcher

proposes four subsidiary objectives for Islamic accounting; (i) Shari’ah compliance,

(ii) the proper assessment and distribution of Zakat , (iii) the equitable and fair

distribution of wealth generated by an organisation, and (iv) the creation of a co-

operative environment and solidarity. These are discussed below:

6.4.1 Shari’ah Compliance.

The first subsidiary objective would be to enable the activities of the entity to be

controlled to be in line with the Shari’ah. This was already partially covered in the

main objective but specific information on Shari’ah compliance would be a main part

of the Islamic accounting information framework. Here, not only is the immediate

Shari’ah meaning of halal (permitted) activities and avoidance of prohibited (haram)

activities meant, but also a broader more comprehensive view of the Shari’ah,

including the protection of the environment. Unfortunately, the case of Islamic banks

seems to indicate that Shari’ah compliance has become a technical compliance with

the letter of fiqh legal devices. For example, the significant use of mark-up

(murabaha) financing does not seem to realise the objectives of the Islamic economic

system for which Islamic banks were established. The researcher takes a broader

view of the Shari’ah, taking the maqasid (objectives of) al-Shari’ah approach of al-

Shatibi which was discussed in Chapter 2 (see Kamali, 1989). Thus, Shari’ah

compliance would include steps taken by the Islamic organisation to relieve poverty
Chapter 6 Page 261

and hardship, to avoid damage to the environment, to avoid consumerist and

misleading advertisements. An indication of the “broadness of the Shari’ah” meant

by the researcher is illustrated by Khan (1994a). He suggests that businesses should

promote the overall-objective of the Shari’ah including protecting the environment,

keeping its contracts and promises, propagation of good and negation of evil, and

contribute towards the socioeconomic development of society. He asserts that

Islamic society requires information on these matters and therefore accountants

should respond to these demands by developing new concepts and procedures.

6.4.2 Assessment and Distribution of Zakat

This is a very special case of Shari’ah compliance and wealth distribution. Under

conventional accounting, tax avoidance is a major activity for accountants. No

consideration is given to the fact that less tax means less wealth distribution and less

money for public benefit. Accountants in the guise of tax consultants spend their

intellectual talent to benefit a few people. In Islam, however, Zakat is a prime

religious obligation on the same level as obligatory prayer. It is an act of honour, duty

and obligation to assess Zakat properly on the wealth and profits of an entity. Pious

Muslims always attempt to over rather than underestimate Zakat, as any excess is

credited to his account as voluntary charity on the day of judgement.

The practice of Zakat assessment and collection has been carried out since the

Prophet’s time. Under the Islamic economic system, Zakat is a cornerstone of public

fiscal policy of in Islamic State. Even in the absence of a truly Islamic government,

many Muslim countries have departments to collect Zakat and distribute them.

Hence, the ability to assess the proper amount of Zakat to ensure that Zakat

beneficiaries get their rightful share is a very important.

Adnan & Gaffikin (1997) advocate Zakat assessment as the main objective of Islamic

accounting. They see accountability manifested “ in the form of how one can account

for his or her Zakat obligations properly” (p121). Gambling & Karim (1986) also
Chapter 6 Page 262

suggest that the way forward for Islamic accounting and finance is to develop the

concept of Zakat more fully. In fact, Gambling & Karim (1986) point out that the

requirement to have a different valuation system of Zakat calculation requires the

need for an accounting system that is adequate to provide the required tax-base on

which Zakat should be calculated.

Since the recipients of Zakat are well defined in the Qur’an itself (mainly poor and

destitute), the payer may be motivated to pay more rather than less because the

Zakat payer knows it will be mostly used for the poor and the destitute. To make this

a reality, however, one may require more rather than less accounting.

The Zakat objective is further endorsed by the AAOIFI (1996) in their objectives of

financial accounting for Islamic Banks. Under the heading of “Objectives of financial

reports”, it declares that:

“Financial reports......should provide the following types of

information.....(c) Information to assist the concerned party in the
determination of Zakat on the Islamic bank’s funds and the purpose for
which it will be disbursed”. (AAOIFI, 1996, p28-29)

The objective of proper Zakat calculation is so important that the AAOIFI has come

out with an exposure draft on Accounting for Zakat (Financial Accounting Standard

No. 11) which gives detailed rules for determining the Zakat base and the asset

valuation method to be used.

Further, Khan (1994a) suggests that since Zakat is an obligation on all individuals

(and organisations) with wealth of more than a certain minimum, every individual

(and organisations) has to keep account of his assets so that Zakat can be calculated

properly. Thus, the importance of Zakat assessment is one of the primary objectives

of Islamic accounting.
Chapter 6 Page 263

6.4.3 Equitable distribution of wealth among stakeholders

Justice and equity are two of the main objectives of Islam. Further, concentration of

wealth is discouraged by the Qur’an itself even if this is legally done. Hence,

equitable distribution of wealth among stakeholders would be a prime objective of

Islamic accounting. Justice in Islam means to give everyone his or her due according

to Doi (1992).

