A THEORETICAL FRAMEWORK FOR THE DEVELOPMENT OF THE ISLAMIC PERSPECTIVE OF ACCOUNTING
Dr Roszaini Mohamad Haniffa* University of Exeter, UK and Dr Mohammad Abdullah Hudaib Essex University, UK
*Corresponding Author: Dr. Ros Haniffa, Department of Accounting & Finance, Bradford University School of Management, Bradford BD9 4JL, UK. E-mail:
[email protected] Acknowledgements: We are grateful for comments and suggestions from Professor T. Gambling, Professor M. Tippett, Professor T.E. Cooke, Dr M. Mirza and Mr M. Zaman on earlier drafts of this paper. Comments received at the Accounting, Commerce & Finance: The Islamic Perspective International Conference 2001 in New Zealand are also acknowledged. Last but not least, we thank the editor, Professor Omar Zaid and the two anonymous referees whose suggestions led to a considerable improvement in the paper. If this modest effort is successful, it is by Allah’s grace and guidance and if it falls short of the readers’ expectations, we can only pray and hope that Allah will forgive our imperfect judgements. 0
A THEORETICAL FRAMEWORK FOR THE DEVELOPMENT OF THE ISLAMIC PERSPECTIVE OF ACCOUNTING
ABSTRACT This paper aims to provide a holistic view of the underlying values and principles of the Shari’ah Islami’iah (Islamic teachings) and its application to the Islamic perspective of accounting (IPA), which we defined as an assurance function that seeks to establish socioeconomic justice through its formalised procedures, routines, objective measurement, control and reporting in accordance with Shari’ah Islami’iah principles. The paper first discusses the need for IPA by critically looking at two aspects of conventional accounting which are perceived as problematic and unsuitable for Muslims viz. philosophical foundation which excludes religion and the limited role of current accounting practice in ensuring society’s longer term well-being. Based on the limitations of conventional Western accounting, the Shari’ah Islami’iah is proposed as the foundation in building a theoretical framework for IPA. Since adherence to Shari’ah Islami’iah is a form of worship, the role of IPA is thus an act of worship in fulfilling obligations to Allah (God), society and self as well as achieving Al-Falah (rewards in this world and hereafter).
Key words: Islamic accounting, Shari’ah Islami’iah, Socio-economic justice.
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A THEORETICAL FRAMEWORK FOR THE DEVELOPMENT OF THE ISLAMIC PERSPECTIVE OF ACCOUNTING
1 Introduction There has been an increasing interest in accounting from the Islamic perspective in recent years. One of the aspects that has received substantial focus is on Islamic banking viz. the applicability of conventional accounting principles to Islamic institutions (Abdel Gader, 1994; Baydoun and Willett, 1994; Gambling and Karim, 1991), its implications (Abdel Magid, 1981) and economic consequences (Karim, 1996); the need for separate accounting standards for Islamic banks (Karim, 1990), the rationale for a conceptual framework for financial reporting by Islamic banks (Karim, 1995) as well as the application of accounting techniques to Islamic financing (Abdel Gader, 1990). Some other issues that have also been discussed in the published literature include the problem of harmonisation of international accounting standards in Islamic countries (Hamid, Craig and Clarke, 1993), a proposal for the formatting of Islamic corporate reports (Baydoun and Willet, 2000), the need of Islamic Accounting Standards (Mirza and Baydoun, 2000) and also an historical account of the development of Islamic accounting and the requirements in the appointment of Muslim accountants in the Middle Ages (Zaid, 1999; 2000).
A review of the literature on IPA highlights some weaknesses in that there seems to be overemphasis on Islamic banking,1 failure to recognise the political and economic constraints that exist in the development of IPA and the neglect of a comprehensive discussion on the aims, principles and role of accounting from the Islamic perspective at both the micro and macro levels. In addition, and perhaps the most important is that, the development of a coherent theoretical framework2 for IPA is significantly ignored. 1
This is understandable because the foundation of conventional banking is interest based and following Islamic resurgence, this becomes the most important issue to be addressed as Islam strongly prohibits interest and any form of dealings with it will be punished as mentioned in the Qur’an: “Those who devour usury will not stand except as stands one whom the Satan by his touch hath driven to madness. That is because they say: ‘Trade is like usury,’ But Allah hath permitted trade and forbidden usury” (Al-Baqarah 2:275). For other examples, see Qur’an, Al-Baqarah 2:276 & 2:278-279, Al-Imran 3:130, An-Nisaa 4:161, Ar-Rum 30:39. 2 The attempt by Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) in developing a conceptual framework is to facilitate its standard setting process for financial institutions. However, there are two deficiencies in the framework: adoption of Western accounting standards with limited changes and treatment of accounting as a technical rather than socio-technical activity imbued with human values and pattern of thinking. 2
Hence, this paper argues that instead of adapting or modifying the current conventional accounting based on Western ideas, there is a need to build a theoretical framework for IPA if it is going to be accepted as a ’new’ paradigm in accounting. 3 As such, the paper is structured to achieve the following objectives: first, to address the need for an ‘alternative’ accounting system for Muslims by critically examining the appropriateness of the current Western based conventional accounting systems; second, to provide an understanding of the basic concepts of IPA based on Shari’ah Islami’iah and third, to suggest a theoretical framework for IPA and its implications on the role of Muslim accountants. The contribution of this paper is the attempt to provide a holistic view rather than discussing in isolation specific issues of IPA. An elaborate reference to the Holy Qur’an and Hadiths is provided because these documents contain many theories on the nature of accounting, its aims, ideology and principles.
2 A Critical Evaluation of Conventional Western Accounting The current conventional accounting4 ideas developed in the West have been used worldwide not because it is recognised as the best system but mainly due to three reasons. Firstly, accounting technology is exported through colonisation (Parker, 1989; Briston and Kedslie, 1997). This includes techniques, institutions and concepts of which professional accountancy associations are the most dominant. Secondly, accountants have to go through an education system and training (Hove, 1986) that emphasise western accounting ideas both in their native country and abroad for global economic and political reasons and finally, international harmonisation efforts imposed in developing countries of the Muslim world (Hamid et al., 1993). Although some countries (for example Malaysia and Pakistan) tried to adapt rather than adopt the whole idea, the effort is still minimal. Similarly, despite the recognition that some underlying concepts and values of current conventional accounting are
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Most Islamic countries either adopt or adapt with little changes the accounting system developed in the West mainly due to the support of the political establishments controlling such countries and also, the powerful Western accounting profession. In other words, the implementation of western accounting is from top-tobottom rather than bottom-to-top which should be the case if accounting is accepted as a social tool or phenomenon. As such, implementation of the Islamic perspective of accounting will be difficult without the proper support from the Governments and the profession. 4 This refers to accounting system that can be used both as ‘ammunition machines’ to promote and articulate particular interested positions and ‘rationalisation machines’ to justify, legitimise and rationalise earlier decisions (Burchell et al., 1980), thus playing a purely technical role based on rationalism and reflecting the dominant functional values of the organisation rather than the values and impacts it has on society. 3
contradictory to that of Islam, at most, only those parts related to riba (usury), haram (unlawful) dealings in alcohol, pork and those with elements of gharar (uncertainty) have been addressed. Many other issues, such as the role expected of Muslim accountants, the effectiveness of current Shari’ah Supervisory Boards as control mechanism in protecting societal interest, the degree of awareness of the contracting parties of their rights and obligations, and the reform in accounting education needed to serve accounting needs of Muslims, which are all significant from an Islamic point of view still remain to be tackled.
Hence in this section, the paper attempts to present arguments for the need for IPA, which we defined as an assurance function that seeks to establish socio-economic justice through its formalised procedures, routines, objective measurement, control and reporting in accordance with Shari’ah Islami’iah principles,5 by focusing on two basic ideas in current conventional Western accounting perceived as problematic and unsuitable for Muslims. The first is in terms of its philosophical foundation and the second is related to its role and function in society. Some societies recognised that human rationality about the universe and the way they cope with problems facing them are restricted or limited. As such, they are capable of addressing only some of the perceived problems and can never perceive the total reality about themselves nor the universe (Gambling and Karim, 1991). Nevertheless, since the earliest times, humans through their collective instinct and mental programming6 have developed rituals and mechanisms7 to reduce this gap, solve difficulties surrounding their existence, and acquire and generate knowledge8 to ultimately sustain and develop their civilisations. 5
Another definition of Islamic accounting was provided by Hayashi (1989, pp.42) where he defined it as “… theory which thinks how it could allocate the resources justly but is not the learning of how the accounting exists.” 6 It is the capacity of a ‘complex’ system for analysing and classifying data and set theories and assumptions based on both logic and institutionalised behaviour. The former refers to human built-in basic beliefs, values, senses and reasoning which all sensible individuals naturally have in their mental or nerve system and which may vary from one individual to another. The latter on the other hand, is the learned, socially acquired traditions and life-styles of the members of a society, including their patterned, repetitive ways of thinking, feeling and acting (Kaplan and Manners, 1972). 7 These include the set of theories and systems that generally need to be abstract and flexible to cope with environmental changes and to allow readjustments to humans’ senses (Kaplan and Manners, 1972). 8 When these rituals are widely accepted and used, they become known as common sense which is defined as “nothing other than the unconscious sensibilities supplied by our central nervous systems. It is quite independent of conscious rational thought … It is the mechanism by which Homo sapiens are able to bring the total interactivity of the real Universe back into (unconscious) consideration”(Gambling and Karim, 1991; p.7). 4
Accounting is such a ritual.9 It has shifted from being merely an assembly of calculative routines or technology to an influential mechanism for economic and social management (Burchell, Clubb, Hopwood, Hughes and Nahapiet, 1980).
