Ethics and Social Accounting vs. Islamic Accounting

 by  : Hanan Gabil, Wed Al-Nafie and Wejdan Al-Harbi

In early history of accounting, the first name to describe the system of debits and credits in journals and ledger which in fact still the basics of today’s accounting is called Luca Pacioli, year 1494.

 

Accounting is defined as a valuable knowledge to be performed and it is considered to be the main index for all countries’ economy. Accounting is also an essential part in processing information of business and economy activity into financial statements. In other words, accounting is the universal language of business and economics as well as finance. However, unfortunately, there is still fraudulent and dishonest practices in business and economic activities. Accounting can be divided into 6 categories as follows:

  1. Finance Accounting
  2. Management Accounting

iii.  Auditing Accounting

  1. Taxation
  2. Funds
  3. Forensic Accounting.

 

There is no certain activity that could be possible done without relying on accounting, because accounting deals with information that consists of financial status and profitability of economic enterprises.

 

Islamic accounting has existed since the 1500s and has its own principle that not only can decrease the degree of unexpected activities pertaining to accounting process but also increase the welfare of both internal and external parties of the business. That’s because Islamic accounting has an aspect that has more meaning and value which is a similar aspect of conventional accounting too. It comprises of all values required to the most preferable accounting process. This essay details the differences between Social accounting and Islamic accounting.

 

Ethics

Ethics in accounting has been posed after scandals that had the greatest impact of the recent century such as examining collapse hiding, law breaking, fraud and violating moral standards. This setback drove companies towards a common strategic goal – principles of accounting. Thus, the following four elements of principle are essential in ethics:

  1. Honesty and trustworthiness

This rule requires a complete and honest presentation of relevant financial and non-financial information. Information presented should be adequately transparency and must not be used for an ethical advantage. A high degree of integrity and discretion is essential.

 

 

  1. Objectivity

Objectivity requires all professionals and information to be fair and unbiased. Professional judgment must be free from conflict of interest such as hospitality and family relationship. It is strongly recommended to refrain from personal relationships and accepting gifts on duty.

 

  1. Confidentiality of information

Unless absolutely necessary and required by the relevant accounting and auditing standards, confidential information should not be disclosed or be used to gain any unethical advantage.

 

  1. Professional competence and conduct

Professionals are required to have an appropriate level of academic and work competence, preferably related to their field. Any offers of professional duty for which one does not possess sufficient skills to execute the task effectively should be declined. Professionals must always comply with relevant accounting and auditing standards and perform their duties diligently.

 

According to the ethical code of conduct, having a code does not eliminate fraudulent activities. In fact, it is a guide to accountants which needs to be fully accepted by professionals before it can be effectively adopted into practice. Therefore, there are two additional codes that are incorporated into Islamic accounting:

 

  1. Faith-driven conduct

Under Islamic accounting, self-monitoring is fundamental. Self-monitoring may be defined as being constantly conscious of one’s actions and their accountability before Allah on the day of judgment. It is also important to seek Allah’s satisfaction instead of pleasing people while performing professional duties which are consistent with Islamic values and the Shariah. One must always be diligent and sincere in his work and actions. This also stresses on keeping promises and honouring agreements.

 

  1. Legitimacy

Legitimacy requires all professional duties to be according to the Shariah. Accountability to Allah is given priority over accountability to the management. Professionals must have competent knowledge of the Shariah rules and principles through education and formal training. All business activities and transactions must be Shariah compliant and should be verified for religious legitimacy by professionals who are responsible for executing them.

 

Social Accounting

Social accounting is also coined as Social Responsibility Accounting because of its responsibility to measure and inform the public about the social activities undertaken by the enterprise and their impact on the society. It is the vision of  which a business seeks to make a valuable impact on social operations. In simpler words, social accounting can facilitate the identification and management of social risks.

 

Business is a socio-economic activity and its objective is the welfare of the society. It requires full responsibility for providing solutions for social issues. Therefore, the concept of social accounting is to manage huge amounts of funds at their disposal and invest substantial amounts in social activities so as to nullify the adverse effects of industrialization.

 

 

The benefit of social economy is to act as an evidence of social commitment, fulfill its obligations, and advise the government and the general public to form correct opinions that are just and ethical. However, it does have its limitations. It can be labor intensive if strategic planning has not been set, or also been not useful for benchmarking.