Hence accounting information should enable all users to get their fair share of wealth

generated by an organisation. Zakat is a special case, which is already taken up

earlier. What is of special concern here is the distribution between

shareholders/owners, managers and employees. Conventional accounting masks

distribution above the bottom line through transfer pricing and other creative

practices. Thus, the “above the bottom line” distribution is especially important such

as the flows between locals and expatriates, Muslims and Non-Muslims, the ‘workers’

and managers. Managers can siphon off wealth in the form of perks and excessive

remuneration in the form of share options, bonuses and expense accounts. In

particular, Islamic accounting should avoid the problems of conventional accounting

associated with inequitable wealth distributions noted by Tinker (1985).

Tinker (1985) noted that conventional accounting with its neo-classical orientation

seeks to measure and disclose indexes of wealth accumulation - profit. This is an

inadequate metric of performance because it ignores how wealth is distributed:

between insiders and minority shareholders (greenmailing and fraud), government

and corporations (tax liability) and business and public (in case of rate determination)

and business and society (pollution costs). Due to its marginalist dependency,

“accounting has no way of judging the inequality or exploitativeness of exchange”

p172). According to Tinker, accounting has also suffered from social alienation

because of its involvement in a number of recent controversies where accounting has

Chapter 6 Page 264

helped to expropriate wealth from one social constituency to another” (outsiders to


The AAOIFI (1991) places the determination of the rights and obligations of all

interested parties” (p28) in accordance with the concept of fairness and charity under

the Shari’ah, as the first objective of financial accounting for Islamic banks and

financial institutions. This obviously includes the rightful share of wealth, which would

be the main concern of financial accounts.

6.4.4 The creation of an co-operative environment and solidarity

The Qur’an in verse 282 of Chapter 2, refers to the avoidance of doubts between

parties as the objective of recording deferred obligations. Doubts and suspicions are

termed Satanic and some suspicions are sins. Further, doubts can lead to mistrust,

enmity and breakdown of harmony. This is especially the case when money is

involved because it often leads to breakdown in friendship. This is a particular failing

of conventional accounting which Islamic accounting has to remedy. Lehman

(1992a), for example, contends that accounting practice has been theorised in a

social and political vacuum, which have led to the misapprehension, silence and

anomalousness of controversies surrounding various stakeholders. Further the

accountants’ “privileged access to specialised information, which places them in

position of power and knowledge” (p2) has not always been used responsibly as

evidenced by the affliction of accounting by financial collapses and controversies.

She argues that accountants play changing roles as arbitrators, public policy makers,

legitimators and mythmakers in social conflicts. Hence, Islamic accounting is

obligated to take up Lehman’s (1992a) call for accounting to move beyond the

posture of ‘objectivity’ and ‘efficiency’ and to move towards the solidarity which

Arrington (1990) proposes.

Chapter 6 Page 265

Further solidarity and co-operation in society is better than cut-throat competition

which results in financial losses and ultimately unfair competition such as by driving

out competitors using loss leader marketing techniques.


When businesses were small and their effect on others external to the business

were negligible; it could be argued that owners and creditors are the most important

and crucial users of accounting information. However, in the current era “when

corporations rule the world” (Korten, 1995), the firm’s consumption of public

infrastructure and communal resources and their activities have positive and negative

effects on other groups in society and the environment. It is therefore essential that

these entities have “public accountabilities” to other groups in society (ASSC, 1975).

It has increasingly been recognised that in addition to the shareholders, other

“stakeholders”, who have a stake in the organisation have rights to its accounting

information in order for them to assess the contribution of the organisation to society

and to control their harmful effects.

Although investors or owners continue to have an important stake in a business

entity, their importance as compared to other stakeholders has increasingly been

questioned in the literature (Cooper & Sherer, 1984;Gray et al., 1996;Stanton

1997;Shaoul,1998 ;Sutton & Arnold, 1998). Shaoul (1998) for example, questions the

notion of stakeholders co-operating in their efforts to generate profit and share in

their distribution as one big happy family. On the contrary, they assert that there is a

conflict between stakeholders inherent in the relations of production and distribution.

They question whether all economic life should be run in the interests of the few

seeking ever higher profits instead of meeting social and public needs of this and

coming generations. They suggest that accountants have refrained from analysing

even existing financial accounts from the perspective of other stakeholders because

to do so would mean a definite social orientation and programme for accounting.

Chapter 6 Page 266

Stanton (1997) on the other hand, advocates a rights based approach to ascertain

valid claims to information by non-investor user groups in order to extend fairness

and justice to these users.

Despite these developments, conventional accounting based on decision-usefulness

continues to give precedence to finance providers as the main target group of

accounting information. For example, the FASB statement of financial accounting

concepts states that the objective of financial statements is to provide information to

“investors, creditors and others” (FASB, 1978). Even the recent preliminary

recommendations of the AICPA (1994) on improving business reporting still “appear

to focus on meeting the needs of a subset of financial statement users who are

primarily interested in profitability and returns on investments” (Sutton & Arnold,


From an Islamic perspective, any organisation is accountable to Allah for its actions.

The Islamic concept of ‘taklif’ or responsibility according to capacity would seem to

indicate that larger organisations, consuming more resources having a magnified

effect on others and would thus be accountable for their activities to society.

In Islamic history, many activities, currently undertaken by business corporations

were the responsibility of the Islamic State. Given the current climate of privatisation,

the responsibility should be transferred to these corporations to the extent that

previously publicly held resources are now turned over to them for the purpose of

efficiency and productivity. Hence, other user groups in society might rank equal in

importance, if nor more important than shareholders and creditors.

