1. Accounting and Control for Islamic Financial Institutions (FIN 6650) Article Review Prepared for: Dr. Noraini Mohd. Ariffin
By: Afifuddin Baharuddin (G ) Sazali Mohd Morshid (G ) Rina Izzati Raduan (G )

2. WOULD THE OBJECTIVES AND CHARACTERISTICS OF ISLAMIC ACCOUNTING FOR ISLAMIC BUSINESS ORGANIZATIONS MEET THE ISLAMIC SOCIO-ECONOMIC OBJECTIVES?
Jurnal Akuntansi & Auditing Indonesia
(Volume 8, No.2, December 2004 ) By
Rizal Yaya
(Department of Accounting, Muhammadiyah University of Yogyakarta)

3. Coverage OBJECTIVES OF ARTICLE
CHARACTERISTICS OF ISLAMIC BUSINESS ACTIVITIES
INAPPROPRIATENESS OF CONVENTIONAL ACCOUNTING FOR ISLAMIC BUSINESS ORGANIZATIONS
APPROACHES IN DEVELOPING ISLAMIC ACCOUNTING
OBJECTIVES OF ISLAMIC ACCOUNTING
CHARACTERISTICS OF ISLAMIC ACCOUNTING

4. OBJECTIVES OF ARTICLE
Explores the objectives and characteristics of what is perceived as Islamic accounting and try to evaluates its problems in meeting the Islamic socio-economic objectives.
Section one - elaborates on the characteristics of Islamic business activities,
Section two - inappropriateness of conventional accounting for Islamic business organizations.
Section three - approaches to developing Islamic accounting system will be evaluated.
Sections four and five - discuss and evaluate the objectives and characteristics of Islamic accounting respectively.

5. CHARACTERISTICS OF ISLAMIC BUSINESS ACTIVITIES
Promotion of ‘Adala (Justice)
Command from Allah in 6:152 & 5:9
"And come not near to the orphan's property, except to improve it, until he (or she) attains the age of full strength; and give full measure and full weight with justice. We burden not any person, but that which he can bear. And whenever you give your word (i.e. judge between men or give evidence, etc.), say the truth even if a near relative is concerned, and fulfill the Covenant of Allah, This He commands you, that you may remember.” (6:152)
“Allah has promised those who believe (in the Oneness of Allah - Islamic Monotheism) and do deeds of righteousness, that for them there is forgiveness and a great reward (i.e. Paradise).”(5:9)

6. CHARACTERISTICS OF ISLAMIC BUSINESS ACTIVITIES, cont.
Promotion of ‘Adala (Justice), cont…
Prophet (pbuh) has also reemphasized the importance of practicing justice and has sternly warned against tolerance to injustice.
(Group Note: Unfortunately, no Hadith was quoted on this by the writer)
Be just & truthful while bearing witness
Be just & truthful while settling dispute; even among adversary
Not allowed to exploit & be exploitated

7. CHARACTERISTICS OF ISLAMIC BUSINESS ACTIVITIES, cont.
Promotion of ‘Adala (Justice), cont…
Principles to ensure justice in business transactions:
Put contract in writing
Have witness to the contract
Individual responsibility

8. CHARACTERISTICS OF ISLAMIC BUSINESS ACTIVITIES, cont.
Promotion of ‘Adala (Justice), cont…
“O you who believe! When you contract a debt for a fixed period, write it down. Let a scribe write it down in justice between you. Let not the scribe refuse to write as Allah has taught him, so let him write. Let him (the debtor) who incurs the liability dictate, and he must fear Allah, his Lord, and diminish not anything of what he owes. But if the debtor is of poor understanding, or weak, or is unable himself to dictate, then let his guardian dictate in justice. And get two witnesses out of your own men. And if there are not two men (available), then a man and two women, such as you agree for witnesses, so that if one of them (two women) errs, the other can remind her. And the witnesses should not refuse when they are called on (for evidence). You should not become weary to write it (your contract), whether it be small or big, for its fixed term, that is more just with Allah; more solid as evidence, and more convenient to prevent doubts among yourselves, save when it is a present trade which you carry out on the spot among yourselves, then there is no sin on you if you do not write it down. But take witnesses whenever you make a commercial contract. Let neither scribe nor witness suffer any harm, but if you do (such harm), it would be wickedness in you. So be afraid of Allah; and Allah teaches you. And Allah is the All-Knower of each and everything” (2:282).