 

Islamic Accounting

In an Islamic society, accounting should establish purposes according to Islamic teachings in relation to contemporary accounting thought. Those which are Shariah-compliant are pursued and those that are not are discarded.

 

Certain Islamic ethical principles have a direct impact on accounting policy and principles.

These principles are derived from the Holy Qur’an and the Sunnah, that stresses on the need for justice, truth, and fairness, and are considered to be a society’s priority and responsibility. This also contains specific standards for accounting practices. In Islamic financing principles, it must follow specific elements which gives it distinctive religious identity. These elements  are:

  • Riba (interest): The payment and taking of interest as occurs in a conventional banking system is explicitly prohibited by the Holy Qur’an.
  • Zakat: The process of repetitive distributions of income and wealth is inherently in Islam to guarantee a fair standard of living for every people especially the poor. Zakat is different from a tax, A tax is an obligation of citizens toward the society, whereas zakat is an obligation of a Muslim not only to society but also to Allah.
  • Haram: Islamic banks cannot finance activities or items forbidden in Islam,

Islamic banks give priority to essential production which caters to the needs of

the majority of the Muslim community.

  • Takaful (joint-guarantee): The only type of insurance that would appear to be lawful according to the Shari’ah insurance.

 

Muslims ought to conduct their business activities according to the requirements of their religion which are moderation, justice, kindness, honesty, spending to meet social obligations. Unfairness and greed should be avoided at all times.

 

Applying Islamic accounting principles leaves a beneficial impact directly and indirectly on the internal and external parties of the business; some of which are highlighted below.

 

  • Less possibilities of unexpected activities by the accountant such as fraud in business and society.
  • The creditor will feel more secure in investing their funds in the business.
  • Financial statement and reporting will facilitate better and more accurate decision making by the users.
  • One of the Islamic accounting purpose is to be concerned about the employees and their families when performing their jobs. It can be useful in reducing poverty and increasing the welfare of the society within the company. This increases the purchasing power of the underprivileged which indirectly contributes to the economic growth.

 

The company also benefits from increased profits, customers’ loyalty, trust, positive brand attitude, combating negative publicity, and having a rightful place in the business world.

 

Conclusion

Overall, accounting is the recording of financial transactions and focuses on presenting the information in financial statements, These reports must be prepared according to accounting principles. Accounting also provides essential information to the management to keep the business financially healthy. It places high importance on ethical values. It is of utmost importance for a business to provide accurate evaluation, truth in operations, clear revenues and expenses.

 

Social accounting differs from Islamic accounting. The general concept of Corporate social responsibility (CSR) is to guarantee sustainability which is forbidden under Islamic accounting Exception is only made if it can be regenerated. CSR activities has a direct impact on the social environment. Therefore, it is required by law for CSR activities and information about its operations to be truthfully disclosed to the general public.

 

Because Islamic accounting obligates businesses to follow the Sharia strictly, it is considered a religious responsibility. Economic responsibility requires financial statements to be viable, profitable and efficient whereas ethical accounting is obliged to respect societal and religious values.

 

Therefore, Islamic accounting is considered to be much more complex than the social CSR concept in terms of providing the economy with accurateness, justice without taking or giving interest.

References:

Lewis, M. K. (2001). Islam and accounting. Accounting Forum,25(2), 103-127. doi:10.1111/1467-6303.00058

 

Yarahmadi, H., & Bohloli, A. (2015). Ethics in Accounting. International Journal of Accounting and Financial Reporting,5(1), 356-360. Retrieved April 27, 2017, from www.macrothink.org/

 

Schneider, B. (2017). Accounting Basics: History Of Accounting. Retrieved April 26, 2017, from http://www.investopedia.com/

 

Mishra, S. (2015). Social Accounting: Concept, Definition, Features and Benefits | Financial Analysis. Retrieved April 27, 2017, from http://www.yourarticlelibrary.com/

 

Islam, M. A. (2015). Social Compliance Accounting Managing Legitimacy in Global Supply Chains. Cham: Springer International Publishing.

 

Asfadillah, C., et al. (2012). The Importance of Islamic Accounting in Modern Era. Cambridge, UK.