Further, in Islam, as credit cannot be extended to anybody under fixed return terms

(i.e. interest), loan creditors, if they exist at all, would be Qardan Hasan (or

benevolent loan) creditors. These could include government giving soft loans and

grants, individuals or societies given interest-free loans to other Islamic organisations

(not necessarily business organisations). If this culture, which is encouraged in Islam,

becomes common, then these benevolent creditors would be a new major user
Chapter 6 Page 267

group. They would have a right to ensure that the organisation to which they have

lent their money, uses it properly and they are operating in a viable manner to ensure

the return of their loan.

Another group of important users from an Islamic perspective would be Zakat

beneficiaries, Zakat payers and the Government authority in charge of Zakat

assessment and monitoring. Although it is the responsibility of the Islamic State to

collect and distribute Zakat, in the current political climate, this is being done by

organisations, such as Islamic banks and charitable bodies such as Muslim Aid in the

UK. In the case of Islamic Banks and business organisations, the organisation acts

as an agent for the Zakat payable by shareholders and employees. Hence they are

deducted from salaries and dividend distributions and credited to a separate fund

from which they are disbursed to the appropriate beneficiaries. In this climate, it is

very important for society to control the organisation to ensure the Zakat is properly

assessed and paid to the proper beneficiaries, in strict conformity to the Qur’an.

If the suggestion by Gambling & Karim (1986) for every Islamic bank to build up a

substantial Zakat fund is to be taken up by Islamic businesses, it has to be accounted

for, monitored and audited separately from the business. Such accounting would be

prominent in Islamic accounting. This will be due to the increased demand by Zakat

beneficiaries, payers and government regulatory agencies for accounting information

regarding this fund.

Besides the user groups mentioned above, the consumer/customer group and local

community and employees have an important stake in the organisation as in Western

society. Consumers especially have more rights and a need for information to

ensure that the entity produces, markets and distributes products and services which

are halal (permitted) under the Shari’ah and are safe and morally desirable for the

community as a whole, instead of firing up insatiable consumer wants and creating

social and environmental havoc.

Chapter 6 Page 268


The rest of the chapter discusses the characteristics of Islamic accounting discerned

from the literature as well as the researcher’s own ideas. The researcher shall first

discuss the similarities and differences between conventional and Islamic accounting

information followed by the information requirements of an Islamic Society. The

researcher shall then discuss the different types of Information needed. The valuation

and income measurement principles in Islam are then discussed. The researcher

concludes the chapter with the overall general characteristics of Islamic accounting

as compared to conventional accounting.

6.6.1 Conventional and Islamic Accounting Information: Similarities and


Conventional accounting stresses the financial results of the economic activity of an

enterprise and the financial position of an enterprise as the two most important types

of information for investors and creditors to assess the continued financial viability of

the business (FASB, 1978; IASC, 1989 ;ASB, 1992). Hence profits, sales, assets and

liability information along with any subsequent or extraordinary events are the main

types of information supplied by conventional accounting. The aim of the information

is for the users to make decisions on whether to hold, buy or sell the investments in

the company.

These items continue to be important in Islamic accounting because, the investors

and other financial providers are members of society and they must get their due

rights. Justice is for everybody, not unlike in Marxist ideology, where the proletariat

must always get the upper hand over the bourgeois. In fact, since interest-based

debts are banned in Islam, equity capital becomes much more important. Hence the

calculation of profits are absolutely essential in order for various parties to get their

just and fair share. Further in a mudharaba transaction, where capital providers are

sleeping partners who bear the entire loss if any, the managers may have added
Chapter 6 Page 269

incentive to consume perks and produce a loss (Jensen & Meckling, 1976,

Obiyathullah, 1995), thus depriving the finance providers of their due share.

Hence, the AAOIFI (1996), for example, does recognise in its objective statement,

their importance. It states that information needed to estimate cash flows, its timing,

and risk associated with it should be provided to enable users in evaluating the

Islamic bank’s ability to generate income and convert it into adequate cash flows

(paragraph 6/2/(d), AAOIFI 1996 p 29).

However, the uniqueness of Islamic accounting would be to provide other types of

information (see section 6.5.2 below) in an integrated manner in an Accounting

Report or Statements. To determine the type of information needed, it is necessary

to consider the information needs of an Islamic society, since Islamic accounting

seeks to discharge a dual accountability (see Islamic Accountability model on

previous section). Information needs of an Islamic society

Baydoun & Willet (1998) assert that unlike conventional accounting, in Islam the

focus is on God and the community rather than the individual demands a social

accountability perspective rather than the personal accountability found in the West.

Therefore, a principle of full disclosure of accounting information is needed, not

based on the outcome of a political process but upon what ought to be disclosed in

order to serve the objective of social accountability. They conclude therefore, that the

differences in the objectives and the specific prescriptions of certain transactions lead

to differences in the type of information that should be disclosed by Islamic


Khan (1994a) insists that the information needs of an Islamic society are different

from those of a capitalist society because of their different world-views. Thus,

besides recording and reporting profitability, liquidity, solvency and efficiency, Muslim

businesses and individuals should report (among others):

Chapter 6 Page 270

• The true figure of Zakat payable and in the accounts of Zakat administration

agencies, the collections, distribution and impact of Zakat.