9. CHARACTERISTICS OF ISLAMIC BUSINESS ACTIVITIES, cont.
Promotion of Ihsan (Benevolence)
Good behavior or an act that benefited others without expecting return
Practices in business that result to Ihsan:
Leniency;
Motives to serve others by considering their needs & interests, helping others, support good cause
Consciousness of Allah & His priorities

10. CHARACTERISTICS OF ISLAMIC BUSINESS ACTIVITIES, cont.
Promotion of Ihsan (Benevolence), cont…
Priorities include:
to prefer the great and everlasting rewards of the Hereafter to the finite benefits of the present world
To prefer that which is morally pure to that which is impure and
to prefer what is lawful to that which is not

11. Contradictions to Islamic Teachings
INAPPROPRIATENESS OF CONVENTIONAL ACCOUNTING FOR ISLAMIC BUSINESS ORGANIZATIONS
Contradictions to Islamic Teachings
Conventional accounting as scorekeeper of performance & does not take into account the harm caused by the business
Caused by decision usefulness objectives
Focus on informational efficiency from shareholders perspective which may not be efficient from others such as employees, government and community
Operates under assumed liberal economic society in which increasing gap between rich & poor is not questioned, no room for environment & ethical values, self-interest
Bias to country that developed the capital market & sometimes does not make any socio or economic sense.

12. INAPPROPRIATENESS OF CONVENTIONAL ACCOUNTING FOR ISLAMIC BUSINESS ORGANIZATIONS, cont...
Contradictions to Islamic Teachings, cont…
Utilized for enrichment of shareholders & creditors at the expense of damaging society & environment
Concept of historical cost & conservatism can be misleading & cannot guarantee justice & honesty with the information that it carries
Conservatism distorted data & non-disclosure of relevant information
Monetary Unit concept unable to serve as just & honest unit of account
money as an inequitable standard of deferred payments
an untrustworthy store of value
encourage some people to be unfair to others

13. Contradictions to Islamic Teachings, cont… Realization Concept
INAPPROPRIATENESS OF CONVENTIONAL ACCOUNTING FOR ISLAMIC BUSINESS ORGANIZATIONS, cont...
Contradictions to Islamic Teachings, cont…
Realization Concept
Earning process for revenues should be known & collectible to a certain degree
Unfair to withdrawing depositors who may lose part of future profit if they withdrew prior to full liquidation of the project
Going concern Concept
There is something else other than Allah that will live continuously.

14. INAPPROPRIATENESS OF CONVENTIONAL ACCOUNTING FOR ISLAMIC BUSINESS ORGANIZATIONS, cont...
Irrelevance of Conventional Accounting to Islamic Accounting Objectives
Matching Concept
Preference to revenue-expense approach rather than asset liability approach
Accountability through zakat only works with asset liability approach
Objectivity Concept
More relevance to secondary objective to facilitate in making economic decision to suit own interest
Not relevant to Zakat accountability

15. INAPPROPRIATENESS OF CONVENTIONAL ACCOUNTING FOR ISLAMIC BUSINESS ORGANIZATIONS, cont...
Insufficiency of Conventional Accounting in Achieving Socio-economic Objectives
Main accounting reports are still important to Islamic accounting but not sufficient
Other type of information needed to reflect accountability to Allah & accountability to Men
Reference to overall objective of Shariah & not user’s rights & needs
Additional disclosure to obtain socio-economic objective:
True figures of Zakat payable
Extend of justice and benevolence
Treatment of employees
Impact on environment
Adherence to Islamic code of ethics

16. APPROACH IN DEVELOPING ISLAMIC ACCOUNTING
Deduction from Islamic Teachings Approach
Establishing objectives based on principles of Islam & its teachings
Match with contemporary accounting thought as long as do not breach Shariah precepts and deemed appropriate to Islamic business organization
Minimize influence of secular accounting theory on the objective to be developed
However, from theory to practice may be difficult in today’s reality

17. APPROACH IN DEVELOPING ISLAMIC ACCOUNTING, cont…
Contemporary Accounting Based Approach
Adopts existing Western objectives that are appropriate to Islamic business
Excludes those violating Shariah
Focuses on moral dimensions currently absent
Deals with actual functioning institutions & is practical
Concept of Ibaha – permissible until explicitly prohibited
Concentrate only on those not currently available e.g. treatment of Musharakah

