M PRA

Munich Personal RePEc Archive

Specific features of Islamic accounting

and cultural paradigm
Stefana Maria Dima (Cristea) and Delia David and Luminita
Paiusan
16. June 2010

Online at http://mpra.ub.uni-muenchen.de/27174/
MPRA Paper No. 27174, posted 4. December 2010 01:22 UTC

SPECIFIC FEATURES OF ISLAMIC ACCOUNTING

AND CULTURAL PARADIGM
tefana DIMA (CRISTEA), PhD Lecturer
Vasile Goldi Western University of Arad
Faculty of Economic Sciences
Address: 15, Mihai Eminescu St., Arad, Romania
Tel: +40 257 213066
Email address: [email protected]

DELIA DAVID, PhD Lecturer

Vasile Goldi Western University of Arad
Faculty of Economic Sciences
Address: 15, Mihai Eminescu St., Arad, Romania
Tel: +40 257 213066
Email address: [email protected]

LUMINIA PIUAN, Lecturer, PhD Student

Vasile Goldi Western University of Arad
Faculty of Economic Sciences
Address: 15, Mihai Eminescu St., Arad, Romania
Tel: +40 257 213066
Email address: [email protected]

ABSTRACT
The objective of this paper is to provide a synopsis of Islamic accounting characteristics as
well as to identify some of the determinants which led to its specificities. It explores several
aspects related to the Islamic accounting principles and its institutional framework. The
cultural paradigm is viewed as a differentiating key factor in the elaboration and
implementation of the accounting standards in the Islamic Word. Based on Hofstede
approach, the elements of this paradigm are linked to the relative preference for IFRS
adoption of different Islamic countries. From the proposed analysis, it emerges the image of
Islamic Accountings complex nature, which may be seen as a distinct alternative to the
principles and views promoted by IFRS.

KEY WORDS
Islam, accounting, IFRS, culture, banking, AAOIFI

INTRODUCTION
When embarking into a study on the topic of Islamic accounting, a researcher should
always keep in mind the permanent need to maintain professional integrity mainly as

he/she encounters controversial aspects. However, various times the objectivity of the
foreign researcher independent of internal influences represents a competitive
advantage. Thus, such a project stimulates professional curiosity, which will
consequently lead to more in-depth studies on the topic. In this paper our research is
based on a qualitative approach. The research objectives include: firstly, providing a
synopsis of Islamic accounting characteristics; secondly, identifying some of the
determinants which led to Islamic accounting specificities, including its institutional
framework; thirdly, testing our research hypothesis which is linked to the fact that the
cultural paradigm is viewed as a differentiating key factor in the elaboration and
implementation of the accounting standards in the Islamic Word; fourthly, based on
Hofstede approach, linking the elements of this paradigm to the relative preference
for IFRS adoption of different Islamic countries and, for this purpose, several
empirical cases being taken into account. Still, the research limits are significant and
go beyond the accessibility to primary bibliographical sources or linguistic and
cultural barriers. In this particular case, the effort is worth while mainly because of
our interest in the cultural and religious background of the accounting regulations and
the consequent attitude towards the use of the International Financial Reporting
Standards (IFRS) issued as a result of the convergence between IASB and US FASB.
Over the past 25 years, a complex network of interlinked economic, social and
political changes has considerably contributed to the wealth held by Muslims and to
their need to make the most of this wealth according to the principles of Islam.
Nowadays, the Muslim population represents 25% of Worlds population with more
than 1.82 billion in the year 20091, being widely spread all around the globe but
mainly concentrated in the Middle East, South East Asia, Africa and Central Asia.
With a banking sector becoming one of the fastest growing financial sectors globally
(Rad, 2006), Islamic Accounting and Finance become more and more difficult to
ignore by the Western business environment. Thus, Islamic accounting and auditing
standards have been developed in order to standardize the most suitable methods for
the operations of the respective financial institutions.
There can be different meanings of Islamic accounting. Firstly, it can be understood in
a religious sense when the accounting rules are influenced by the religious dogma.
Secondly, the label Islamic accounting can be applied to those countries where Islam
had been the dominant religion at a certain moment in time. Given this last remark,
we must mention that the influence of this religion on the national accounting rules
may differ considerably from one country to another.
For a long time the historical evidence on Islamic accounting available in English,
was thin and mainly based on few secondary sources. Only recently, the modern
technologies and communication tools permitted the exploration of primary records.
Initially, the international accounting classifications did not mention much the Islamic
countries, showing little interest in comparing these countries among them or with
other jurisdictions in the world. Mueller (1968) in his second classification argues that
different business environments need different accounting systems and the closest he
gets to Islamic countries is the reference to one group represented the developing
nations of the Near and Far East which might need standardized accounting systems.
This idea has repeatedly been presented by the modern literature as Islam is seen
different from Occident, so it must have its own accounting system (see in Gambling
and Karim, 1986). Nair and Franks (1980:429) classification using clustering