Historically, religious believe was the main source of developing and organising accounting and financial affairs. In Islamic countries, religious requirement of zakat (religious levy) imposed in the year 2 Hijri’iah (H) (623 AD) and the increasing responsibilities of the Islamic State established in 622 AD compelled Muslims to develop accounting records and reports to satisfy their religious believe as well as commercial needs in accordance to Shari’ah Islami’iah (Zaid, 2000). Similarly, in Medieval Europe, accounting and financial affairs were developed and organised by the Church through its Canon law. The former model began to decline in the Muslim world with the intrusion of Western imperialists and colonialists which resulted in the decline of Islamic values and accounting that diverts from Shari’ah Islami’iah. The latter model declined with the development of science and rapid changes in the business environment that promotes capitalism. The primacy of God and the irrational interpretations of the church which could not be defended following the discovery of science, led to ideas of social contract by thinkers such as Rousseau and Locke (Cranston, 1965; 1968). Similarly, the interdiction of the church regarding riba and avarice were discarded and replaced by the capitalist spirit of wealth accumulation which removed spiritual values and became amoral (Tawney, 1927). In short, the failure of the religious paradigm10 as a source of organising and controlling businesses and human acquisitive spirit resulted in a shift to humanism (focusing on what happens in this life), which bred secularism (excluding religion in establishing the well-being of mankind), which led to materialism (maximising wealth at the expense of others viz. Adam Smith’s invisible hand) and ultimately to hedonism (focusing on pleasure as the purpose of life), where the basic premise of all these ideologies is ‘rationalism.’11
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Morgensten (1964) argues that accounting is intended for use in ritual negotiations of daily life rather than direct indications of course of actions. 10 Kuhn (1970) defines paradigm as “the entire constellation of beliefs, values, techniques, and so on, shared by members of a given community.” 11 ‘Rationalism’ argues that, humans pursue self-interest to maximise their real or apparent advantages and look to their own minds rather than the wider world (Coleman, 1995). Hence, they build accounting models for the assessment of relative ‘goodness’ i.e. maximising profit. 5
One of the problems with rationalism is its heavy emphasis on the human instinct of selfinterest in contrast with the collective interest of the community at large, and its emphasis on wealth maximisation. The undermining of the significance of the latter instinct by rationalism resulted in the development of accounting and financial rituals that mainly cater for the interests of powerful groups viz. owners, managers, creditors, the profession and the government, at the expense of society at large. Another problem with rationalism is that it separates religion from economic activities. Man-made law and code of ethics is perceived as an adequate mechanism in managing and controlling corporate activities but in reality, they caused clash not only between different individuals within a group but also between different groups in society resulting from the absence of an ethical communis opinio. In other words, these mechanisms do not seem to work because to achieve an orderly society, the dichotomy ‘temporal/spiritual’ should be removed. Similarly, the epistemology of conventional accounting views human existence as a purely economic phenomenon devoid of social and spiritual considerations or has little relevance to accounting as it constitutes only a small part of life.
The philosophy of pursuing self interest or wealth maximisation with no regard to religious/moral foundations results in accounting rituals that do not appeal to the logical mind. This may partly be attributed to the dual nature of accounting activities - technical and human. The technical activity consists of methods for identifying and measuring values and as such is related to the human logical instinct. Human activity, on the other hand, comprises methods for communicating values (providing information), constructing accounting theories, policies, standards and ethical/moral conduct as well as implementing wider societal, political and economic views. Hence, it is related to the institutionalised behaviour of societal mental programming. These two activities may sometimes be seen to contradict one another if a decision is based solely on human logical instinct. For instance, accounting has been ‘irrationally employed’ (although this may be perceived as rational by those who employed it) to help self-interested businessmen and powerful personalities in financial and political domains to manipulate financial figures to assist them in raising new capitals or loans, influencing share prices, destroying competitors and finding loopholes in the tax
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system to reduce the tax ‘burden’ etc.12 Similarly, the emphasis on shareholder value, especially in market based economies, encourages not only creative accounting, but also accounting which results in a craze for take-overs and mergers of questionable value which consequently give rise to social problems such as job losses. Such activities clearly contradict the accounting concept of ‘fairness’ and the professional concept of ‘serving the public interest’. Another problem with economic rationalism is the narrow scope of its philosophical views in sustaining and promoting society as a whole. Conventional Western accounting assumes that greater social welfare will result if user needs (i.e. information to maximise wealth) are satisfied but this has been criticised by Laughlin and Puxty (1981) and Gray, Owen and Adams (1996). They argue that the decision-usefulness paradigm actually motivates behaviour of self-destruction13 and suggest that it should be replaced with the fundamental concept of accountability to society.14 Similarly, due to the strong belief in the efficient allocation of resources by the market mechanism for increasing economic growth and wealth creation, conventional accounting has actually caused wealth misappropriation and conflicts between various classes in society (Lehman, 1992). Despite the shift from pure economic (free-market) to political-economic15 and socioeconomic16 paradigms, accounting still lags behind in fulfilling its social role of preventing certain members and parties in society in pursuing their spirit of acquisitiveness. At best, accounting only manages to prescribe different methods and policies as rituals for daily
12
This view may seem extreme by those who believe in the concept of ‘bounded rationality’ which is characterised by satisficing rather than maximising behaviour but the philosophical foundation is still different from the Shari’ah Islami’iah perspective. 13 For instance, the fascination with predicting behaviour based on financial figures has encouraged the practise of creative accounting. 14 However, their concept of accountability to society did not address ways to solve the problem of equality in society and above all, no mention is made on ultimate accountability to Allah which is important from the Islamic perspective as mentioned in the Qur’an: “ Did ye then think that We had created you in jest, and that ye would not be brought back to Us (for account)?” (Al-Mu’minun 23:115). 15 This paradigm focuses on developing the role of accounting in society and argues that self-interest can either regulate itself (market forces) or be controlled by the superior vision of political illumination or explanation (Gambling and Karim, 1991). This utilitarian philosophy advocates the notion of the greatest happiness of the greatest number of men. 16 Under this paradigm, accounting recognises the social problems caused by economic activities of corporations but could not fully develop the idea of social responsibility accounting because human rationality still remains as the ideology upon which social, economical and political affairs in society are handled. 7
negotiation (e.g. controlling and reporting) instead of identifying a rigid course of action to promote the interests of society at large. The continued process of eliciting its role based on rationalism has resulted not only in accounting measurements and presentations becoming suspicious and distrustful, but also led to an increase in the number of business frauds and bankruptcies, which in turn affects society either directly or indirectly.
In short, the pursuance of self-interest which forms the core principle of rationalism in the current conventional accounting and the exclusion of religion, have serious implications on society. For example, the various accounting methods for appraising projects evolve around the economic rationality of wealth maximisation of certain groups, mainly the owners, instead of the potential benefits to society as a whole. In other words, based on rationalism, only projects that can generate the highest returns at lowest risk to the business rather than potential benefits accruing to society, will be the premise of business decisions. Although some argued that pursuing the goal of profit maximisation may lead to potential benefits to society, in practice, this does not always happen because when faced with trade-offs, companies usually give preference to the more powerful or dominant group e.g. shareholders rather than employees or society at large.
The imbalance between a philosophy of wealth maximisation in a world of limited resources17 and a philosophy of living together to preserve and enhance societal integration adopted in current conventional accounting, results in a wide range of unjustifiable conflicts within society viz. interests of owners, profession, government and the public.18 It has been acknowledged that humans are by nature social animals i.e. they are born with the instinct to socialise and as such, they build sets of shared unconscious values and norms which make
17
It should be noted that the idea of limited supply is based on the tenet of neoclassical economic theory but Muslims believe in the concept of Rububiyyah i.e. there is sufficient sustenance for everything and everybody to achieve God’s perfect plan for the universe (Zaid and Keen, 1999) as mentioned in the Qur’an: “It is Allah who has created you: further, He has provided for your sustenance” (Ar-Rum, 30:40) and “It is He who has made the earth manageable for you, so traverse ye through its tracts and enjoy of the sustenance which He furnishes: but unto Him is the resurrection” (Al-Mulk 67:15). From the verses in the Qur’an, it can be seen that Islam imposed limitations upon individual behaviour which subsequently reduce demand to a level at which there is a sufficiency of resources (Zaid and Keen, 1999). For other examples, see Qur’an, Al-Qamar 54:49 and At-Talaq 65:3. 18 The Islamic perspective of accounting is able to adjust the various interest groups in the society because it addresses the economic, political as well as accounting problems within the framework of Shari’ah Islami’iah (Hayashi, 1989). 8
up their various institutions, organisations as well as their mutual interpretations about unrealisable or incomprehensible phenomena (Kropotkin, 1924). This instinct leads them to seek collectivism rather than individualism as a necessary way for sustaining and developing their lives and civilisations. Consequently, living in a group requires each member to compromise some of his/her self-interest for the sake of the group or society in general. However, accounting based solely on rationalism with the exclusion of religion in the quest to offer a proper system in dealing with these two competing instincts, individualism vs. collectivism, is not fruitful. Due to the inherent problems of rationalism as a basis in the development of current accounting, three main features, which are contradictory to Islamic view, may be identified. Firstly, it is underpinned by a renunciation of religion and metaphysics and regards the will of the State as the supreme power. As such, the underlying views on sources of authority and enforcement and the concept of accountability differ from that of Islam. To Muslims, Shari’ah Islami’iah is the guiding force as it encompasses all aspects of human life and accountability is ultimately to Allah, as all deeds will be appropriately accounted as stated in the Qur’an: “To Allah belongeth all that is in the heavens and on earth. Whether ye show what is in your minds or conceal it, Allah calleth you to account for it” (Al-Baqarah 2:284).19 In addition, any activity that conforms to Shari’ah Islami’iah is recognised as a form of ibadah (worship) and the ultimate goal is to receive al-Falah (benefit for the people in this world and hereafter). Secondly, its basic beliefs and values stem mainly from the concept of self-interest without proper consideration towards societal interest 20 and thirdly, it believes that men has no inherent conception of justice but are true opportunists. In fact, it has been suggested that man is not at all the social animal but are homo homini lupus - as wolves to one another (Kropotkin, 1924). As such, striking a balance between these two instincts (i. e. self-interest and societal interest) is difficult, resulting in accounting becoming a tool for the few and most powerful groups in pursuing wealth maximisation at the expense of many others in society. This humanistic view is extreme whereas in Islam, self-interest is 19
