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The Differences of Conventional and Islamic Accounting. Prof. Sofyan S. Harahap Trisakti University, Indonesia. Corporation and Society.

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the differences of conventional and islamic accounting

The Differences of Conventional and Islamic Accounting

Prof. Sofyan S. Harahap

Trisakti University, Indonesia

corporation and society
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
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
IslamUnity of God and Power is hold by God

There is a judgment day in which mankind pay responsibility during his/her life before the God

There is hell and heaven fulfilled by mankind

Social justice

OccidentPower hold by mankind (ratio)

No judgment day, world is the end of life. No judgment day.

No heaven and no hell

Individual welfare

Occident Vs Islam
the future of conventional accounting
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
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
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
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
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
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
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
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
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
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
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:

Based upon modern commercial law-permissive rather than ethical

Limited disclosure (provision of information subject to public interest)

Personal accountability (focus on individuals who control resources)

Islamic Accounting:

Based upon ethical law originating in the Qur’an (Islamic law, As-Sunnah)

Full disclosure (to satisfy any reasonable demand for information in accordance with the Shari’a)

Public accountability (focus on the community who participate in exploiting resources)

Conventional Vs Islamic Accounting
slide18
Conventional Acc.

Economic rationalism

 Secular

 Individualistic

Profit maximization

Survival of fittest

Process

Absolute ownership

(Ec. rationalism: the desire to stand apart from others, to compete, to manipulate and to amass surplus”)

Islamic Acct.

Unity of God

Religious

Communal

Reasonable profit

Equity

Environment

Relative ownership

Conventional vs Islamic Accounting:(Boudyn and Willet, Islamic Corporate Reports, Abacus, Vol. 36, No.1, 2000).
toshikazu hayashi on islamic accounting imes working paper series no 18
Islamic Accounting

Society – oriented

 Focus on society aspect

Basically Al Qur’an & As Sunnah (Shariah)

Religious (must responsibility to God at the Judgment Day)

Conventional Accounting

Individuality – oriented

 Focus on individuality aspect without consider any social aspects

 Accounting Law and Ethics

 Secular

Toshikazu Hayashi, “On Islamic Accounting, IMES Working Paper Series No.18.
hayashi continued
Islamic Accounting

No differentiation between Normative and Descriptive Accounting (They always going simultaneously)

 In operational, they do everything in boundaries of Islam (Shariah)

Measure as saleable value

Market (selling) price rather than historical cost

Conventional Accounting

The normative accounting always influencing descriptive accounting or individuality interest

In operational, they permit everything to reach the highest profit

Measure as highest possible profit

Historical Cost

Hayashi (Continued)
haniffa and hudaib 2001
[Entity]Separation between business and owners

[going concern] Business continues forever

[Accounting period] Periodical measurement of performance

[unit of measure] Monetary Value

[Full disclosure principle] Decision making process

[objectivity] Reliability of measurement

[Materiality] Relative importance of information for decision making

[Consistency] Consistency based on GAAP

[Conservatism] Use least favorable impact on owners

Firm doses not have separate financial obligation (I.e profit sharing scheme)

Depend on contractual agreement between party

One lunar year for zakat calculation

Quantity based and monetary based (zakat calculation)

Importance for fulfillment of duties and obligation to God, society and individual.

Clear conscience with God in fulfilling all duties.

Consistence to shariah rules

Most favorable to society (justice)

Haniffa and Hudaib (2001)
problems of rationalism
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
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
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 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
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
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
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

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

Many thanks for your attention

See you in other occasions

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