includes, for example, Pakistan in the British Commonwealth model; whereas

Doupnik and Salter (1993), in testing Nobes classification (1983), suggest a general
model about the causes of accounting differences, posing 10 variables, and including
in the study a group of Arab countries.
However, the development of Islamic financial institutions was the one that
contributed significantly to the emergence of a modern literature on Islamic
accounting. To this has added also the development of well-funded universities in
Muslim countries such as the International Islamic University of Malaysia (IIUM),
where a significant group of accounting scholars with a vast interest in the progress of
the Islamic accounting literature in the recent years. Moreover, the contributions of
the Muslim and non-Muslim scholars operating within Western universities have
become considerable - since in the last decades, in a quest for better fulfilling the
needs of investors, no matter their state of origin or religion, the Great Britain and
United States became operating centers for Islamic financial organizations and
research institutions, without denying the role of Malaysia and Indonesia in promoting
Islamic finance globally (Wardi, 2005).
In general, contemporary Islamic finance, banking and accounting have been
described as an interesting alternative to conventional or capitalist accounting;
while international organizations and Western governments support the contemporary
Islamic banking sector. Essentially, the growing body of literature related to Islamic
accounting focuses on:
a) The history of accounting developments in Muslim countries since the early days
of the Islam (Hamid et al., 1995; Zaid, 2000a, 2000b, 2001; Solas and Otar, 1994;
Farag, 2009). For instance, Zaid (2001: 216) addresses the topic of the doubleentry system, and underlines the possibility that Muslim traders developed it and
lent it to their Italian counterparts. Farag (2009) presents a historical review of
the evolution of accounting and accounting profession in Egypt since the ancient
Egyptian civilization to the modern accounting practices. Egyptian accounting
practice is divided into three stages: record keeping (18831939); financial
reporting under changing economic regimes (19391975); and the move to adopt
international accounting standards in an attempt to liberalize and integrate the
Egyptian economy into the global economy (19752008).
b) The basic understanding of Islamic accounting principles, its objectives and
compliance with Islamic law. Abdel-Majid (1981), the first major paper in an
English-language journal, discusses the Islamic Shariah system, presents a range
of Shariah - compliant banking transactions, and asserts that there is a need for
specific accounting treatments for these transactions. Overall, there is a sense that
Islamic accounting needs to be different from Western accounting. Khan (1994)
also argues that the information needs of an Islamic society are quite different
from those of a capitalist society, by providing a framework for Islamic
accounting based on the proprietary theory.
c) The differences between Islamic and conventional accounting (Baydoun and
Willett, 2000; Haniffa and Hudaib, 2001; Kuran, 2004; Vinnicombe and Park,
2007). For instance, Vinnicombe and Park (2007) provide a comparison of
AAOIFIs FAS (Financial Accounting Standard) no.11 vis--vis IAS 37 and 39
reveals some substantive differences.

d) Specific issues in Islamic Accounting standards and practices (Mirza and

Baydoun, 1999; Baydoun and Willett, 2000; Sulaiman, 2000; Dar and Presley,
2000).
e) Trends in Islamic accounting research (Mirza and Baydoun, 1999; Kuran, 2004;
Kamla et al., 2006; Kamla, 2009). For instance, Kamla (2009) finds indications
that Islamic accounting research is diverting from its primarily proclaimed social
and moral roles. The article provides a critique of the limited scope of Islamic
banking and accounting practices and research. It pinpoints the obsession with
technical and instrumental matters related to the interest ban and zakah
calculations.

1. THE KEY GUIDING PRINCIPLES TO ISLAM AND THE APPROACH

TOWARDS ACCOUNTING
Islam literally means peace, obedience to Allah in this world and hereafter. Shariah
is the comprehensive body of Islamic laws, mainly concentrated in: al-Quran, Sunnah
(the acts and sayings of the Prophet Muhammad, as transmitted through traditions
known as Hadith); and two complementary sources Ijtihad/ijma: shuratic and
consensus process. These rules represent guidelines provided to all aspects of daily
life of mankind including business, management and finance. Thus, Islam implies a
series of principles that can basically be resumed as:

Unity of God (tawheed) which implies a comprehensive worldview; an integration

between world and Islamic principles (truth, justice, fair, goodwill, honesty,
benevolence, accountability before God); the unity and equality of all Gods
creations in the worship of God and their equality as partners in terms of respect
and appreciation towards the existence of all and the interconnectedness between
all (Kampla et al., 2006).