For other examples, see Qur’an, Ya-Sin 36:12, Al-Mu’minun 23:115, Al-Anbiyaa 21:47. It is important at this point to distinguish between society and ummah (community). The former refers to an external group of individuals gathered on the basis of interest, material needs or to ensure survival and is ruled by the laws of the fittest, subjection, and exploitation while the latter refers to an internal group of people brought together by the feeling of belonging based on spiritual needs, aspirations and understands the concept of justice, mutual help, solidarity and brotherhood (Izetbegovic, 1989). 20
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considered as being at the lower level of the natural instinct embedded in the human selves and that they use consciousness at a higher level to allow them to live together in a civilised environment to distinguish them from the rest of the animal kingdom. In short, Islam recognises man not only as homo oeconomicus but also homo ethicus and homo religiosus. Due to the limitations of the three features in the development of accounting based on rationalism, an alternative accounting paradigm incorporating both technical and social aspects based on religion as well as rationality, is needed. In addition, the alternative paradigm must also be able to strike a balance between self-interest and societal interest. To Muslims, Shari’ah Islami’iah is seen as the most appropriate paradigm in the development of IPA as it encompasses every aspect of human life by laying down principles, which are sometimes specific and some in general terms, to allow Muslims to give a great deal of thought to what they should do as part of their quest in understanding Allah’s wisdom (hikmah). 3 The Alternative Paradigm: Shari’ah Islami’iah Accounting events are not static and they follow a pattern of successful evolutions from religious to pure economic to socio-economic. Six competing paradigms21 have been identified in the conventional Western accounting field viz. the anthropological/inductive paradigm,
the
true-income/deductive
maker/aggregate-market-behaviour
paradigm,
paradigm,
the
the
decision
usefulness/decision-
decision-usefulness/decision-model
paradigm, the decision-usefulness/decision-maker/individual-user paradigm and the information/economics paradigm (Belkaoui, 1992). Burrell and Morgan (1979), on the other hand, use philosophy and social theory in explaining four distinct sociological paradigms in accounting – the functionalist, interpretative, radical humanist and radical structuralist. Laughlin and Gray (1988) reclassify accounting models based on a systems perspective – data oriented, decision usefulness and organisational resource categories, where financial accounting is seen as gathering data from the focal organisation and moulding them into particular information statements which are subsequently dispatched into the substantive environment. Velayutham and Rahman (1992) use a multidimensional matrix in classifying 21
American Accounting Association (1977) categorised these six paradigms into three i.e. classical-inductive and true income, decision-usefulness and information economics. 10
accounting theories – the purpose of accounting (descriptive/normative); the approach in theory formulation (deductive, inductive, eclectic); the underlying assumptions (economic, sociological, ethical, human behaviour, communication) and the level of development of accounting theory. Each of the paradigms mentioned above determines the way in which members view accounting research, practice and education and there is no one paradigm that is superior than the other. In other words, the paradigms exist based on the development and interpretation of human thoughts in constructing accounting knowledge. This in a way attributes to the differing views on the role of accounting and subsequently to the technical and behavioural aspects of the accounting profession. Based on the definition of paradigm by Kuhn (1970), a new paradigm is suggested for IPA, as there exists a community that shares and believes in it, the Muslim ummah (Arif, 1985). Figure 1 illustrates the foundation of the Shari’ah Islami’iah paradigm. It can be seen that Shari’ah Islami’iah
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is based on two basic sources: the Qur’an (the
word of Allah) and the Hadith23 (sayings, approvals and actions of the Prophet Muhammad, peace be upon him (pbuh) during his lifetime). The third source is Ijma’, a consensus of Muslim scholars and is applied only in the absence of an explicit answer to the issue in question. The final source is Qiyas, which is represented in the analogical deductions from the other three sources for contemporary issues that are not directly mentioned in those sources but have similar characteristics as those that existed in the past. Once any decision is made by either Ijma’ or Qiyas, it becomes mandatory and cannot be overruled by future generations (Zaid, 2000).
22
The Shari’ah Islami’iah for Muslims is the book of Allah. Three books are considered to be the books of Allah. The other two are Torah for Jews and the New Testament for Christians as they are derived from religious laws (Wilson, 1997). 23 The Hadith helps to clarify rules in the Qur’an that are revealed in general terms e.g. the Qur’an only mentioned the payment of zakat to eight specific groups: “Alms are for the poor and the needy, and those employed to administer the (funds): For those whose hearts have been (recently) reconciled (to truth); for those in bondage and in debt; in the cause of Allah; and for the wayfarer: (thus is it) ordained by Allah. And Allah is full of knowledge and Wisdom” (At-Tauba 9:60) but did not mention the rate and method of payment which was clarified further in the Hadith. 11
Figure 1 The Foundation of the Shari’ah Islami’iah Paradigm Tawhid (Unity of Allah)
S H A R I’ I A H
Qur’an Hadith Ijma’ Qiyas Objectives of Shari’ah Islami’iah: * Al-adl and Al-ihsan (social justice and compassion for fellow human) * Barakah (Allah’s blessings) * Al-Falah (Realise benefit for the people in this world and hereafter)
I S L A M I’ I A H
Ethics/Morality Iman (Faith) Taqwa (Piety) Birr (Righteousness) Ibadah (Worship) Fardh (Responsibility) Ikhtiy’ar (Free will) Amanah (Trust) Hablun min’Allah (Believe in Allah and enjoin what Qur’an recognises to be right and forbid what it considers to be wrong) Hablun min’an-nas (Striving for the good of humanity)
Politics: Shura (Consultation) Khilafa (Succession) Bay’a (Obedience)
Economics: Zakat (Religious levy) Halal (Lawful means) Nizam (Order) I’tidal (Moderation) Islah (Noble)
Social: Ummah (Community) Maslahah (Public interest) Daf al-darar (Prevention of harmful activities) Raf al-haraf (Removal of hardship in society)
The main objective of the Shari’ah Islami’iah is to educate the individual, establish justice and realise benefits to the people in this world and in the hereafter (Kamali, 1989) and any activity that conforms to it is recognised as a form of ibadah (worship). It governs every aspect of a Muslim’s life, be it relationship with Allah or with others including politics, economics and social24 by safeguarding their faith, life, intellect, posterity and wealth 24
Some of the basic principles in these three main areas are outlined in Appendix 1. 12
(Abdalati, 1975). Similarly, Ibn Al Qayim Al-Jawziyyah states that the basis of Shari’ah Islami’iah is hikmah (wisdom) and al-Falah (welfare of the people in this world as well as the hereafter)25 and as such, everything departing from justice to oppression, mercy to harshness, welfare to misery and wisdom to folly, runs counter to the tenets of the Shari’ah Islami’iah (Chapra, 1992). In other words, Shari’ah Islami’iah is concerned mainly in promoting al-adl and al-ihsan (justice and welfare of society) and seeking barakah (Allah’s blessing) by setting the basic foundations for its moral, social, political and economic philosophy to achieve al-Falah.
The moral aspects of Islam are underpinned by the concepts of tawhid (unity), iman (faith) and its other interrelated concepts viz. taqwa (piety), birr (righteousness), ibadah (worship), fardh (responsibility), ikhtiyar (free will), amanah (trust), hablun min’Allah (believe in Allah and enjoin what Qur’an recognises to be right and forbid what it considers to be wrong) and hablun min’an-nas (striving for the good of humanity). The most important is iman (faith) because without it, it would be difficult to achieve the other aspects. Tawhid (unity) is the unqualified belief and man’s unconditional surrender to Allah by making his desires, ambitions and actions subservient to His command.26 A pious Muslim believes in the six cardinal articles of the Islamic faith.27 In addition, a true Muslim views his/her creation and life as having a meaningful and sublime purpose beyond the physical needs and material activities of man in accordance with his/her Covenant with Allah, which is ibadah (to worship Allah). Thus, man cannot escape from fardh (responsibility) entrusted to him/her as Allah has provided him/her assistance in the form of Shari’ah Islami’iah (Islamic teachings), aql (intelligence) and also ikhtiyar (free will), which is the power to choose his/her course of conduct.28 Furthermore, man has voluntarily accepted nature as amanah
25
‘Al-Falah’ is a tangible quality towards the achievement of God’s pleasure (Siddiqi, 1972). The Qur’an states: “Say: Truly, my prayer and my service of sacrifice, my life and my death, are all for Allah, the Cherisher of the worlds” (Al-An’am 6:162). 27 These are the belief in one Allah (the concept of unity or Tawhid), His angels, His Books, His messengers, the Last Day of Judgement and the absolute knowledge and wisdom of God (Qada’ and Qadar). The last belief implies that human beings are asked to think, plan and make sound choices but they should not despair or lose faith if things do not happen as they wished/wanted it to be as Allah knows best. 28 Islam views man as having a special status in the hierarchy of all known creatures as man alone is gifted with rational faculties, spiritual aspirations as well as powers of action. Man is Ashraful-Makhlooqat. 26
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(trust) from Allah and as such must be willing to serve God’s purpose.29 In short, three qualities as signs of sound faith and moral rectitude in Islam is hablun min’Allah, hablun min’an-nas and ittminaan al-qalbi bil iman (to resent and resist returning to disbelief). Taqwa (piety or love of Allah) demands that man “acts in obedience to Allah, and hopes in His mercy, upon a light from Him; and leaving acts of disobedience to Allah out of fear of Him, upon a light from Him” (Ibn Abee Shaybah cited in Al-Uthaymeen, 1998, p: 9). The Qur’an describes some obvious benefits of taqwa, of which, achieving barakah (Allah’s blessings), is one. Some of the barakah mentioned in the Qur’an include making general affairs of mankind easier,30 protecting mankind from evil harm,31 attaining guardianship from Allah,32 distinguishing truth from falsehood and having knowledge of each one of them,33 preventing injustice in matters of wealth,34 providing the means of attaining Allah’s mercy in this life and the hereafter35 as well as attaining knowledge.36
Birr (righteousness) comprises all kinds of good and perfection expected in man viz. his faith should be true and sincere, he must be prepared to show kindness to his fellow man and make saddaqa (charity), he must be a good citizen, should support charitable institutions and social organisations, and be steadfast and unshakeable in all circumstances. 37 Besides 29
Man’s willingness to accept responsibility and trust is stated in the Qur’an: “We did offer the trust to the heavens and the earth and the mountains; But they refused to undertake it, being afraid thereof: But man undertook it” (Al-Ahzab 33:72). 30 This is mentioned in the Qur’an: “And for those who fear Allah, He will make things easy for them” (AtTalaq 65:4) and “So he who gives (in charity) and fears (Allah), and (in all sincerity) testifies to the best, – We will indeed make smooth for him the path to ease” (Al-Lail 92:5-7). 31 “Those who fear Allah, when a thought of evil from satan assaults them, bring Allah to remembrance, when lo! they see (aright)!” (Al-A’raf 7:201). 32 “But Allah is the protector of the righteous” (Al-Jathiya 45:19). 33 “O ye who believe! If ye fear Allah, He will grant you a criterion (to judge between right and wrong), remove from you (all) evil deeds and forgive you” (Al-Anfal 8:29) and “He will bestow on you a double portion of His mercy: He will provide for you a light by which ye shall walk (straight In your path)” (Al-Hadid 57:28). 34 “It is prescribed, when death approaches any of you, if he leave any goods, that he make a bequest to parents and next of kin. According to reasonable usage; this is due from the God-fearing” (Al-Baqarah 2:180). 35 “And ordain for us that which is good, in this life and in the hereafter: For we have turned unto thee. He said: ‘I afflict my punishment on whom I will; but my mercy extendeth to all things’ ” (Al-A’raf 7:156). 36 “For it is Allah that teaches you. And Allah is well acquainted with all things” (Al-Baqarah 2:282). 37 “But it is righteousness – To believe in Allah and the last day, and the angels, and the book, and the messengers; to spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves; to be steadfast in prayer, and give Zakat, to fulfil the contracts which ye have made; and to be firm and patient, in pain (or suffering) and adversity, and throughout all periods of panic. Such are the people of truth, the God-fearing” (Al-Baqarah, 2:177). 14
believing in the truth of Allah and life, and making proper use of his wealth by spending it in accordance with the Shari’ah Islami’iah,38 the righteous man will also make a proper use of his spiritual and physical abilities by observing prayer, controlling his anger and emotions as well as having moral capacity for forgiveness and patience, and a conscious urge to regret and repent when he sins.39 If this form of righteousness can be established and sustained, then the individual and society will experience peace and security in all circumstances.