 

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Comprative analysis of AAOIFI Vs IFSB

Nahlah Aljudaibi, Adwaa S. Melebari and Hanadi Simbawah

Introduction:

Islamic finance has been rapidly grown recent few years nearly 20 percent annual growth in each year (Zeine Zeidane, 2015), The Islamic Financial Services Industry now has assets of over $175billionwith equity of US$15billion. With more than 300 Islamic banks, finance companies, investment banks (Shahul Hameed bin Mohamed IbrahimStandard,2007 )& Poor’s Ratings declare that over all assets held by Islamic financial institutions estimate around $1.8 trillion with probability to increase for double-digit growth over the coming few years to reach about $3 trillion.

Thus the Islamic finance system must adapting a stander accounting system that compliant with sharia rule and has a sharia objective which cares about Din(faith), nafs (life), maal(wealth), nasel(progeny) and aqal (rational). For following these principles and provide stander accounting system to service Islamic finance institutions and  guide the operations of the industry around the world, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established since 1991 in Bahrain which was issuing accounting, auditing and Sharia standards for financial reporting at Islamic financial institutions. The another institution that considers as issuing supervisory and regulatory standards and guidelines which are governance standards for Islamic institutions is The Islamic Financial Services Board (IFSB) that established in 2002 in Malaysia.

Before elaborate, the two Islamic accounting stander in details must explain the general principles of Islamic accounting.

 

 

General principles of Islamic accounting;

According to the (Muhammad, 2002), there are three general principles in Islamic accounting

  1. Accountability:

The concept of accountability is that everyone is accountable for his actions on the Day of Judgment.  The accounting man is a person who involves in accounting issue which let him responsible with the mandated and also related parties, forming in financial statements.

  1. Justice

Justice in accounting system has a meaning of honest and cares about ethical and moral value regarding the parties are included in the financial transaction.

  1. Truth:

The measurement and reporting of accounting activity must create justice or fairness for all shareholders and this cannot happen without Truth principle

AAIOIFI:

AAIOIFI is based in Bahrain and operates as an independent international organization with support from some200 institutional members coming from about 45 different countries. Consist of central banks and monetary authorities, financial institutions, accounting and auditing firms, and other institutions that support the international Islamic finance industry.

AAIOFI is a stander for sharia, accounting, auditing, and governance exactly is issued of 88 standers including of 48 Sharia standards, 26 accounting standards, 5 auditing standards, 7governance standards and 2 codes of ethics. The standards are implemented globally even in non-member countries as they are applicable to IFIs worldwide.

The objectives of AAOIFI:

  • To develop accounting and auditing thoughts relevant to Islamic financial institutions
  • To disseminate accounting and auditing thoughts relevant to Islamic financial institutions and its applications through training, seminars, publication of periodical newsletters, carrying out and commissioning of research and other means
  • To prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions
  • To review and amend accounting and auditing standards for Islamic financial institutions

AAOIFI carries out these objectives in accordance with the precepts of Islamic Shari’a which represents a comprehensive system for all aspects of life, in conformity with the environment in which Islamic financial institutions have developed. This activity is intended both to enhance the confidence of users of the financial statements of Islamic financial institutions in the information that is produced about these institutions, and to encourage these users to invest or deposit their funds in Islamic financial institutions and to use their services.

AAOIFI Standards

Shari’ah Standards

Guidance on Shari’a permissibility and rules for specific Islamic finance products and mechanisms. AAOIFI’s Shari’ah standards are typically issued through a professional and meticulous scholarly methodology (known as the due process). The standards development process follows a number of stages, commencing with the commissioning of consultants to conduct a thorough study on a specific topic or issue that greatly impact the Islamic finance industry. The study involves Shari’ah characterization of the topic in question and the compilation of Fiqh academy fatwas and collective fatwas pertaining to the topic, and it accounts for all relevant practical applications. The exposure draft is then submitted to the respective Shari’ah standards subcommittee which discusses and reviews it. If approved, the consultant will be commissioned to prepare an exposure draft on the same topic or issue. The first exposure draft will then be discussed with the subcommittee prior to submission to the Shari’ah Board for further discussion and elaboration.

Accounting Standards

Guidance on accounting treatment for specific Islamic finance products and mechanisms and guidance on presentation of financial statements for Islamic financial institutions. Accounting standards due to the unique characteristics coupled with the growing demand of IFIs’ products and services so as to facilitate and enhance the credibility and reliability of the financial statements and reports. It is argued that the current standards which are based on conventional framework seem insufficient to guide the IFIs. Currently, the various IFIs apply different accounting standards in their preparation of their accounts due to the absence of Islamic accounting standards (Zaini, 2007). The trend towards the AAOIFI standards has become a pressing issue that has generated heated debate among Organization of Islamic Cooperation countries.