Trusteeship implies that people are given a special role in relation to the
environment. The human being is appointed a trustee (steward) or Khalifah
(Lewis, 2001:110) that will not abuse people for personal interests but will
maintain the balance, spreading justice, truth and virtue.

Community principles. According Al-Gazzali an eminent Muslim philosopher of

the XIth century (quoted in numerous authors including Ibrahim, 2000:62), the
purpose of Shariah is to promote the welfare of the people, which lies in
safeguarding their faith, their life, their intellect, their prosperity and their wealth.
In economic terms, these principles have to do with social responsibility and
public accountability ensuring the community with the fact that the entity is
continuously operating within the socioeconomic boundaries of the Islamic
Shariah.

The importance of knowledge (ilm), especially self-knowledge is connection to

the notion of developing a sustainable community, by promoting developments of
the intellect, wisdom and knowledge (Tinker, 2004).

The holistic approach to life has to do with the wider environment, Islam being
concerned to protect the environment and maintain the balance between the
material and spiritual needs of all human beings. This principle has the most
evident association to sustainable development, emphasizing the negativity of
waste, obsessive extravagance (israf), excessive consumerism and conspicuous
consumption (Kampla et al., 2006:254). The holistic approach to life has a
significant influence on economics (Chapra, 1992) and so the Islamic economic

systems should be viewed from such a perspective (Gambling and Karim, 1991:
32). This approach has to do with perception of social justice as according to
Quran wealth should not be concentrated in the hands of a few individuals. This
leads to the notion of the fair distribution of wealth through zakah/ zakat. This is
one of the Five Pillars of Islam, is the giving of a small percentage of one's
possessions to charity. The Muslims have the duty to collect zakat and to fairly
distribute it.
1.1. Application of the Islamic principles to accounting
Regarding the application of the Islamic principles to accounting, there is a general
and old belief that, according to Quran, Allah rules over business and accounting.
Islamic accounting is seen as 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 this diverse
domain (Hayashi, 1989). It is supposed to provide full disclosure and social
accountability in order to satisfy any reasonable informational demand in accordance
with Shariah (Lewis, 2001).
In early Islam, the accountant (Muhtasib) was appointed to ensure justice in society
by means of the transactions on the market and traders behavior matching the Shariah
stipulations (Gambling and Karim, 1991); this remaining the model for modern
Islamic accountant whose prime obligation is to the community (umma).
One of the early institutions to regulate the market and prevent fraud was al-Hisba
established in 7th and 8th centuries for the promotion of good and the prevention of
evil (Gambling and Karim, 1991:50). Among the unlawful (haram) business
practices in Islam, there is riba (interest on credit), manipulation, fraud, speculative
transactions, gambling, uncertainty/risks, free market interference. In fact, the two
issues that influence profoundly the development of Islamic accounting are riba and
zakat (for a detailed analysis see Sulaiman, 2003, Iqbal, 2002). The influence of riba
on Islamic accounting lies in the equity structure of an entity and its influence on this
entitys disclosure practices. On the other hand, zakat influences the measurement
(valuation) methods.
In respect to the parallel between conventional and Islamic accounting, many authors
attempted such comparison in general or for specific standards (see for instance
Baydoun and Willett, 2000; Haniffa and Hudaib, 2001). According to them, the main
differences between conventional and Islamic accounting have to do with the
following:
a) General economic aspects such as:
Secular versus religious;
Economic rationalism versus Unity of God;
Individualism versus collectivism;
Profit maximization motive versus reasonable profit;
Absolute versus relative ownership.
b) Specific accounting issues like:
Conservatism: apply prudent valuation methods and avoid using the most
favorable impact on owners versus most favorable to community;
On going concern: business goes forever versus based on contractual
agreement between parties;

 Measuring unit: monetary value versus quantity and monetary based

(according to zakat calculation);

Consistency based on the standards/regulations used by the entity versus

consistency with Islamic law;

Materiality: decision making usefulness versus fulfilling all duties before

Allah;
Users of financial information: identifying economic events and transactions

versus identifying socio-economic and religious events and transactions.