Both concepts of taqwa and birr are founded on strong faith and constant practice, and not just convenient claims and oral confessions. Accordingly, Muslims use these concepts to define ‘good’, unlike the rationalists who see it as ‘what man wants more of’ or the neurotic instinct of self-interest as the source of happiness in life. Thus, Islam mediates these concepts to be the best way for all-mankind to distinguish between good and evil, as humans have limited rationality when dealing with abstract concepts. For instance, true income or net profit is not a natural phenomenon that can be calculated objectively. It is an abstract concept, developed by the human mind and calculated via the application of arbitrary conventions (Thomas, 1969) to maximise wealth whereas in Islam, it is to fulfil Allah’s obligation (e.g. zakat) based on the principles laid down by the Shari’ah Islami’iah.
The social aspect of Islam is based on the concepts of tawhid (unity), adalah (justice), ummah (Islamic community) and maslahah (benefit for the people). Based on the concept of tawhid, everyone is equal in the sight of Allah, to whom there is direct access (Abdalati, 1975). Based on this concept of equality of mankind by nature and origin, the role of society as well as every individual is to be the true embodiment of the virtuous, the wholesome and the noble (Abdalati, 1975). Further, promoting adalah (equality, justice and virtues) in society would guarantee the achievement of al-Falah (a comprehensive human welfare in
38
Issues regarding wealth is given considerable attention in the Qur'an. It is mentioned forty-six times in different verses in the Qur’an. 39 “Who believe in the unseen, are steadfast in prayer, and spend out of what We have provided for them; and who believe in the revelation sent to thee, and sent before thy time, and (in their hearts) have the assurance of the hereafter. They are on (true guidance), from their Lord, and it is these who will prosper” (Al-Baqarah 2:35) and “Those who spend (freely), whether in prosperity, or in adversity; who restrain anger, and pardon (all) men; – For Allah loves those who do good; – and those who, having done an act of indecency or wronged their own souls. Remember Allah and ask for forgiveness for their sins, – and who can forgive sins except Allah? – and are never obstinate in persisting knowingly in (the wrong) they have done” (Al-‘Imran 3:134-135). 15
this life and also in the hereafter).40 The concept of ummah (community) in Islam has certain unique characteristics that are related to the foundation of a community, its historic mission and purpose, as well as its status among other communities. The foundation of the ummah is based on the principle of submission to the will of Allah, obedience to His law, and commitment to His cause. In terms of its mission and purpose, al-amr bi al-ma’ruf wa alnahi’an al-unkar (advocate what is good, demand what is right and eradicate what is wrong) and believe in Allah, is expected of the ummah.41 In addition, the Qur’an also mentioned that the Muslim ummah must play an exemplary role.42 By adhering to Shari’ah Islami’iah, mankind is able to realise maslahah. This includes raf al-haraj (removal of hardship), daf’aal-darar (prevention of the forbidden) and striving for the truth (haqiqiah) before pursuing self-interest. The pursuance of benefit for the people is a good goal as they are concerned with the subsistence of human life, the completion of man’s livelihood, and the acquisition of what his emotional and intellectual qualities require of him i.e. protection of interests (Masood, 1989).
The political aspect of Islam is based on the concepts of tawhid (unity), shura (consultation), adalah (justice), khilafa (succession) and bay’a (obedience). Based on the concept of tawhid, sovereignty in Islam does not belong to the ruler, nor even to the people themselves. It belongs to Allah43 and man’s role is that of khalifa (Allah’s vicegerent) on earth.44 Shura refers to free consultation at all levels45 to provide the ruler or leader with room to handle common affairs with the aim of achieving adalah (justice), providing security and protection to all citizens, and promoting their welfare regardless of colour, race or belief, in conformity
40
The narrow meaning of justice in Islam is that everyone should receive his/her rights in this life (adalah) while the wider meaning is the human welfare in this life and also in the hereafter (al-Falah). 41 “Let there arise out of you a band of people inviting to all that is good, enjoining what is right, and forbidding what is wrong: They are the ones to attain felicity” (Al-Imran 3:104) and “Ye are the best of people, evolved for mankind. Enjoining what is right, forbidding what is wrong, and believing in Allah” (Al-Imran 3:110). 42 “Thus have We made of you an ummat justly balanced. That ye might be witnesses over the nations, and the messenger a witness over yourselves” (Al-Baqarah 2:143). 43 “Blessed be He in whose hands is dominion; and He over all things hath power” (Al-Mulk 67:1) and “Such is Allah, your Lord and Cherisher: to Him belongs (all) dominion. There is no God but He: then how are ye turned away (from your true Lord)” (Az-Zumar 39:6). 44 “Behold, thy Lord said to the angels; ‘I will create a vicegerent on earth’ ” (Al-Baqarah 2:30). 45 “And consult them in affairs (of moment). Then, when thou hast taken a decision, put thy trust in Allah” (AlImran 3:159) and “who (conduct) their affairs by mutual consultation” (Ash-Shura 42:38). 16
with the stipulations of Allah in His constitution.46 The ruler is entitled to bay’a (obedience from the community) as long as that role is performed in accordance with the law of Allah.47 Thus, each citizen is enjoined to supervise the conduct of the governing administration and question its handling of public affairs and entitled to enjoy freedom of belief, thought and expression etc., though not in the absolute sense, for that may lead to chaos and anarchy. In short, the ruler has dual responsibility, first to Allah and then to society. The ruler is acting only as an executive chosen by the people to serve according to the law of Allah. Hence, the leader must be chosen on the basis of the merits of virtue, fitness and competence, independent of any political party of a non-Islamic platform or subjected to foreign powers, if he is to exercise his due authority on behalf of Allah and in His cause. Islamic economics is based on the concepts of tawhid (unity), al ‘adl wal ihsan (equilibrium), ikhtiyar (free will) and fardh (responsibility) as asserted in the Qur’an and Hadith (Naqvi, 1994). Based on the concept of tawhid, the ultimate ownership of all wealth is Allah and man has been given amanah (trust) to use it in the ways prescribed by the Shari’ah Islami’iah.48 In addition, Islamic economics encourage Muslims not only to engage in islah (noble) as opposed to fasad (corruption) in conducting economic activities, but also i’tidal (moderation) in consumption of resources to achieve nizam (order) in society. Al ‘adl wal ihsan (equilibrium) in Islam is based on the normative concept of adl (justice) as opposed to dhulm (injustice), which denotes social dis-equilibrium whereby the resources of the society flow from the poor to the rich, which is strongly forbidden in the Qur’an.49 Ikhtiy’ar indicates that man is born with a free will i.e. having ability of making choices in various conflicting situations.50 Fardh (responsibility) in Islam emphasises two important 46
“And when ye judge between people that ye judge with justice” (An-Nisaa 4:58) and “O ye who believe! Stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your partners, or your kin, and whether it be (against) rich or poor: For Allah can best protect both. Follow not the lusts (of your hearts), lest ye swerve, and if ye distort (justice) or decline to do justice, verily Allah is well-acquainted with all that ye do” (An-Nisaa 4:135). 47 “O ye who believe! Obey Allah, and obey the Messenger, And those charged with authority among you” (An-Nisaa 4:59). 48 The Shari’ah Islami’iah specifies eight rules governing private ownership and use of property viz. continuous utilisation; payment of zakat according to market value; beneficial use of resources; care not to harm others when utilising the resources; possession is in compliance with Shari’ah Islami’iah; use must neither be parsimonious nor prodigal; self due benefits to owners are permitted and property transfers are subject to Islamic inheritance laws (Mannan, 1986). 49 “In order that it may not (merely) make a circuit between the wealthy among you” (Al-Hashr 59:7). 50 “Verily never will Allah change the condition of people until they change what is in themselves” (Al-Ra’d 13:11). 17
concepts – first is related to man’s vicegeral role on earth and the second is basically voluntary in nature i.e. making sacrifices but not to the extent of causing hardship to oneself.51
Accordingly, economic or business activity in Islam is a form of ibadah (worship). It requires Muslims to earn a living through halal (lawful) means. They must also avoid riba al-Nasi’ah (usury) and riba al-Fadl (interest)52 by participating in profit sharing activities.53 In addition, they are expected to honour uqud (contracts), istiqamat al-daftar (keep proper accounts), avoid israf (extravagance), i’tidal (moderate) in consumption and fulfil obligations to society by paying zakat,54 other form of taxes55 required by the state, as well as saddaqa (charity). They must avoid ihtiyal (fraud), khiyana (dishonesty), tanajush (collusion), qimar (gambling) and all forms of gharar (speculative) activities in any business transactions. These are all aimed at achieving economic justice based on equality and fairness. 4 The Islamic Perspective of Accounting Based on Shari’ah Islami’iah Against the background of the preceding discussions, the basic concepts of Shari’ah Islami’iah can be linked to accounting. Figure 2 illustrates the theoretical framework of IPA. IPA acts as one of the mechanisms to assist in achieving the goals of Shari’ah Islami’iah and as such, its main objectives are to help achieve socio-economic justice, fulfill rights and obligations to Allah, ummah and individuals as a form of ibadah and to attain al-Falah.