18. APPROACH IN DEVELOPING ISLAMIC ACCOUNTING, cont…
Contemporary Accounting Based Approach, cont…
Critics:
Not suitable for society that have revealed doctrines that governs all social, economic and politic aspects
Partial approach to Islamization
Deceptive as still maintain un-Islamic assumptions & retain norms & hypotheses of original model albeit modification to accommodate Islamic components

19. APPROACH IN DEVELOPING ISLAMIC ACCOUNTING, cont…
Hybrid Approach
Combination of the first two approaches & addresses the shortcomings
Steps:
Identify ethical & accounting principles of Shariah in relation to business activities and compare with current practice
Identify primary & secondary objectives according to Islamic ethical principles
Considering development of socially related reporting that cannot be ignored by modern accounting
Identify theoretical foundation
Identify user and information that they need

20. OBJECTIVES OF ISLAMIC ACCOUNTING
Decision Usefulness
Information which is useful to users
Current objective may still be compatible but some modification
Examples: AAOIFI SFA No.1 for financial institutions:
Compliance with Shariah requirements
Economic resources & obligations & effect of transactions
Information on determination of Zakat
Estimation of cash flow that can be realized, timing and risk associated with it
Discharge of Fiduciary duty to safeguard fund & investment
Discharge of social responsibility

21. OBJECTIVES OF ISLAMIC ACCOUNTING, cont…
Stewardship
Safeguarding of the assets
Enhancement of managerial and productive capabilities
Compliance to established goals and policies
Focus for external reporting
Discharge of stewardship duty by management to shareholders for the use of company resources
Efficient & profitable use
(remark: no emphasis given on the stewardship to Allah, the ultimate master)

22. OBJECTIVES OF ISLAMIC ACCOUNTING, cont…
Accountability
Duty to provide an account or reckoning of those actions for which one is held responsible
Principal –agent relationship
Two parts:
Responsibility to undertake certain actions
To provide an account of these actions

23. OBJECTIVES OF ISLAMIC ACCOUNTING, cont…
Accountability, cont…
Accountability through Zakat
Ultimate accountability to Allah
Zakat maximization vs. profit maximization
Achieving social welfare
(remark: the writer is not convinced)
Islamic Accountability
Trust given by Allah
Concept of Khalifah (primary)
Secondary accountabilities include:
Duty between manager & institutions
Identify, measure & report socio-economic activities
Shariah compliance & Zakat
Distribution of wealth

24. CHARACTERISTICS OF ISLAMIC ACCOUNTING
Financial Measurement Aspects
Zakat as measurement tools
Zakat is a concept of asset measurement in Islam
Zakat is the pillar of Islam
Development of accounting in early Muslim state is closely related to Zakat
Muslim jurists: zakat based on prevailing price necessitate the application of current costing rather than historical costing
Conservatism principle need to be relooked: move to selection of accounting techniques with most favorable impact on society rather than owner (e.g. better to overestimate Zakat)
Current Value + Historical Cost may also be possible (though the writer is not in favor)

25. CHARACTERISTICS OF ISLAMIC ACCOUNTING, cont…
Disclosure and Presentations Aspects
Fulfillment of duties & obligations in accordance to Shariah
To also disclose prohibited transactions undertaken
Zakat obligation need to pay & paid
Social responsibility: charity, wages to employees & environment protection
Social accountability & full disclosure
Current value balance sheet
Income statement as notes
Incorporation of Value Added Statement (VAS)
Transparency & avoid manipulation

26. WRITER’S CONCLUSION
it would also be appropriate to direct an Islamic accounting system towards the achievement of the Islamic socioeconomic objective of falah. Hence, in designing an Islamic accounting system, its objectives and characteristics should be able to direct the enterprise not only to provide a true picture of the enterprise but also to encourage them to be Ihsan (benevolence) and discourage them from being unjust. Based on the previous discussion, it is shown that some of the proposals for the objective and characteristics of Islamic accounting have doubtful ability to achieve the Islamic socio-economic objectives.

27. GROUP OBSERVATIONS & COMMENTS
Since the title ask the question related to socio-economic objectives, it would be beneficial to the reader if this aspect is firstly defined
The quotes and reference made to other materials formed large portion of this article which limit the view of the writer himself
The group believes that major part of the arguments are referring to goals and objectives of business organization as a whole. Once these are re-aligned to goals and objectives of Shariah, major part of the so called conventional accounting problems can be resolved
The conclusion to this article has not really answered the title of this article