• The extent to which justice and benevolence is considered in the organisation’s

treatment of its employees.

• The extent to which the business keeps its promises and fulfill its contracts

• The impact of the business on its environment

• The extent to which the business adheres to the Islamic code of business ethics

while dealing with customers, competitors, government and other agencies and

• The contribution of the business toward the socioeconomic development of

society, particularly the usefulness of the goods and service it produces.

Khan (1994a) observes that the point of reference is the overall objective of the

Shari’ah (not users’ rights or needs, cf. Gray et al. 1996). He opines that since

conventional accounting fails to provide this information, there is a need to change

the social paradigm of Muslim society to an Islamic ethos, which will place demands

on accountants to develop an accounting system which will meet these information


In addition, or large Muslim organisations, the researcher believes, the term financial

statements and financial reports are not appropriate as it tends to emphasise the

importance of one type of information and one category of users i.e. fund providers.

The researcher suggests the term “Accounting Report” or “Accounting Statement”,

the term ‘accounting’ in these terminology to be used not in a financial sense but as a

holistic socioeconomic term.

From the above, Islamic accounting reports must provide the following type of

information, besides the type provided by conventional ‘financial’ accounts;

1. Information on Shari’ah Compliance and on prohibited transactions.

2. Information regarding Wealth Distribution

3. Information on internal employee/manager and financial relationship

Chapter 6 Page 271

4. Information regarding social and environmental impact of entity

We shall discuss these in turn.

6.6.2 Information on the Shari’ah Compliance of the Entity.

The basis of any activity of any Muslim- whether an individual or organisation - is the

Shari’ah. This is especially true of Islamic organisation, whether business,

government or not for profit, which has been set up especially to operate within the

Shari’ah boundaries. Even, in the case of Muslim companies or organisations not

specifically set up as an Islamic organisation, the Muslim manager and owners would

want to follow the Shari’ah to the extent possible, although, in practice they may act

in breach of its prescriptions. In case of Islamic banks, the reason for their existence

is the Islamic Shari’ah. Hence, their compliance with it and accounting for it assumes

primary importance.

This is recognised in the AAOIFI’s (1996) statement of the objectives of financial

accounting for Islamic banks and financial institutions. This statement lists

information regarding the Islamic Bank’s compliance with the Islamic Shari’ah in its

objectives and the establishment of such compliance as one of the prime

requirements of their financial reports. Since Islamic businesses have to operate in a

multi-religious environment, illegitimate earnings may arise unavoidably or

inadvertently because of factors outside its control (e.g. dealing with non-Muslim

institutions). Hence, the statement observes that financial reports of Islamic banks

should provide information establishing the separation of prohibited earnings and

expenditures, if any, which occurred, and of the manner in which these were

disposed off.

The researcher believes that this is true in the case of all Islamic and Muslim

business organisations, which cannot escape the realities of the multi-religious world.

Although Muslim or Islamic organisations would actively seek to refrain from Sharia’h

prohibited activities and to seek Shari’ah allowed alternatives, this cannot be

Chapter 6 Page 272

achieved in toto, especially in a multi-national environment. In Malaysia, for instance,

the Shari’ah Advisory Board of the Malaysian Securities and Exchange Commission

(SEC, 1998), allows investment in business which have Shari’ah prohibited income,

as long as it is not derived from the main activity of the business and forms only a

small part of the income. The prohibited income is seen as representing the customs

and the rights of non-Muslim living in the country and is excused as long the main

activity benefits the Muslims and the country. Further consideration is also given to

good reputation and image of the company.

Other fund managers in Malaysia attempt to purify profits i.e. separate the prohibited

income and donate it to charity. It is suggested that this is a practical alternative to

not investing at all and is allowed as a dharura (emergency) under Shari’ah rules as

otherwise Muslims may find themselves in a weak economic position in their own

countries, if a 100% halal (permitted) investments is a must.

As long as these conditions last, it is important for Islamic accounting to provide

information on the extent and the impact of earnings from prohibited activities. This is

to ensure that Muslims are aware of the forbidden portion of their income and also to

ensure that the activity is unavoidable and does not become a major activity. Hence it

is suggested that Islamic accounting provide the income arising from and the reason

for prohibited transactions which take place.

In addition to accounting information on prohibited activities and Shari’ah compliance,

Islamic banks have Shari’ah Supervisory Boards (SSB’s) to ensure that the policies

and instruments are and activities have been conducted in compliance with the

Shari’ah (Karim, 1990). These SSBs issue reports to this effect which forms part of

the Annual Report of Islamic banks. This is essential to instill credibility in the

operations of the Islamic banks.

Chapter 6 Page 273

6.6.3 Wealth distribution

The importance of equitable and fair wealth distribution as an objective of Islamic

accounting was discussed earlier. What is the form that this information should take?

The equitable distribution of wealth is not just a matter of reporting format as

Baydoun & Willet (1998) seems to suggest. The appropriation of wealth is linked

with the valuation system and income measurement model as well as the accounting

principles used. For example, the equity between present and future investors will not

be preserved if historical cost accounting, which does not recognise unrealised gains

is used, if the gain is realised in another period. This is further discussed in section

6.5.7 below.

However, Baydoun & Willet’s (1998) suggestion that Value Added Statement should

replace conventional profit and loss statement is radical and deserves comment.