51
“Those who spend their wealth for increase in self-purification” (Al-Lail 92:18). Riba al-Fadl (tampering with the freedom of the market) includes monopoly and monopsony, price control, taxation, imposed medium of exchange and exclusive rights of authors (copyrights) and inventors (patents) while riba al-Nasi’ah (unequal advantage) includes renting of money, uncertainty in transactions and unfair advantages in transactions (Vadillo and Khalid, 1992). Also see El-Ashker (1987, p.39) for explanation of different types of riba. 53 See El-Ashker (1987, p.71-79) and Gambling and Karim (1991, p.35-38) for discussion of the different forms of partnerships and lending arrangements in Islamic business organisations. 54 Zakat is a religious duty and type of worship levied on Muslim individuals only. The spending of the proceeds and the beneficiaries are specified in the Qur’an (At-Tauba 9:60) and the rate is dependent on the type of economic activities (see El-Ashker, 1987; p.48-49). 55 Such as taxes on income and profit, foreign trade, consumption and production and other indirect taxes such as road tax, vehicle excise and capital transfer tax. 52
18
Figure 2: Theoretical Framework of the Islamic Perspective of Accounting Shari’ah Islami’iah
The Islamic Perspective of Accounting Objectives: Al-Adl and al-ihsan (To assist in achieving socio-economic justice) Ibadah (To assist in fulfilling obligations to Allah, society and individuals concerned) Al-Falah (To assist in achieving rewards in this world and the hereafter)
Technical
Human
Pre-Measurement Importance: * Halal transactions * Careful recording and observation of the date of occurrence of transactions for zakat purposes
Authority + Enforcement Basis: Morality/ethics based on 56 Divine law * Mu’minoon (Believer) * Adalah (Justice/Equitability) and Tazkiyah (Growth & Purification) * Amanah (Trust) * Mas’uliyah (Accountability) * Ilm (Knowledge) * Shura (Consultation) * Balagha (Eloquence) * Hikmah (Wisdom)
Measurement Importance: * Zakat purposes * Determination and distribution of profit * Treatment of debts and liabilities * Treatment of assets * Payment of taxes
Disclosure Importance: To assist users in decision-making * Payment of zakat to beneficiaries * Saddaqa (charities/gifts) * Riba free resources * Halal dealings * Employees welfare * Environmental protection * Attainment of objective of business venture * Efficient and fair use of resources
In order to achieve those objectives, the principles addressing both the technical and human aspects must also be derived from Shari’ah Islami’iah. With regards to the technical aspect, IPA addresses accounting constructs related to pre-measurement, measurement and
56
The bottom three human values viz. hikmah, ilm and balagha are largely based on discussion in the article by Zaid (2000b). 19
disclosure, while the human aspect addresses accounting constructs related to authority and enforcement.57
In dealing with constructs related to pre-measurement and measurement, the principles related to zakat and halal business transactions are the two most important issue to be addressed and the same applies to the constructs related to disclosure viz. zakat and saddaqa,58 riba-free59 resources and halal business transactions. They are Allah’s laws and not fulfilling Allah’s law will result in sin and punishment in the hereafter.
Besides those specific principles, the measurement construct must also tackle issues related to distribution of profits, treatment of debts, liabilities and assets as well as payment of other forms of taxes.60 These issues are all important from an Islamic perspective as they are related to distribution of wealth. Similarly, the disclosure construct need to also address the issue of social responsibility reporting i.e. whether other obligations and duties as prescribed by Shari’ah Islami’iah have been fulfilled viz. saddaqa (charities/gifts) generously made to society, employees received reasonable wage and their welfare given priority (e.g. housing and transport allowances, safety, training etc.), the environment and resources are not abused in business endeavour and that products are not harmful to society. Table 1 provides a summary of principles related to pre-measurement and measurement constructs of two concepts that are unique in IPA i.e. halal dealings and zakat. At the premeasurement stage, it is important to ensure that business transactions that are collected and recorded are only those classified as halal and disregard and/or highlight any haram activities. To facilitate discussion of principles related to this construct, three issues related 57
The division between human and technical constructs is made to assist in explaining the underlying principles. Although disclosure is value-leaded, some aspects of the preparation and reporting of financial statements are technical e.g. graphical presentation. The pointer in the diagram indicates that human values to some extend affect the technical construct. 58 The Qur’an uses the word infaq, saddaqa and zakat as perfect synonyms of ways for spending in the way of Allah with the obligatory part known as zakat, and is kept distinct from infaq and saddaqa which are both voluntary (Hassan, 1986). 59 The moral motive for prohibiting riba revolves on the principle of not exploiting the poor/needy via interest charges on borrowed money while the economic motive stems from the principles of justice (fairness in dividing gains/losses in business dealing, risk sharing), encouraging hard work and accumulation of wealth via interest (i.e. without hard work) is regarded as selfish. 60 These include taxes on income and profit, foreign trade, consumption and production and other indirect taxes. 20
to IPA are identified: source of capital and financing, nature of contracts and forms of business dealings. In terms of source of capital and financing, it is important for the accountant to ensure that preference shares and riba-bearing bonds, riba leasing transactions, notes payable and notes receivable are avoided and in their place, halal forms of capital and financing viz. mudaraba, musharaka, murabaha, ijara and ijara wa iktina, are utilised. The issue of contracts in business receives considerable attention in Islam. 61 Some principles of contracts related to transactions include checking that financing contracts are free from usurious terms, contracts of service pay fair wages, full text of all contracts put in writing, sale and purchase contracts are based on fair pricing and business contracts are secured fairly (e.g. not based on bribery). In addition, forms of business dealings to be recorded and measured must not involve prohibited products i.e. gambling, alcohol, swine, idols etc. and also speculative transactions62 such as bay al-gharar (speculative sales), mulamasah (sale-at-a-touch), munabadah (sale-at-a- toss) and najash (false bidding).
61
This is mentioned in the Qur’an: “O ye who believe! When ye deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing. Let a scribe write down faithfully as between the parties: let not the scribe refuse to write: as Allah has taught him” (Al-Baqarah 2:282). 62 The Qur’an prohibits any form of fraud transactions: “Woe to those that deal in fraud–those who, when they have to receive by measure, But when they have to give by measure or weight to men, give less than due. Do they not think that they will be raised up? – On a Mighty Day” (Al-Mutaffifeen 83:1-5). 21
Table 1 Summary of the Islamic Perspective of Accounting Principles Regarding Measurement Concept
Aim
Principles
Halal dealings
Allah has clearly stated certain things as haram (prohibition) because they are harmful and undesirable for human beings and involvement in such activities results in sin. All others are considered halal, as they are good and beneficial.
Classification Issue: Source of capital - ensure sources are halal i.e. avoid preference shares and riba-bearing bonds, riba leasing transactions, notes payable and notes receivable. Source of financing - mudaraba (partnership without time limit), musharaka (partnership of limited duration and specific purpose), murabaha (bank purchase and sell goods required by customer i.e. cost-plus pricing), ijara (capital leasing), ijara wa iktina (hire purchase). Contracts financing contract must be free from usurious terms. contracts of service require payment of fair wages. full text of all contracts must be confirmed in writing. sale and purchase contracts based on fair pricing. contracts are secured fairly i.e. securing unfair advantages in business such as bribery and cartels must be avoided. Forms of business dealings avoid forms of business related to gambling, alcohol and other unlawful (haram) products. avoid any form of speculative transactions e.g. bay al-gharar (speculative sales), mulamasah (sale-at-a-touch), munabadah (sale-at-a-toss) and najash (false bidding).
Zakat
Three main purpose of zakat are as follows: a) to give thanks unto Allah for blessing of wealth and to ask for more b) to purify oneself from the vice of niggardliness c) spend wealth to show one’s love to Allah
Accounting for zakat purposes calls for the need to keep proper accounts and use of correct weights and measurement based on the following rules: Valuation Issue: Classification of ‘zakatable’ items asset items for zakat purposes must be based on current market value. only actual amount of bad debts are deductible from zakat. in the case of insolvency, owners are not liable for zakat if creditors remain unpaid.
Nisab (‘Zakatable’ threshold) and rate money/cash not used (savings) for one year: 2.5% in excess of the equivalent of 86 gm worth of gold value. income from investments: 10% in excess of the equivalent of 86 gm worth of gold value. personal income: 2.5% in excess of the equivalent of 86 gm worth of gold value. manufacturing industry: 10% of net profit. gold and silver: 2.5% in excess of 200 dirhams (725.76 gm). grazing animals: 1 sheep for every 5 camels; 1 cattle for every 30 cattle and 1 sheep for every 40 sheep. agricultural crops: 5% for irrigated crops and 10% for non-irrigated crops that exceed 1,568 kg. riqaz (buried treasures) and ma’adin (minerals): 20% of total value.