AAOIFI accounting standards have been made part of mandatory regulatory requirement in jurisdictions such as Bahrain, Jordan, Oman, Qatar, Qatar Financial Centre, Sudan, and Syria.

AAOIFI accounting standards have also been adopted by Islamic Development Bank Group, a multilateral institution.

In addition, AAOIFI accounting standards have also been used as basis of national accounting standards in jurisdictions such as Indonesia and Pakistan..

Auditing, Governance and Ethics Standards

AAOIFI auditing, governance and ethics standards are not part of mandatory regulatory requirement for Islamic finance.  Instead, these standards are used voluntarily by leading Islamic financial institutions across all major Islamic finance jurisdictions.

AAOIFI’s Auditing Standards broaden the scope of the external auditor so that s/he is satisfied with reasonable assurance that the Islamic bank’s transactions comply with Shari’a rules and principles. Require the external auditor’s report to clearly state in the auditor’s opinion whether or not the financial statements give a true and fair view in accordance with Islamic Shari’a rules and principles and the financial reporting framework.

AAIOFI’s Governance Standards aim to enhance the role of SSB in corporate governance. Provide guidelines to harmonize the SSB’s structure and process, including: l Its appointment, dismissal, and the format of its report and the information it should contain. l Steps that should be followed by the SSB in its review to form an opinion as to whether or not the bank has complied with Shari’a precepts.

AAOIFI’s code of ethical structure conduct consists of three sections; namely the foundations of accounting ethics, the principles of ethics for accountants, and the rules of ethical conduct for accountants. The foundations of accounting ethics delineate seven basic foundations; namely, integrity, vicegerency, sincerity, piety, righteousness, Allah-fearing, and, accountability to Allah. From these seven foundations, AAOIFI developed six basic ethical principles; namely, trustworthiness, legitimacy, objectivity, professional competence and diligence, faith-driven conduct, and professional conduct and technical standards. Finally, for all six ethical principles, they developed guiding rules for accountants in their professional works.

IFSB:

Islamic Financial Services Board, it’s an international organization that issues guiding principles and standards for association to central bank and monetary authorities and other institutions that are responsible for regulation and supervision of Islamic financial services industry. IFSB was founded in Malaysia 2002 and started operation on 2003. It serves as an International standard-sitting body of regulatory and supervisory agencies to ensure soundness and stability of the Islamic financial services industry in banking, capital market, insurance.

IFSB definesShari’ahgovernance system as a set of institutional and organizational arrangement through which an Islamic financial institution ensures that there is effective independent oversight of Shari’ah compliance over each of the following structures and process:

  1. a) Issuance of relevant Shari’ah pronouncement or resolution. This refers to a juristic opinion on any matter pertaining to Shari’ah issues in Islamic finance given by the appropriately mandated Shari’ah board.
  2. b) Dissemination of information on such Shari’ah pronouncement or resolutions to the operative personnel of the IFIs who monitor the day-to-day compliance with the Shari’ahresolutions vis-à-vis every level of operations and each transaction. However, this task would normally be done by the internal Shari’ah compliance department.
  3. c) An internal Shari’ah compliance review or audit reports that if there is any incident of non-compliance, it should be recorded and addressed and rectified. With regard to this, IFSB-3 sets out that Shari’ah resolution issued by the Shari’ah boards should be strictly adhered to. d) An annual Shari’ah compliance review or audit for verifying that internal Shari’ah compliance review or audit has been appropriately carried out and its findings have been duly noted by the Shari’ah boards.

The IFSB members have increased from 9 in 2003 to 188 members in 2016with 3 membership type:

1)      31 as full members.

2)      22 as associate members.

3)      125 as observer members.

The ISFB consists of:

  • The general assembly, which includes all members of the ISFB
  • The council, which acts as the policy making body of the IFSB and includes the senior executive of each full member of the organization
  • The technical committee, which advises the council on issues and consists of up to 15 persons appointed by the council
  • The working group, which drafts standards and guidelines and reports to the technical committee
  • The secretariat, which acts as the permanent administrative body and is headed by a secretary-general appointed by the council

 

 

The objectives of the IFSB are:

* To promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Sharî’ah principles, and recommending these for adoption

* To provide guidance on the effective supervision and regulation of institutions offering Islamic financial products and to develop for the Islamic financial services industry the criteria for identifying, measuring, managing and disclosing risks, taking into account international standards for valuation, income and expense calculation, and disclosure.

