THE NEED FOR ISLAMIC ACCOUNTING STANDARD FOR THE MUSLIM SOCIETY
by Ros Aniza Bt. Mohd. Shariff [View Writer's Profile]
Lecturer
Department of Accounting
Kulliyah of Economics and Management Sciences
International Islamic University Malaysia

Abstract
Accounting is not purely technical activity. It is more than that. The cultural, economic and political features of a society shape it. Accounting in a society exists to reflect the business practice in that society. Thus, accounting and reporting practices in Islamic society is different from the conventional accounting because it must comply with the Islamic law (Shari’ah Islamiah).It is crucial that the Islamic banking system has its own accounting standard, as in the case of the conventional banking system. Despite the internal self-regulations, Islamic banks and other interested parties have recently appreciated the need to externally self-regulate their financial reporting. The objective of Islamic accounting standard is to facilitate comparisons among the Islamic financial institutions and minimize the social and economic costs in making rational decisions. Besides that, it will also regulate the Islamic banks to ensure safe and secure banking system. Furthermore, it will provide competition among the Islamic financial institutions and lead to the growth of the Islamic banking system.

Introduction

Accounting is often described as the “language of business”; a means of communicating financial information. It is presented to be a way of interpreting, measuring, and describing the financial outcomes of economic activities. It is not a purely technical activity¹. Hence, the cultural, economic and political features of the society in which decisions are made shape it. Furthermore, accounting in a society exists to reflect the business practices of that society; it has a little use otherwise. It is reasonable to suggest that each culture should develop its own accounting system for the accomplishment of its own needs². Thus, it follows that accounting and reporting practices of firms in Islamic societies are likely to reflect the Islamic business contracts and business practices.

Islam and Accounting

Islam does not recognize the separation between spiritual and temporal affairs³. Commerce is seen as a matter of morality and is subject to the precepts of the Shari’ah Islami’ah. The Shari’ah forms the basic ground rules with which Islamic banks must comply in all their financial transactions. For example, Islamic banks cannot enter into financial transactions that would result in the payment or receipt of riba (usury) as this is strictly prohibited by the Shari’ah law. The prohibition of riba is likely to lead firms to implement accounting and reporting practices that are in consonance with the Shari’ah Islami’ah principles and discard the ones that are not.

In the Qur’an, the word “hisab” or “account” is repeated more than eighty times in different verses. “Account” is the root of “accounting”, which in Arabic is called “Al-Muhasabah”(accounting). “Account” in its generic sense refers to one’s obligation to “account” to Allah on all matters pertaining to human endeavor for which every Muslim is accountable. Every Muslim has an “account” with Allah, in which is recorded all good and all bad deeds, an account which will continue until death, for Allah shows all people their account on their judgment day as mentioned in the Qur’an; (4:62), (45:11), and (43:72). The basic similarity between account in Islam and accounting lies in the responsibility of every Muslim to do his or her duties as described in the Qur’an.⁴

The need for an Islamic Accounting standard.

In recent years, there has been an emphasis in the accounting world on developing international accounting standards in response to the increasing globalization of markets and economies. It is argued that the international standards will increase comparability and understandability of financial statements, and improve the credibility of financial reporting. However, the domain of international standard setting is dominated by Anglo-American accounting thought. Thus, it may not be compatible with Islamic purposes, as Islamic economics is based on completely different considerations from those of Western countries.⁵