Haol (Periodicity) one full lunar year of asset ownership except for agriculture and buried treasures and mines where zakat must be paid immediately.
In short, zakat (one of the five pillars of Islam) should not be considered as a burden but a form of ibadah and wealth distribution aimed at achieving al-adl and al-Falah .
22
For zakat purposes, the valuation principles related to zakatable items, nisab (‘zakatable’ threshold) and rate of payment and haol (periodicity) are important issues for IPA. For companies, zakat is calculated based on net working capital including cash (Gambling and Karim, 1991) i.e. current assets less liabilities. To determine the value of stocks, Muslim scholars suggest the use of current market value less distribution expenses (El-Ashker, 1987). In terms of debts, only the actual amount of bad debts (al-munkaser min al mal) can be deducted from the zakat base. Any provisions for bad debts and doubtful debts such as almuta’ather (high probability of non-payment by debtors due to certain obstacles), wal-almutahayyer (probability of non-payment by debtors due mainly to external factors) and waal-muta’akked (probability of non-payment by debtors due mainly to internal factors), are not deductible. In the case of insolvency, zakat is not liable on owners as payment to creditors takes priority. Nisab (threshold of zakat) and the rate for payment of zakat has been elaborated in the Hadith and it is only based on assets that meets the haol (periodicity) which is one lunar year for all items except for certain products e.g. agriculture, riqaz (hidden treasure) and ma’adin (minerals) which must be paid immediately.
Disclosure of accounting information in corporate reports and other media is important as it assists users in their decision making and also for management (including accountant on behalf of the firm) to demonstrate accountability. Unlike conventional accounting, where the investor group is defined as the primary group whose informational needs should be accommodated (ASB, 1999), IPA must consider the needs of all users equally, in conformance to the spirit of justice in Islam. As such, it must not only disclose specific items of information that are essential to assist Muslim user group in making economic and religious decisions but also address the information need of non-Muslim user group who may be involved directly or indirectly with the business activities.63 Table 2 presents a summary of the principles related to the disclosure constructs.
63
Users include investors, lenders, suppliers, employees, customers, government and other agencies and the public.
23
Table 2 Summary of the Islamic Perspective of Accounting Principles Regarding Disclosure Concept Full disclosure And Social responsibility
Aim
Principles
Disclosure of relevant and reliable information that will assist users in making both economic and religious decisions and for management and accountants to demonstrate fulfilment of rights and obligations to Allah, ummah and oneself.
Relevant Any information that will influence economic and religious decisions of Muslim users. Predictive information is less important. The following information are material and relevant for Muslim users: Zakat Disclosure of the amount and to whom zakat has been made i.e. Baitul Mal (zakat institution) or the group of beneficiaries mentioned in the Qur’an..64 Halal dealings Disclose any activities, products and services and percentage of profit contribution from any transactions that has the elements of haram and doubtful which are beyond control and the way they are being handled. Riba-free Disclose any activities and percentage of profit contribution from any usurious and speculative transactions. Community Disclose type and amount of saddaqa (charity), qard al-hasan (benevolent loan) and waqf (charitable trusts). Debtors65 Disclose amount of debts written off and debt policy. Employees66 Disclose information related to wages and welfare of employees e.g. housing, safety, training, donation and qard al-hasan etc. Product Disclose nature, quality and safety of products including marketing efforts undertaken. Environment67 Disclose amount and actions taken to alleviate the effects of pollution and other ‘externalities’. Reliable Information provided are free from material error and faithfully represented i.e. without distorting what is measured, the measurement process and what is disclosed via selective process that could unintentionally damage others.
64
It is important for zakat recipients viz. faqir (poor), miskin (needy), amil (zakat collectors), al-mua’lafah gulubahum (those who reconciled to Islam), riqab (captives and slaves), gharim (debtors), fi-sabilillah (in the cause of Allah) and ibn-al-sabil (travellers) to know the source of zaka. If it is not of a lawful source, the recipients should abstain therefrom. In the modern world, it is the duty of the accountant and zakat officials in the Baitul Mal (one of the user group of Islamic accounting information) to check the source of the zakat on behalf of the recipients. 65 The Qur’an encourages leniency with debtors: “If the debtor is in strained circumstances, then let there be postponement to the time of case; and that ye remit the debt as alms giving would be better for you if ye did but know” (Al-Baqarah 2:280). 66 The Hadith stressed on the importance of a fair wage and welfare of employees: “They (servants) are your brethren, Allah has placed them under your control, so whoever has his brother under his control, he should feed him from what he (himself) eats and give him clothes the like of which he (himself) wears; and do not impose on them tasks which are too hard for them and if you impose on them such a task then help them (in doing it)” (Bukhari). 67 The Qur’an condemns exploitation of the environment: “When he turns his back, his aim everywhere is to spread mischief through the earth and destroy crops and progeny but Allah loveth not mischief. When it is said to him, ‘Fear Allah,’ he is led by arrogance to (more) crime” (Al-Baqarah 2:205-206).
24
Two important concepts viz. full disclosure and social responsibility disclosure are important in IPA but the type of information emphasised are those that would aid Muslim users in making economic and religious decisions and firms in discharging their accountability to Allah and society. Discussion on the concepts of full disclosure and social responsibility need to be linked to the principles of relevance and reliability. For IPA, material and relevant information are those that would affect economic and religious decisions of users and also all information that helps the firm (the accountant as an agent) to demonstrate its accountability to Allah and society. As such, quantitative and qualitative information related to zakat, halal dealings,68 riba-free transactions and also those that falls under the themes of community, employees, debtors, products and the environment should be disclosed. Although some may argue that this may lead to information overload and perceived as being less credible (since information are often not audited), from an Islamic perspective, it is the duty of information providers to disclose as much as possible to clear their conscience as a trustee and for users to filter the information and form their own opinion. As for the principle of reliability, all information provided to users must be free from bias and truthfully represented. This means that the figures provided are not misleading, not manipulated for specific purposes and that vital information that may affect users economic and religious decisions have not been concealed. As for constructs related to authority and enforcement, Table 3 provides a summary of the principles related to nine concepts of values derived from Shari’ah Islami’iah viz. mu’minoon (believers), adalah (justice), amanah (trust), mas’uliyyah (accountability), tazkiyah (growth and purification), shura (consultation), hikmah (wisdom), ilm (knowledge) and balagha (eloquence), that should form the basic foundations in influencing the actions of faithful Muslim accountants who accept Islam as a way of life. The authority who is most appropriate in implementing and enforcing IPA must be a mu’minoon imbued with taqwa (piety) and birr (righteousness). This is vital in achieving the objectives of maslahah, hablun min’Allah and hablun min an’nas. 68
There are five distinction in Shari’ah Islami’iah of human acts: halal (permitted acts), haram (forbidden acts), mandub (recommended acts) makruh (objectionable acts) and ja’iz (between recommended and objectionable).
25
Table 3 Summary of Islamic Perspective of Accounting Principles Regarding Authority and Enforcement Concepts Mu’minoon (Believers)
Principles Taqwa (piety)
Recognise that Allah is the Supreme power and that Allah is watching over every action which will be assessed on the day of Judgement. Seek barakah (Allah’s blessings). Gain guidance from Allah in decision-making.69
Birr (righteousness)
Vision of success and failure extends beyond worldly existence i.e. achieve Maslahah.70 Hablun min’Allah (believe in Allah and enjoin what Qur’an recognises to be right and forbid what it considers to be wrong) and hablun min an-nas (strive to maintain good relationship with fellow human)
Adalah (Justice)
Able to judge and make sound decisions.
&
Fear Allah in discharging responsibilities by being objective, fair and independent.
Tazkiyah (Growth & Purification)
Justice to all Allah’s creations, not just to man (ihsan).
Amanah (Trust)
Recognise the duty to maintain the undertaking or capital in the very best physical and spiritual condition as a holder of amanah.
Recognise that all material enhancement must lead to social justice and spiritual betterment for the ummah as well as the proprietor.
69
Muslims are encouraged to perform al-istikharah, a special prayer to seek Allah’s guidance when having to make major decisions and should not be frustrated later if it turned out to be not the right one as Allah knows best. 70 There are three interrelated divisions of maslahah viz. a) daruriyat (essentials) where lives of people depend on e.g. belief and religion, nafs (self), nasl (family), mal (wealth or property) and aql (intellect); b) hajiyyat (necessities) which supplements the essential interests and if neglected may lead to hardship but not total disruption of normal life e.g. religious obligations; c) tahsiniyyat (embellishments) which leads to improvement and attainment of that which is desirable (Rahman, 1995).
26
Table 3 Summary of Islamic Perspective of Accounting Principles Regarding Authority and Enforcement – cont. Concepts Mas’uliyyah (Accountability)
Principles Not only to human superiors i.e. employer and users of accounting information but ultimately to Allah. Strive to provide excellent service and recognise work as a form of ibadah (servitude to Allah) and amal saleh (virtuous deed) which is the key for attaining al-Falah. Realise purpose in life as a khalifah (vicegerent) over the earth and responsible for its well-being.
Ilm (Knowledge) & Hikmah (Wisdom)
Knowledge of Shari’ah Islami’iah helps in the justification of recommendations as well as rationalisation of judgements. Knowledge of Mu’amalat (business transactions)71 helps not only in the identification of halal and haram transactions but other important aspects such as formation and types of business allowed, valuation of non-monetary assets, distribution of profit and loss, documentation of transactions, calculation and payment of zakat etc. In addition, must also possess technical competence in accounting.
Balagha (Eloquence)
Able to express and present qualitative and quantitative information that are clear and understandable because users rely on the contents of the report in making economic and religious decisions.72 Need to be careful in the selection of words and expressions and communicate only facts instead of exaggerating information which could cause damage and provide benefits to those who did not deserve them.
Shura (Consultation)
Consultative procedures should be applied to all collaborators i.e. shareholders, suppliers, customers, employees and community.