They assert that the Value Added Statement (VAS) is a “more appropriate measure

of performance in an Islamic context” because it “focuses on the benefits the firm

brings through its commercial activities to the community as a whole. They assert the

VAS shifts focus from the individual accountability of the conventional income

statement to the “social accountability” required of Islamic accounting. Further, they

accuse the profit and loss account of having the power to corrupt Islamic values

through its primary focus on just one dimension of the firm’s performance and

emphasizes the self at the expense of the community. For this reason, they believe

that there is no choice except to replace the income statement with the VAS.

The researcher tends to agree with Baydoun & Willet (1998) on the reasons for the

VAS. Nevertheless, he rejects the notion that the income statement should be

completely replaced. Baydoun & Willet seem to contradict their own suggestion of

using the transaction cost approach (the end result of which is the income statement)

as opposed to a valuation approach which they earlier reject in their paper as

unsuitable foundation for an Islamic accounting theory. Further, profit is not

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necessarily evil and is recognised even in the Qur’an as the prime motivating factor

in business. Also the calculation of profit, especially in interest-barred environment is

crucial in the ultimate equitable allocation of the wealth generated.

The value added statement also disregards Tinker’s (1985) warning on the above the

bottom line activities hidden by conventional accounting. According to Tinker (1985),

this results in intra-class alienation which arises due to conflict between different

capital-providing groups using their privileged position as insiders (e.g. accountants,

managers, bankers) to expropriate the wealth of shareholders, employees,

customers and developing countries. Tinker’s (1985) study of the Sierra Leone

Mining corporations shows how wealth transfers take place above the bottom line

and are thus not exposed by conventional accounting. This oversight by conventional

accounting is, according to Tinker, due to the treatment of the corporation as an

entity and not as fractions of capital and other social constituencies. The value-

added statement shows the co-operative nature of an undertaking but it fails to

disclose the misappropriation of wealth.

It can thus be seen that Islamic accounting should provide specific information on the

nature of related party activity. All such transfers should be revalued at arm’s length

transactions. If not the constituents of expenses and revenues should be broken up

to include the information.

Zakat assessment and distribution forms an important part of wealth distribution

information. The researcher agrees with Baydoun & Willet (1998) that a separate

statement of Sources and Application of Zakat and Qard Hassan Funds (Benevolent

Loan funds) be included in the Islamic accounting Reports. This would also enhance

the accountability of the fund proposed by Gambling & Karim (1986).

6.6.4 Employee-Manager relationships

Islam emphasises social harmony and co-operation and brotherhood especially in

relationships where there is a tendency to pressures and strains such as that of a

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Master and Servant, Employer and Employee. The Muslim manager will have to look

after the human interest and not only the economic contribution of the employee. The

principle of benevolence (ihsan) should operate between employees in a firm. The

ethical treatment of employees with regard to his religious duties (e.g. time off for

prayer), fair treatment (not to give undue work and responsibility) and fair wages are

all a must (Beekun, 1997). Further, the pay between managers and employees

should not be too different in order to encourage a spirit of brotherhood and fellow

feeling. This is not simply utopian thinking but a command of the Prophet (pbuh) who

is reported to have said “feed and clothe your workers the same as you eat and

wear”. This is the ideal wage level, which should be made an objective of Islamic

organisations. This certainly means that Managers cannot be paid fat bonuses,

perks and share options while the lower rungs hardly can make a living. The

minimum wage is a decent wage, which is enough to provide sufficiently for the

employee and his family.

From an accounting point of view, there should be an Employee Relations report

outlining the state of Employee relations and policies. Further, the wage band for

different levels of employees including directors should be given in the Islamic

financial statements. These should include perks, bonuses and fixed expense

allowances so as to disclose full information.

6.6.5 The Social and Environmental Impact of the Organisations Activities.

As explained in the Islamic accountability model, a manager’s accountability to

society is part of his Accountability to God as a trustee of God’s resources. Hence

the positive and especially the negative effects of the activities of the organisation

need to be reflected in Islamic accounting. Some form of social and environmental

accounting would constitute part of Islamic accounting information.

The Qur’an speaks of tazkiyah (purification) as a prelude to falah. This is normally

referred to as spiritual purification but has been extended by certain Quranic

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exegesis to the purification of the environment. (Q 23:4, 87:14, 91:9). The emphasis

of cleanliness of body and clothes logically can be extended to the environment.

Pollution of the environment caused by contemporary strife for material development

does not fit well in the Islamic concept of falah (Khan, 1985).

An Islamic organisation may not need to be proactive in environmental conservation

as the “Greenies” would like Western corporations to be. This is because, according

to Islamic belief, God has given the animal, plant and mineral kingdoms for the

benefit of man. Hence, Islam does not promote vegetarianism and prevention of

animal killing (except wanton killing).

Although cruelty to animals is condemned, sacrifices and carnivorous life-styles are

permitted. However, Islam is extremely abhorrent of cruelty and wanton killing and

maiming. If pets are kept, their maintenance is the responsibility of the keeper. Since

cosmetics and luxurious clothing is forbidden to Muslim, the case of animal testing for

developing such a product should not arise for Muslim businesses. Businesses are

certainly responsible for any pollution they cause especially in the pursuit of human

wants as opposed to needs. (Beekun, 1997). Hence, accounting information must be

included on these activities.

