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The Differences of Conventional

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									The Differences of Conventional
    and Islamic Accounting
        Prof. Sofyan S. Harahap
      Trisakti University, Indonesia
       Corporation and Society
• “Corporation have emerged as the dominant
  governance institution on the planet, with the
  largest among them reaching into virtually every
  country in the world an exceeding most
  government in size and power, increasingly, it is
  the corporate interest more than the human interest
  that define the policy agendas of state and
  international body although the reality and its
  implication have gone largerly unnoticed and
  unaddressed” (Korten, 1995)
• Accounting Western Model contributes to this
  situation
          Muslim Population and
              Countries
• 25% of World population (> 1 billions)
• Arab: Saudi, Kuwait, Egypt, Syria, Libanon,
  Yemen, Jordan, Iraq.
• SE ASIA: Indonesia, Malaysia, Brunei, Thailand.
• Africa: Mauritania, Senegal, Nigeria, Sudan,
  Somalia, Ethiopia, etc)
• Sub-continent: Pakistan, Bangladesh, India)
• Inner Asia: Iran, Uzbekistan, Kazakhstan,
  Turkmenistan, Tajikistan, Kirgizia and China)
• Canada, Europe, East Europe, Australasia, USA.
             Occident Vs Islam

• Islam                         • Occident
  Unity of God and Power is       Power hold by
  hold by God
                                  mankind (ratio)
• There is a judgment day in
  which mankind pay             • No judgment day,
  responsibility during           world is the end of life.
  his/her life before the God     No judgment day.
• There is hell and heaven      • No heaven and no hell
  fulfilled by mankind
                                • Individual welfare
• Social justice
    The future of Conventional
           Accounting
• “The traditional Western double-entry
  based accounting technology is well-suited
  to an orthodox, positivist society of any
  kind. It is not surprising that it is proving
  inadequate, as people are returning to more
  integrated world views, whether Islamic or
  otherwise” (Hayashi, 1989)
       Critics on Conventional
             Accounting
• Externalities is not included in financial report
  (Lee Parker, environmental accounting)
• Intangible asset cannot be measured
  adequately(Lev Baruch)
• Human resources and employee reporting interest
  are not included.
• Social Interest is overlooked
• Promote the exploitation of capitalist over labor
  and society.
• Promote the concentration of wealth and power o
  the hand of the rich.
               What is Islam?
• Literally meaning:
• “Peace” (in this world and hereafter)
• “obedience” to Allah as his/her God, comply with
  the motivation of God’s creation of Man, which is
  “to serve Allah”, to be “his viceregent on earth”.
• A comprehensive worldview, a unity of God, and
  an integration between world and hereafter.
• Islamic principles: truth, justice, fair, goodwill,
  honesty, benevolent, accountability before the
  God.
 Islam’s epistemology of Devine
              Unity:
• “The Islamic world view is thereby, the
  comprehensive and universalizing,
  overreaching and complementing design of
  reality that is premise on the epistemology
  of divine unity and is evolved into
  intellection through the process orientation
  model of unification of knowledge in world
  system as derived from the primal sources
  of divine unity”.
               Islamic Rules:
• Allah (God) gives two guidance for mankind:
• al-Quran (revealed world of God ) and
• Hadist/Sunnah: Prophet Saying, God’s inspired
  acts, description of the conduct of the prophet’s
  companion of which Mohammad was uncritical.
• Ijtihad/ijma’: shuratic and consensus process.
• Guidance are related to all daily life of mankind
  including in business, management, and finance.
• The phenomena of nature can be also a sign of
  God’s power and existence.
 The purpose of shariah (Islamic
  law) (Al-Gazali: 1058-1111)
• To promote the welfare of the people
  which lies on:
• Safeguarding of their faith
• Their life
• Their intellect
• Their posterity and
• Their Wealth
   Quranic verse on Accounting
• i.e. Albaqarah (2) ayah 282:
• “Oh you who believe! When you deal with each
  other, in transaction involving future obligations
  in a fixed period of time, reduce them in writing.
  Let a scribe write down faithfully as between
  parties”.
• There is an integration between worship ritual and
  socio-economy-politico and daily life of mankind.
• Allah rules out business and accounting.
   Islamic accounting: Hayashi

• “is an integrated discipline with social,
  political and economic domain ruled by
  Allah or “meta rule”. Islamic accounting
  should regulate and establish a harmonious
  integration among the parties of these
  diverse domain”.
     Ancient Accounting Role in Islamic
       State is Muhasabah, it means:
•   Calculation of one’s act
•   Clear the account, make neutral
•   To take care of, to try to find
•   To anticipate a reward in the hereafter
•   To take into account, into consideration
•   To order Muslim to perform their duties
•   To avoid fraudulent practices in business and
    society, to check illegal contract, keep free market
    and fair price, prevent necessities from being
    hoarded. (Hayashi, 1989)
         Islamic Accounting
• 1. To report accurate income determination
• 2. To promote efficiency and leadership
• 3. To comply with the shariah (Islamic
  principles)
• 4. Commitment to justice
• 5. To report a good things
• 6. To adapt to positive social change.
  (Khan, in Harahap, 1992)
       Accounting and Culture
• Culture (i.e. religion) influences accounting
  (Hofstede, 1983, Gray, 1998)
• Culture: “all those social, political, and other
  factors which influence individual’s behavior”
  (Hamid, et. al, 1993)
• Different culture, different economico-sociol-
  politico systems demand different accounting
  system
• Islam is different from Occident (Capitalist
  ideology), so it must have its own accounting
  system (Gambling and Karim, 1986: Triyuwono,
  2001: Hameed, 2001)
       Conventional Vs Islamic
            Accounting
• Conventional Accounting:       • Islamic Accounting:
• Based      upon     modern     • Based upon ethical law
  commercial              law-     originating in the Qur’an
  permissive rather than           (Islamic law, As-Sunnah)
  ethical                        • Full disclosure (to satisfy
• Limited          disclosure      any reasonable demand
  (provision of information        for     information      in
  subject to public interest)      accordance      with    the
• Personal accountability          Shari’a)
  (focus on individuals who      •      Public accountability
  control resources)               (focus on the community
                                   who       participate    in
                                   exploiting resources)
          Conventional vs Islamic Accounting:
(Boudyn and Willet, Islamic Corporate Reports, Abacus, Vol.
                      36, No.1, 2000).