71
Statement of Principles for Financial Reporting para 3.11 (ASB, 1999) also identified commercial awareness as one of the criteria expected of accountants. The role of accountant in aiding decision making was explicitly recognised and mentioned by Imam Ash-Shafi’i: “he who learnt accounting will make an appropriate decision” (Shahata, 1993; p. 45). 72
27
Besides acting as a mu’minoon, it is equally important for the ulu-l-amr (those charged with authority) to be adl (just). Adalah (justice) in Islam include those related to decision making73 and also in speech74, in accordance with Allah’s saying. Khadduri (1984) states that the standard of justice in Islam comprises of ‘iffa (continence), rahma (compassion),75 al-nus hi li al-kull (universal benevolence) and al-ijtihad fi naf’al-kull (endeavour to secure advantages to all men), without which will give rise to injustice. In addition, the call for justice in Islam is not only to fellow human but to all ihsan (Allah’s creations). In short, adalah is a combination of moral and social values denoting fairness,76 objectivity,77 temperance and straightforwardness. In addition, based on the concept of tazkiyah, the ulu-lamr should recognise that all material enhancement must lead to social justice and spiritual betterment for the ummah besides the proprietor(s). The ulu-l-amr must also treat his/her work as an amanah (trust) from Allah and society. This is closely related to the concept of ownership78 in Islam where all wealth belongs to Allah and ownership is actions which individuals take to contribute to society and to themselves.79 In other words, the ulu-l-amr must act as steward not only to parties who elected him/her but also to society. Another value concept required of ulu-l-amr is mas’uliyyah (accountability) not only to human superiors i.e. employer and users of accounting information but ultimately to Allah. This is in conformance to human purpose in life which is as a khalifah (vicegerent) over the earth and responsible for its well-being. As such, the ulu-l-amr must strive to provide excellent service and recognise work as a form of ibadah (servitude to Allah) and amal saleh (virtuous deed) which is the key for attaining al-Falah. 73
“If ye differ in anything among yourselves, refer it to Allah and His Messenger, if ye do believe in Allah and the last day: that is best, and most suitable for final determination” (Qur’an, An-Nisaa 4:59). 74 “Whenever ye speak, speak justly, even if a near relative is concerned” (Qur’an, Al-An’am 6:153). 75 “Then will he be of those who believe, and enjoin patience, (constancy and self-restraint), and enjoin deeds of kindness and compassion” (Qur’an, Al-Balad 90:17). 76 “Give measure and weight with (full) justice” (Qur’an, Al-An’am 6:152). 77 “But take witness whenever ye make a commercial contract; and let neither scribe nor witness suffer harm. If ye do (such harm), it would be wickedness in you” (Qur’an, Al-Baqarah 2:282). 78 Islam specifies public ownership (those that society collectively possess i.e. fire, water and salt), state ownership (those that are essential for public utilisation and as such they should be controlled by the State to ensure that public benefits from it such as minerals and gas) and private ownership. 79 “Do ye not see that Allah has subjected to your (use) all things in the heavens and on earth, and has made His bounties flow to you in exceeding measure, (both) seen and unseen?” (Qur’an, Luqman 31:20). For other examples, see Qur’an, Luqman 31:26 & Ash-Shura 42:12.
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Ilm and hikmah are important qualities to assist the ulu-l-amr in making judgements, recommendations and decisions. Besides technical knowledge and competence in accounting, knowledge of Shari’ah Islami’iah especially those related to mu’amalat (business transactions) should be the guiding force if the rights and obligations of Allah, ummah and individuals are to be fulfilled. Besides knowledge and wisdom, the ulu-l-amr must possess balagha (eloquence) to enable him/her to express and present qualitative and quantitative information that are clear and understandable as well as communicating only facts instead of exaggerating information which could cause damage to society and provide benefits to those who did not deserve them. Lastly, shura (consultative procedures) should be applied to all collaborators i.e. shareholders, suppliers, customers, employees and community to ensure justice to all.
Having outlined the principles for IPA, it is appropriate to highlight its differences to conventional Western accounting. Table 4 presents a summary of the differences. The entity concept, which is central to accounting theory in conventional accounting, recognised separation of entity and owners and as such, the equity of the entity is in excess of its assets over its liabilities and the income of the entity is the excess of its revenues over its costs. In addition, this concept is concerned with benefits (revenues) to one constituency, the shareholders. On the other hand, IPA emphasised on benefits accruing primarily to those outside the entity’s constituencies: customers, suppliers, employees, the community in which it is located, shareholders and society in general, with costs borne by the entity. In other words, the concerns at the enterprise level in IPA is maslahah, thus changing the entity concept from firm alone to owners and their affected constituencies.
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Table 4 Summary of Differences in Underlying Postulates and Principles of Conventional and the Islamic Perspective of Accounting Principles
Conventional Western Accounting
Entity Postulate
Going-concern Postulate
And
Islamic Perspective of Accounting
Views the business organization as an entity separate from its owners and the focus of accounting is on revenues of shareholders. Business continues forever i.e. entity will survive long enough to carry out its commitments and fully realise its existing assets and as such, prediction of the future solvency of the company is important.
There is no separation as advocated by proprietary theory i.e. the firm belongs to owners and as such the assets belong to them and the liabilities are their obligations. Continuity of business depends on contractual agreement between parties involved in the profit-sharing activities and recognises the importance of both short and long term focus in life. As such, short-term focus is on zakat and long-term focus is on capital maintenance.
Consistency Principle
Recorded and reported in consistent manner based on GAAP.
Accounting Period Postulate
Cannot afford to wait until the end of firm’s life to measure success of operations, thus more regular assessment.
Provision of all information either voluntarily or mandatory that aid economic and ethical decision making of all user groups. This include social responsibility reporting.
All information related to justice in premeasurement and actual measurement of business transactions and disclosure of information related to zakat, halal dealings riba-free transactions as well as information related to social responsibility namely, community, debtors, employees and environment that helps users in making economic and religious decisions are material.
Any information that would significantly influence economic and ethical decision especially of current and potential users.
Provision of information that aid economic and religious decision making based on the precepts of Shari’ah Islami’iah to demonstrate accountability to Allah, society and individuals.
Information has been faithfully represented and free from material error i.e. has not been manipulated especially to influence economic decisions of users.
Information has not been distorted in terms of what is measured, the measurement process and what is disclosed as part of taqwa i.e. having clear conscience with Allah in fulfilling duties related to both financial and non-financial matters.
Selection of accounting techniques that report the most likely scenario in the future.
Selection of accounting techniques that focus on discharge of stewardship and accountability to Allah, society and individuals
Recorded and reported in consistent manner based on principles prescribed by Shari’ah Islami’iah. One lunar year for zakat purposes except for agricultural product i.e. one season or at harvest, and minerals and buried treasures which must be paid immediately. For other purposes, regular assessment is feasible.
RELEVANCE: Full Disclosure Principle And Materiality Principles
RELIABILITY: Objectivity Principle
And Conservatism Principle
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Furthermore, the entity in Islam could be one of these forms: mufawada (unlimited liability) and inan (limited liability) based on delegation or mutual agency,80 mufawada bi al-Dhaman (partnership by guarantee),81 sharikat bi al-amal (companies based on labour),82 sharikat bi al-shohrah (companies based on reputation)83 and mudaraba (commenda).84 All these types of entities indicate that liabilities must be borne by owners.
The going-concern postulate i.e. an indefinite continuation of the enterprise, support the use of historical costing of fixed assets as prepayments of expenses matched against revenue and justify adoption of current and non-current classification of assets and liabilities (Gambling and Karim, 1991). In other words, the focus is more on the solvency of the business in the future and as such, information for predicting purposes is vital. In contrast, IPA focuses on both short and long term obligations: short-term focus is to identify the wealth subjected to zakat and the long-term focus is on wealth procured for utilisation beyond the zakat period. This corresponds to the spirit of Islam which encourages acts of worship and strive for sustenance as in the Islamic conventional wisdom: “Work as if you are going to live forever and worship Allah as if you are going to die tomorrow.”
Closely related to the going-concern postulate is the consistency principle. Since conventional accounting focuses on the long run and information for prediction purposes is needed, the consistency principle emphasises on information for comparison purposes for economic reasons and as such, GAAP is utilised as a mechanism to achieve the objective. On the other hand, the consistency principle in IPA is concerned with ensuring that business conform to Shari’ah Islami’iah at all time.
80
Partners contribute equal capital, share profits and losses equally, assume equal liability for all debts of the company, have equal voting rights and each partner agrees to delegate the other partner (s) the right to act as agent both in the partner’s presence or absence. 81 Partners may not contribute equal capital, profits distributed in proportions agreed upon by partners, losses distributed in the ratio of capital contribution. 82 Two or more individuals agree to participate in a business without joint investment of capital and profits are distributed based on agreement between partners e.g. professional practices i.e. lawyers, accountants etc. 83 A type of joint venture with limited life. Partners do not contribute capital but rely on good reputation to obtain goods on credit and sell them for cash. Any profits made are shared based on agreement between partners and partners are liable for debts when payment has to be made. 84 Partnerships where some partners contribute capital and others participate through labour, experience or contacts. Profits are distributed based on agreement between partners in advance but any losses are borne by partners who have provided the capital but only to the limit of capital contribution.
31
The accounting period postulate i.e. the need to measure success of operations before the end of a firm’s life, results in conventional accounting that concentrates on accruals accounting and the principles of income recognition and matching (Gambling and Karim, 1991). In contrast, IPA prescribes one lunar year for zakat purposes except for agricultural products where zakat is due at harvest and as such, accounting statements are prepared for that particular period, indicating the amount on which zakat is to be levied.