6.6.6 Some other considerations of Islamic Accounting Monetary Measurement Concept

The concept of accounting ensures that only economic events, which are reliably

measurable in monetary terms, are measured and reported. Hence the so-called

externalities are left out. Since Islamic accounting has a social accountability

dimension (Baydoun & Willet, 1998), Islamic accounting cannot restrict itself to the

monetary measurement concept. The researcher proposes that to the extent

possible, externalities be measured in monetary terms where possible and included

in the Islamic accounting report. If not, at least qualitative disclosure is required.

Islamic accounting, however, should not separate social and economic events into
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different reports as prescribed by Chen (1975) but a holistic “Accounting” or

“Accountability” report combining monetary and non-monetary, qualitative and

quantitative, social and economic events and transactions. Islamic Auditing

One further aspect is the Shari’ah audit. As stated earlier, Islamic Banks presently

have Shari’ah Supervisory Boards (SSBs). The independence and competence of

such boards has been called into question because the members are currently

employees of the organisations (Karim, 1990). However, the SSBs sometime have

powers equal to that of external auditors conferred on them by the statutes of

incorporation of the Islamic Banks such as the Faisal Islamic Bank of Egypt.

Research conducted in Bahrain (Bucheery & Hood, 1998) showed a low perception

of religious auditor independence amongst financial auditors, bankers and others

except the religious auditors themselves! The same research showed that financial

auditors were reluctant to undertake the responsibility of ensuring Shari’ah


However, the effectiveness of the SSB Audits is called into question because of the

lack of auditing skills on the part of the members of the SSB. Furthermore, their remit

to ensure that all transactions conform to the Shari’ah becomes increasing

impossible given the increasing number of transactions (Karim, 1990). Hence

Shari’ah auditing needs to adopt the methods and procedures of conventional

auditing in order to give a reasonable assurance of compliance. However, this can

only be done, if conventional auditors familiarise themselves with the Shari’ah and

Islamic accounting and auditing standards, at least in case of Islamic Banks.

In future, all Muslim and Islamic Organisations should be audited by Islamic Auditors,

having a single qualification and belonging to a single professional body and who

have a knowledge of the Shari’ah, Islamic accounting and conventional auditing

procedures as:
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“Ideally, both SSB and external auditors should be from one

organisational body since Islam does not recognise any separation between
business and religion”. (Karim, 1990, p34)

This is important if Islamic organisations are to maintain their credibility in respect of

their Islamic credentials. Further, as Karim (1990) suggests, to ensure that business

transactions are measured, recorded, and reported in accordance with Islamic

precepts, accounting principles compatible with Islamic law (Islamic accounting) must

be developed. In the meantime, there needs to be interaction between the two


6.6.7 Income Measurement and Valuation in the Islamic Accounting system.

As discussed earlier, the calculation of profits is essential from an Islamic point of

view, both for its equitable distribution between different classes of stakeholders but

also for the calculation of Zakat. In addition, the prohibition of Interest makes profits

the only form of reward for risk undertaking in Islam.

Zakat is basically a religious wealth and income tax and its payment is a religious

obligation. Its collection should be done by the state and redistributed mainly for

social welfare and defence purposes. It acts as a disincentive to holding wealth in a

zero interest environment because there is a 2.5% tax on wealth. Zakat is levied on

wealth in case of gold and silver (or their money equivalent) and livestock. It is also

levied on income from agriculture (5% gross income or 10% net ) and on business

profit and current net worth. All these require valuation and income concepts in order

to establish a ‘Zakatable’ capacity and Zakat base.

In the early days of Islam, where businesses were not capital intensive and wealth

(and sources of income) consisted of either agricultural produce, livestock or stock in

trade (e.g. spices, clothes, jewelry etc.), the Zakat was levied on stock, debts, cash

(gold and silver) at market value. Zakat on livestock and agriculture was based on

numerical units rather than monetary units i.e. Zakat was based on number of
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animals of a certain age rather than a percent of value. Hence, for a business which

trades in livestock using numerical units to calculate Zakat would solve the problem

of valuation. Obviously this is a ‘realised’ payment and if monetary accounting

statement are still prepared, then the Zakat paid would have to be converted to

market value and shown as an appropriation.

There is presently a controversy on whether fixed assets are liable to Zakat (Kahf,

1991). Conventional Islamic scholars, basing their judgments on the practices

prevalent at the time of the Prophet (pbuh) have ruled that fixed assets are not

Zakatable. This follows the prophet’s exemption of Zakat on tools used by farmers

and artisans in the Prophet’s time. If this is true, then the problem of valuation will not

be that acute as the valuation of fixed assets presents the most problems in

conventional accounting.

However, businesses nowadays are capital intensive. Further current world-class

manufacturing technologies and modern cost management techniques which

minimize inventory (just in time, keiretsu, economies of scope, ABC) will almost

eliminate the Zakat base from business ventures which add the most value to the

economy and are very important sources in developing and industrializing Muslim

countries. Therefore, in order to be in line with the maqasid or objectives of the

sharia’ in ensuring socio-economic justice i.e. equitable distribution of wealth, several

writers (for example, Kahf, 1991; Al Zarqa, 1984) have called for a re-thinking of this


Kahf (1991) refers to his earlier study in which he showed that if Zakat is levied on

these new sources of wealth and income, the amount of Zakat collected can be

doubled or tripled and the Zakat thus collected would be able to eradicate poverty in

Muslim countries within a reasonable period of time.