* To liaise and cooperate with relevant organizations currently setting standards for the stability and the soundness of the international monetary and financial systems and those of the member countries.

* To enhance and coordinate initiatives to develop instruments and procedures for efficient operations and risk management.

* To encourage cooperation amongst member countries in developing the Islamic financial services industry.

* To facilitate training and personnel development in skills in areas relevant to the effective regulation of the Islamic financial services industry and related markets.

* To undertake research into, and publish studies and surveys on, the Islamic financial services industry.

* To establish a database of Islamic banks, financial institutions and industry experts.

IFSB Standards

the IFSB has issued twenty-seven Standards, Guiding Principles and Technical Note for the Islamic financial services industry. The published documents are on the areas of:

  1. Risk Management (IFSB-1)
  2. Capital Adequacy (IFSB-2)
  3. Corporate Governance (IFSB-3)
  4. Transparency and Market Discipline (IFSB-4)
  5. Supervisory Review Process (IFSB-5)
  6. Governance for Collective Investment Schemes (IFSB-6)
  7. Special Issues in Capital Adequacy (IFSB-7)
  8. Guiding Principles on Governance for Islamic Insurance (Takāful) Operations (IFSB-8)
  9. Conduct of Business for Institutions offering Islamic Financial Services (IIFS) (IFSB-9)
  10. Guiding Principles on Sharī`ah Goverance System (IFSB-10)
  11. Standard on Solvency Requirements for Takāful (Islamic Insurance) Undertakings (IFSB-11)
  12. Guiding Principles on Liquidity Risk Management (IFSB-12)
  13. Guiding Principles on Stress Testing (IFSB-13)
  14. Standard on Risk Management for Takāful (Islamic Insurance) Undertakings (IFSB-14)
  15. Revised Capital Adequacy Standard (IFSB-15)
  16. Revised Guidance on Key Elements in the Supervisory Review Process (IFSB-16)
  17. Core Principles for Islamic Finance Regulations (IFSB-17)
  18. Guiding Principles for Retakāful (Islamic Reinsurance) (IFSB-18)
  19. Recognition of Ratings on Sharī`ah-Compliant Financial Instruments (GN-1)
  20. Guidance Note in Connection with the Risk Management and Capital Adequacy Standards: Commodity Murābahah Transactions (GN-2)
  21. Guidance Note on the Practice of Smoothing the Profits Payout to Investment Account Holders (GN -3)
  22. Guidance Note in Connection with the IFSB Capital Adequacy Standard: The Determination of Alpha in the Capital Adequacy Ratio (GN-4)
  23. Guidance Note on the Recognition of Ratings by External Credit Assessment Institutions (ECAIS) on Takāful and ReTakāful Undertakings (GN-5)
  24. Quantitative Measures for Liquidity Risk Management (GN-6)
  25. Development of Islamic Money Markets (TN-1)
  26. Stress Testing (TN-2)
  27. Guiding Principles on Disclosure Requirements for Islamic Capital Market Products (IFSB 19).

Conclusion:

This paper discusses the important role of AAIOFI and IFSB to ensure that the whole activities of financing activities are in line with the Shari’ah. Also the paper including comparison between AAIOFI and IFSB, the country that host it , objectives, members, standards ,rules and regulation.

 

 

References:

Lumpur, K. (2015). IFRS vs AAOIFI : The Clash of Standards ?, (March 2007). Trokic, A. (n.d.). Islamic Accounting ; History , Development and Prospects, 1–6. \Lumpur, K. (2015). IFRS vs AAOIFI : The Clash of Standards ?, (March 2007).

Kingdom, U. (2012). AAOIFI – Governance and Auditing Standards, (September).http://www.ifsb.org/objectif.php

Nawal Kasim, Sheila Nu NuHtay, S. A. S. (2013). Comparative Analysis on AAOIFI , IFSB and BNM Shari ’ ah Governance Faculty of Accountancy. International Journal of Business and Social Science, 4(15), 220–227. Retrieved from http://ijbssnet.com/journals/Vol_4_No_15_Special_Issue_November_2013/28.pdf