•   Conventional Acc.                       •   Islamic Acct.
•   Economic rationalism                    •   Unity of God
•   Secular                                 •   Religious
•   Individualistic                         •   Communal
•   Profit maximization
                                            •   Reasonable profit
•   Survival of fittest
                                            •   Equity
•   Process
•   Absolute ownership                      •   Environment
•   (Ec. rationalism: the desire to stand   •   Relative ownership
    apart from others, to compete, to
    manipulate and to amass surplus”)
       Toshikazu Hayashi, “On Islamic Accounting,

              IMES Working Paper Series No.18.


   • Islamic Accounting         • Conventional Accounting
• Society – oriented             • Individuality – oriented
• Focus on society aspect      • Focus on individuality
•                                 aspect without consider
                                  any social aspects
• Basically Al Qur’an & As     • Accounting Law and
  Sunnah (Shariah)                Ethics
• Religious (must              • Secular
  responsibility to God at
  the Judgment Day)
           Hayashi (Continued)
• Islamic Accounting            • Conventional Accounting
• No differentiation between    • The normative accounting
  Normative and                   always influencing
  Descriptive Accounting          descriptive accounting or
  (They always going              individuality interest
  simultaneously)               •
• In operational, they do
  everything in boundaries      • In operational, they permit
  of Islam (Shariah)              everything to reach the
•                                 highest profit
• Measure as saleable value     • Measure as highest
• Market (selling) price          possible profit
  rather than historical cost   • Historical Cost
        Haniffa and Hudaib (2001)
•   [Entity]Separation between           •   Firm doses not have separate
    business and owners                      financial obligation (I.e profit
•   [going concern] Business                 sharing scheme)
    continues forever                    •   Depend on contractual agreement
•   [Accounting period] Periodical           between party
    measurement of performance           •   One lunar year for zakat calculation
•   [unit of measure] Monetary Value     •   Quantity based and monetary based
•   [Full disclosure principle]              (zakat calculation)
    Decision making process              •   Importance for fulfillment of duties
•   [objectivity] Reliability of             and obligation to God, society and
    measurement                              individual.
•   [Materiality] Relative importance    •   Clear conscience with God in
    of information for decision making       fulfilling all duties.
•   [Consistency] Consistency based      •   Consistence to shariah rules
    on GAAP                              •   Most favorable to society (justice)
•   [Conservatism] Use least
    favorable impact on owners
       Problems of Rationalism
• The supreme power lies on human or power
  holder not on God
• Man guided by the concept of self interest and
  overlook the social interest
• Man has no inherent justice but true opportunists.
• Social imbalance and social conflicts due to
  concentration of wealth and power in a few elites
• Global ecological destruction
 Examples of Unlawful Business
      Practices in Islam:
• There is lawful (halal) and unlawful (haram) in
  business
• Riba, usury or interest on credit: increment over
  and above the amount of of capital loaned.
• Favor Equity financing than debt financing
• Pork, Alcoholic drinks
• speculative transaction, gambling, dishonesty,
  collusion, uncertainty, manipulation, fraud, free
  market interference, exploitation, hoarding.
      Altruism and Mankind’s
              Records
• Islam advocates altruism and ethical behavior.
• Allah is aware of what mankind do in his/her
  everyday life.
• All activities of mankind are recorded in siijin
  (bad deeds) and illiyin (good deeds)
• Mankind is responsible for what he/she did in the
  world. Mankind can be go to hell or heaven, it
  depends on his/her records
• Allah provides a true justice in hereafter.
 Zakat and Social Accountability
• Zakat is one out of five Islamic pillars
  (Recognition, Prayer, Zakat, fasting in
  ramadhan month and doing haj)
• Zakat is levied on wealth and on rich people.
  Calculated on business transactions, on
  assets and on revenues.
• Zakat is used to help the needy.
• Zakat is calculated based on current price.
 International/National Body on
       Islamic accounting
• AAOIFI (Accounting Auditing
  Organization for Islamic Financial
  Institution based in Bahrain.
• In 2002, Indonesia has a financial
  accounting standard on Islamic banking
  reporting.
               What next?
• The Islamic accounting which has implicit
  economic, political and religious meaning
  (an integrated world view system, author),
  has the possibility to show the key to a post
  Newtonian Accounting (Western Secular
  based accounting, author)” (Hayashi, 1989)
     Religious (Cultural) based
            Accounting
• Japan that has a strong commitment to its
  traditional culture has a strong ability to
  formulate, to implement, its own accounting
  philosophy and principles difference from
  that of capitalistic society.
• Shinto for example has a potential drive to
  establish a Shinto based Accounting.
           Future
I hope this discussion may help
 us to establish our own system
   comply with our traditional
     culture and believe, not
  interfered by other believes.
Many thanks for your attention

     See you in other occasions

								
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