As for the relevance postulate i.e. the provision of all relevant information that can make a difference in the outcome of a decision, the underlying principles of full disclosure and materiality in conventional and IPA differs. Unlike the principle of materiality in conventional Western accounting which emphasises on the relative importance of the information for economic and to some extent ethical decision making purposes, IPA views materiality of information as all information that aid both economic and religious judgements. The latter purpose requires that all information indicating that justice in measurement as well as demonstration that the entity is not involved in unlawful activities (e.g. usury, gambling, animal testing etc.), payment of zakat has been made according to Shari’ah Islami’iah, fulfilment of social responsibility and the objective of establishing the business, are relevant. This forms part of huqu-qu-Allah (fulfilment of the duties and obligations to Allah), huqu-qul ibad (fulfilment of the duties and obligations to society) and huqu-qul-shakhseea (fulfilment of the duties and obligations to oneself).
With regard to reliability postulate i.e. users can rely on the information provided, the objectivity and conservatism principles under the two accounting systems differs. Although the concept of objectivity in both conventional and IPA imply measurement that is free from personal bias, the former is often based on human rationality. For Muslims, objectivity has a much deeper meaning beyond establishing justice in measurement85 as it is related to having a clear conscience with Allah (the concept of piety) when fulfilling duties regarding financial matters such as measuring zakat, profits, debts and quantification of non-financial information. As for conservatism principle, conventional accounting encourages the
85
“We sent aforetime Our messengers with clear signs and send down with them the Book and the balance (of right and wrong), that men may stand forth in justice” (Al-Hadid 57:25).
32
selection of accounting techniques that report the most likely scenario in the future and as such, those that is least likely to overstate assets and profit. In contrast, IPA requires the selection of techniques that report the current position with the purpose of demonstrating stewardship and accountability to Allah, society and individuals.
Hence, from the preceding discussions, the differences in the conventional and IPA are obvious not only in terms of their objectives but also their underlying principles. As such, the theoretical framework for financial reporting based on the Shari’ah Islami’iah paradigm is uniquely derived from Divine law rather than man made law, and has important implications on the role of Muslim accountants, which can be summarised as follows: 1. Imbued with world-view of tawhid (awareness of Allah) - not anti-profit86 or antiworldly gain - but a vision of success and failure that extends beyond worldly existence to life in the hereafter. 2. Responsibility and accountability- not only to human superiors (management/clients) but ultimately to Allah in his/her capacity as a servant and trustee of Allah in enhancing socio-economic justice in this world and to assists in achieving al-Falah. 3. Relationship - need to improve and strengthen relationships with Allah (hablun min’Allah) and maintain good relationship with superiors and other fellow humans (hablun min’an-nas) by fulfilling all his/her religious obligations. 4. Motivation - provide excellent service in every undertaking as a holder of ‘amanah’ (trustee of Allah) and to recognise work as a form of ‘ibadah’ (servitude to Allah) and ‘amal saleh’ (virtuous deed) in conformity with the divine norms and values as key for the attainment of al-Falah (success in this world and in the hereafter). 5 Concluding Remarks This paper provides a holistic view on the need for IPA and builds an appropriate theoretical framework for Muslims. It starts by highlighting the reasons for the unsuitability of conventional accounting in fulfilling the needs of Muslims, namely on three counts viz. religion is often eliminated in deriving its values, its emphasis on the use of economic
86
Profits are encouraged in Islam to assist in fulfilling social obligations satisfactorily as long as it is not at the expense of the community.
33
rationality as the basis of developing accounting theory and practice, and its narrow focus on owner/shareholder value. The Shari’ah Islami’iah is proposed as the basis in developing a theoretical framework of IPA as it works on universal postulates, has a very stringent and evolved methodology with answers given in terms of a strategy for action, thus, giving it universal validity (Manzoor, 1984). This explains why any theoretical Muslim thinking must pass through the objective framework of Shari’ah Islami’iah in order to become operative. IPA based on Shari’ah Islami’iah recognises all the different roles suggested by the different conventional paradigms. It takes into account the concept of accountability in accounting (the anthropological/inductive paradigm), the use of a single valuation base in determining income (the true-income/deductive paradigm), the importance of financial accounts as an information-providing system which forms the basis for decisions and reviewing the consequences of those decisions (the decision-usefulness/decision-model paradigm, and the decision-usefulness/decision-maker/aggregate-market-behaviour paradigm) as well as consideration
of
human
behaviour
in
the
accounting
process
(the
decision-
usefulness/decision-maker/individual-user paradigm). Similarly, unlike the extreme classification based on ideology in the construction of accounting knowledge to reflect reality by assuming that it can be analysed as a natural science, and addressing the nature of society as related to the order-conflict debate, the Shari’ah Islami’iah paradigm may be seen as striking a balance between the extreme holistic-atomistic and radical-descriptive dimensions of sociological views (as it addresses the structure, process, meaning and function at both micro and macro levels).87
However, it is to be noted that although IPA is considered as a multi-paradigm addressing the different accounting ideologies, its foundation is different. The reason is that, it is based on Shari’ah Islami’iah and as such, it addresses three interrelated dimensions: huqu-quAllah, huqu-qul ibad and huqu-qul-shakhseea. Fulfilment of these three dimensions forms 87
The holistic-atomistic continuum seeks to understand society from ‘top-down’ and from the ‘bottom-up’ while the descriptive-radical continuum is content with describing society as it is, as opposed to a form of political practice (Roslender, 1992).
34
part of the act of worship. In other words, for accounting to qualify as an act of worship for Muslims, the three interrelated dimensions viz. fulfilment of the rights of Allah, ummah and individuals, based on the principles of Shari’ah Islami’iah must be observed. In addition, the Shari’ah Islami’iah paradigm moves from a pseudo-value-neutrality to one that is more open and manifest value-commitment and value-fulfilment devoted to the optimisation of human well-being in all dimensions. IPA recognised equilibrium between work and worship, mutual responsibilities in society, balanced and beneficient use of the bounty of Allah and limited sovereignty of people in society. It is also important to acknowledge that implementation of IPA based on the Shari’ah Islami’iah paradigm is a significant part of tawhid al-ibadah (maintaining the unity of Allah’s worship). As such, continuous efforts should be made by Muslims to adhere to the principles prescribed by Shari’ah Islami’iah, for acceptance of non-Islamic law lands in shirk (worshipping other than Allah) and an act of kufr (disbeliever) (Philips, 1990; p:26).88
Some may question the validity of IPA as a mechanism to achieve socio-economic justice as many Islamic countries are not less afflicted by corruption, extremes of wealth and poverty89 and other problems just like their non-Islamic counterparts. This problem exists because an Islamic state as envisioned by the Messenger is absent and Shari’ah Islami’iah is not adopted wholesome in the so called Islamic countries.
Meanwhile, the absence of an Islamic state should not constrain the academic development of a model for IPA. Continuous efforts should be made to translate the framework for business, management and accounting into methods which will increase the ‘Islamic goodness’. In other words, IPA should not be perceived as a revolution but an evolution of the function of accounting which enables Muslim accountants to continue making ‘good’ in private, social and religious duties to achieve al-Falah.
88
This has been mentioned in the Qur’an, “Those who do not rule by what Allah has revealed are disbelievers (kaafiroon)” (Al-Maidah 5:44). 89 The major sources of poverty in Muslim countries include colonial exploitation and legacy (in terms of transfer of resources from Muslim lands in the nineteenth and first half of the twentieth century and imitation of irrelevant development models of the developed countries by Muslim countries), economic and financial dualism in the market system and the neglect of investment in human resources (Mannan, 1988).
35
We hope this paper manages to enlighten current and future accountants and others in the profession of an alternative accounting approach. Awareness among Muslims of their religious roots and realisation of an Islamic alternative to conventional accounting is a prerequisite to the development of IPA. Although our paper is normative in nature, it should be realised that a number of issues in IPA cannot be settled solely by empirical observations because values are inextricably bound up with the Islamic life philosophy, cultural and religious positions. Finally, we also believe that a sweeping change in IPA can never be brought about through legislation because real progress will have to first come from changes in the minds of both current and future Muslim accountants.
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APPENDIX 1
Basic principles in the Shari’a regarding politics, economics and social life. POLITICS
ECONOMICS
SOCIAL
Every deed of Muslim individual/group is inspired and guided by the Law of God (Qur’an)
Earn living through decent labour and avoid dependence on others
Believe in the unity of mankind in origin
Sovereignty in Islamic State does not belong to the ruler nor the people but belongs to God i.e. ruler acting only as executive chosen by the people to serve according to the law of God
Earnings through lawful means (halal) is recognised as private possession
Believe in the unity of mankind in human status and aims
First responsibility of ruler is to God and then to the people - dual responsibility
Avoid usury (riba) and interest
Fulfil public interest (maslahah)
Ruler is a representative employee chosen by the people and derives his authority from obedience to the Law of God which binds the rulers and the ruled by a solemn contract over which God is the superior
Fulfil obligations to society via zakat and charity and pay taxes to the state
Individual can be contributor and society the beneficiary and vice-versa - concept of mutual responsibility and concern
Rulers are chosen on the basis of own merits of virtue, fitness and competence
Avoid extravagance (israf) and be moderate in consumption to reduce scarcity
Fulfil obligations and honour treaties undertaken
Ruler must administer justice and provide security for all citizens irrespective of their beliefs
Honour contracts (uqud) and keep proper accounts
No class warfare, social castes and domination of any individual over society
Ruler must be independent of any political party of a non-Islamic platform or subjected to foreign powers if it is to exercise its due authority on behalf of God and in His cause
Profit sharing between those providing and using funds as alternative to avoid riba financing
Due respect to other people’s interests and rights to life, honour and property
Ruler has room to handle common affairs through consultative methods (shura) at both local, national and international level
Gambling (qimar) and all speculative activities are forbidden
Maintain good relationship with fellow human (hablun min’an-nas)
Every citizen is enjoined to supervise the conduct of the administration and question its handling of public affairs
Aim for economic justice based on equality and fairness
Remove hardship in society (raf al-haraj)
Every citizen is entitled to enjoy freedom of belief, thought and expression etc. But not in the absolute sense as it may lead to chaos and anarchy
Avoid fraudulent and dishonesty (khiyana) including collusion (tanajush) in business transactions
Prevent harmful activities on society (daf al-darar)
The governorship is a public trust; entrusted by the word of God and by the consent of the people including that of the minorities
Business activities as form of worship (ibadah)
Public interest exceeds private interest
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