The other major institution of concern here is the prohibition of interest. This rule has

made conventional banking, which is an important modern economic institution illegal

in Islamic society. However, the absence of interest does not mean the cost of
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capital is zero in Islamic societies. What is illegal is the predetermined fixed rate on

capital, i.e. the return on money without sharing the corresponding risk of the

borrower. Islam allows and one can say even encourages profit and loss sharing

partnerships (both active and sleeping partnerships). Islam recognises the

opportunity cost and risk involved in deferred and installment sales and allows the

deferred price to be higher than the cash price. It also allows operational leasing and

renting. However the strict prohibition on interest means, the main way a capitalist

can participate in business is by partnership, equity shareholding and commenda. All

these three legitimate methods require the computation of income and asset

valuations for profit distribution. Further in conventional accounting, the investor is

considered more a lender of capital than a participant in the business with a

conventional concentration on return such as interest cover and earnings capacity.

In Islam, a business has social and moral obligations, which derives from the khilafa

(vicegerancy) concept in Islam. Man is a trustee of property for God. Ownership of

property in Islam is not absolute but conditional. Hence Islam requires the investor to

be responsible for the management, activities and the liabilities of the business. This

is the reason why limited liability and the entity theory of the firm is frowned upon

(e.g. Khan, 1994a). Hence, it can be seen that income determination is more

important in Islamic accounting than in conventional accounting, which has the

opportunity of charging interest on capital as reward for its use.

The search for an alternative banking institution resulted in the creation of Islamic

banks and Insurance (takaful) companies in Muslim and Western countries which

finance their customers through these allowed methods. The creation of these

Islamic financial institutions has resulted in the mobilisation of funds from Muslims

and non-Muslims which has been reported at US$101billions (Timewell , 1998).

These funds are mobilised either on the basis of ‘al-wadia’ or

‘musharaka/mudharaba’ investment deposits. The ‘al-wadia’ deposits are accepted

on a safe custody basis with return of balance guaranteed but no interest is paid on
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the deposits as in conventional banks. However the bank can utilize the ‘al-wadia’

funds while in its custody as long as the activities financed by the bank are not

against the Shari’ah such as gambling and alcoholic drinks industry. Banks are

allowed to pay a part of the profit they make to deposit holders as a ‘gift’ to the

depositors provided it is not computed as a percentage of deposits or guaranteed in


Another type of deposit is the investment account. Here the depositor deposits the

money as an investor and the bank is the partner. The bank then shares any profit it

makes from the investment with the depositor on a pre-agreed percentage. Any loss

is borne by the depositor while the bank loses its effort. Thus there is no guarantee

the investment depositor will get back his capital.

Since Islamic banks are not allowed to lend on interest, they undertake Islamic

financing techniques. Although they use mostly murabaha (or cost plus pricing

technique) financing, they do practice musharaka and mudharaba (partnership and

commenda) which was the original equity-based instruments suggested in the

Islamic economics literature such as Chapra (1992).

It can be seen that both musharakah and mudaraba transactions (see Chapter 5)

require income numbers for both the determination and distribution of profit to deposit

holders. Examples of the problems encountered in this area is illustrated by

Abdelgader’s (1990) study which found the following problems in his investigation of

profit determination and distribution by Islamic banks in Sudan:

1) The time lag between deposits and investments, as profits to depositors is partly

based on the length of deposit (as between depositors) holding whereas investments

could not be related directly to the deposit holding period.

2) The right of the depositor (savings account) and investment account to withdraw

his deposit at any time whereas the investment is not yet liquidated.

3) The need to ensure fairness for a depositor who has withdrawn but his share of

profit is unknown until realization of the investment.

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4) The pooling of various funds i.e. savings, investment, current account and the

equity of the bank itself as compared to division of profits from various activities of


5) The problem of bank expenses and venture expenses: should a proportion of a

bank’s own expenses be charged to the investment profit?

All these problems show that income determination and valuation concepts are

important for Islamic accounting.

If we adopt the objectives of Zakat base, avoidance of disputes and socio-economic

justice (public welfare) and accountability as a framework of Islamic accounting, there

are serious implications for accounting principles, conventions, concepts3,

measurement and valuation (Gambling & Karim, 1986) and reporting practices

(Baydoun & Willett, 1998). The implications for income measurement and valuation

will be discussed.

The first question is should there be a different accounting for different purposes or a

single ‘true’ income figure? According to Khan (1994), “the Shari’ah supports a

system of valuation which is good for all purposes, whether shareholders,

government, future investors or general public”(p 17). Thus different profit for

different purposes is not supported. The reason is that “the business firm in an

Islamic society has a social role as well, the most important manifestation of which is

the payment of Zakat. Hence accounting must provide information for businessmen

to determine their Zakat liability and pay it promptly. Under a conventional tax

system, the government may have priorities of expenditure and promotion of the

economy, certain industries, which result in different fiscal policies and thereby

enforcing certain rules such as capital allowances, expense exemptions and double

relief. This does not apply to Zakat calculations. The objective of Zakat assessment

would be to determine a fair share of the wealth and income to be distributed to the

See Adnan & Gaffikin, 1997 for a review of the literature on Islamic perspective of the accounting
concepts and conventions)
Chapter 6 Page 283

poor. Even the Zakat rate is pre-determined and cannot be changed by the


The next question is what valuation basis is to be used for the main objective of

calculating Zakat? Atiyah (1992) quotes a Hadith (tradition of the prophet) which is

quoted as : “Value at current value (market price) and then pay Zakat (on it)”. This

has been further refined to mean net realizable values by Al Qardawi (1979).

However, the Zakat laws do not offer much help for valuation of fixed assets for

currently they are not subject to Zakat as fixed assets were not very significant

component of a business at the time of the Prophet (pbuh) and a long time thereafter

until the Industrial Revolution. However, Gambling & Karim (1991) support

Chamber’s Continuously Contemporary Income as the income model to be used by

Muslims. This model uses the current cash equivalent to value assets of a business.

This is the amount of cash or purchasing power that could be realised in an orderly

liquidation and may be measured by quoted market prices for assets of a similar kind

and condition.

However, Islam frowns on unearned income and wishes the dignity of labour to be

recognised. Hence if we use the net change in value method, using NRV (Net

Realisable Value) or CCE (current cost equivalent), the operational aspect of the

business is not emphasised. Further the way in which the year end assets and

liabilities came about is not known. This is especially important in mudharaba

accounting where entrepreneurs are rewarded on their effort. Should Islamic

accounting ignore transactions based - historic cost accounting all together even, if

as Ijiri (1971) argues that , it might be the best system to avoid disputes?

The current conventions of historic cost and conservatism arose from the needs of

bankers and shareholders. However these concepts could be contrary to the idea of

fairness and justice for equitable transfer of property rights among different

stakeholders and disadvantaged members of society. This is due to the fact that

Zakat based on a historic cost valuation would yield lower receipts and consequently
Chapter 6 Page 284

lower transfer payments to the beneficiaries in times of inflation and rising costs. The

transaction basis of historic cost accounting, however, is still very important and

advocated by Baydoun & Willet (1998) as opposed to the economic valuation basis

of accounting These authors argue, that the economic value approach depending on

future oriented values is probably unacceptable. Further valuation based on

discounting future values which has the time value of money as its basis has been

rejected by themselves as well as Gambling & Karim (1991) and Khan (1994).

The researcher suggests that a trading/ income account to the gross profit stage be

based on historic costs transaction base i.e. the costs would be actual historic cost

as they are incurred and the sales would be the actual revenues earned. To this a

stock adjustment would be made in the profit and loss account to bring the closing

stock to current market value. A current cost depreciation adjustment would have to

be made taking the net realisable value or replacement cost (where NRV is not

available) of the fixed assets at the end of the period less the current cost at the

beginning of the period. No historical cost depreciation will be made. The final

income figure would be added to capital. Zakat can be paid either on the current

value of net current assets or net worth at current value.

Variable income and economic income would not be suitable as income models as

they involve prediction of cash flows which are hypothetical and the use of an interest

rate which is forbidden in Islam as well as difficult to obtain.


In this chapter, the researcher has attempted to deduce the objective and

characteristics of Islamic accounting using a normative-deductive methodology

based on the ethical principles of the Shari’ah. The ethical principles are in turn

based on the Qur’an and Sunnah, the two primary sources of Islamic Law. The

researcher has argued that this methodology is consistent with the Principles of

Islamic prudence (Kamali, 1991). The objective of Islamic accounting, in the

Chapter 6 Page 285

researcher’s opinion, should be based on the overall objective Muslims to attain

falah. For the purposes of operationalising this in accounting, the concept of Islamic

Accountability was developed using a dual accountability model based on the Islamic

concept of Khilafa (vicegerency) and Amana (divine trust). The researcher proposes

that the main objective of Islamic accounting is Islamic accountability. Zakat

calculation, Shari’ah compliance, equitable wealth distribution and the creation of a

co-operative and conducive environment instead of competition and conflict were

seen as subsidiary objectives of Islamic accounting.

Next the users of Islamic accounting information were considered, with the

suggestion that the community, employees, benevolent creditors, consumer groups

and Zakat beneficiaries could be as important if not more important than the

traditional fund providers who are considered as the prime users of conventional


The characteristics of Islamic accounting were discussed taking into account the

information requirements of an Islamic society. The conclusion was that Islamic

accounting should provide information on Shari’ah compliance and non-compliance,

Zakat calculation and distribution impact on environment and society, wealth

distribution and employee-manager relationships. There is a need for a holistic,

integrated measurement and reporting system, which uses both, monetary and non-

monetary measures and provides quantitative and qualitative information which

should be Shari’ah audited by independent Islamic auditors. Profit measurement in

interest-free Islamic economic environment was seen to especially important. The

requirement for equitable Zakat and information distribution may required Islamic

accounting to be based on current valuation model rather than the historical cost

model of conventional accounting.

In the next chapter (Chapter 7), the research design and data collection techniques

used in the empirical data collection phase will be discussed. The objective of the

empirical part of this research is to gain data on the consensus of Malaysian Muslim
Chapter 6 Page 286

Accountants and Academics regarding the proposed objectives and characteristics of

Islamic accounting. Towards this end, some hypotheses will be presented in the next

chapter and tested in the empirical part of this research.