In addition, some (Razik, 2009) consider that Islamic accounting and IFRS differ in
five issues that are related to leases, restricted contracts, and specialty investment
account (where the investors bear part of the business risk), related party transactions;
whereas others (Baydoun and Willett, 2000) analyze the contents of Islamic corporate
reports suggesting that a current value added statement should also be part of Islamic
corporate reports in order to provide greater awareness of the social impact of
companys activities. Sulaiman (2000) supports the use of both current value balance
sheets and value added statements as part of Islamic business enterprises corporate
reports.
1.2. Islamic banking sector
Islamic banking has become in the last two decades, mainly after the oil price rises of
the early 1970s, a successful global phenomenon, existing in majority and nonmajority Muslim countries. It was often argued that its expansion was due to the
endorsement from the oil-rich Gulf States (Henry and Wilson, 2005).
The reality is that there are, in our time, around 300 Islamic financial institutions
globally, with assets of about $200 - $300 billion, a Dow Jones Islamic Market Index
created in 1999 and another index - Dow Jones Citigroup Sukuk (Islamic Bond) Index
in Kuala Lumpur - created in 2003 (Pollard and Samers, 2007). To this situation also
contributed the so called Islamic windows, which represent separate divisions of the
multinational banks devoted to marketing Shariah - compliant financial products.
This became a trend which spread rapidly into countries where large Islamic
communities lived, such as the United Kingdom. Conventional banks such as HSBC
and Lloyds offered Islamic banking products and a series of financial institutions
followed: the Islamic Bank of Britain (created in 2004), Amana Mutual Funds Trust,
American Finance House, Manzail and so on. Apart from operating in the Western
world, many banks began operating in Islamic countries such as Citibank which was
the first Western bank to open an Islamic subsidiary in Bahrain (in 1996). Other
British, American, French and Swiss banks such as American Express, UBS and
Banque Nationale de Paris started providing Islamic products through their Western
branches or through Islamic subsidiaries in Pakistan, Bahrain and other Islamic
countries (Iqbal, 1997; Pollard and Samers, 2007).
The institution that formally regulates the Islamic banking sector is The Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI)2 - a
standard setting body based in Bahrain. AAOIFIs fields of interest include
accounting, auditing, governance, ethics and Shari'ah standards for Islamic financial
institutions and industry. AAOIFI was established in accordance with the Agreement
of Association which was signed by Islamic financial institutions on February, 26,
1990 in Algiers. Then, it was registered on 27 March, 1991 in the State of Bahrain.

AAOIFI is supported by institutional members (200 members from 45 countries, so

far) including central banks, Islamic financial institutions, and other participants from
the international Islamic banking and finance industry, worldwide. Despite that the
AAOIFI standards are not mandatory; it has been successful in promoting its
standards to Islamic countries (Kingdom of Bahrain, Dubai International Financial
Centre, Jordan, Lebanon, Qatar, Sudan and Syria). Moreover, the relevant authorities
in Australia, Indonesia, Malaysia, Pakistan, Saudi Arabia, and South Africa have
issued guidelines that are based on AAOIFIs standards and pronouncements. So far
AAOIFI issued 26 accounting standards, 5 auditing standards, 2 ethics standards, 7
governance standards, 35 Shariah standards (for a list of these please check Appendix
1).
The declared objectives of AAOIFI are:
1. to develop accounting and auditing thoughts relevant to Islamic financial
institutions;
2. 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;
3. to prepare, promulgate and interpret accounting and auditing standards for Islamic
financial institutions; and
4. to review and amend accounting and auditing standards for Islamic financial
institutions.
AAOIFI carries out these objectives in accordance with the precepts of Islamic
Shariah. This activity is intended both to enhance the confidence of financial
statements users in the information disclosed by these institutions, and to encourage
these users to invest or deposit their funds in Islamic financial institutions and to use
their services. In addition, AAOIFI assist financial institutions in developing new
products (Lewis, 2001).
In spite of the AAOIFIs claims that it has issued Shariah - compliant standards, there
are researchers who believe that these standards have been built significantly on
Western standards and the objectives of the AAOIFIs standards resemblance a lot to
any other standards issued by international or local accounting bodies in the capital
market (Maurer, 2002). Some researchers (El-Gamal, 2006) even think that by
standardizing the Islamic accounting, AAOIFI has helped legitimize these standards
as Islamic and reduced suspicion by Muslims as to their Islamic nature, permitting
Islamic institutions to avoid costumer comparisons between Islamic products and
conventional ones or raising questions on the methodology used.
Theoretically, the existence of Islamic windows implies that Islamic banks
differentiate their activities and products from conventional ones in that they should
share profit and loss with their depositors (Dar and Presley, 2000). Consequently,
Profit Loss Sharing (PLS) is one of the basic concepts of Islamic finance representing
contractual arrangement between two or more transacting parties, which allows them
to pool their resources to invest in a project to share in profit and loss (Dar and
Presley, 2000:4). Almost in all theoretical models of Islamic banking, PLS is based on
one of two major modes of financing (Mudaraba and Musharaka) or on both.
However, the research reveals that practice of Islamic banking rarely uses these
models. Even specialized Islamic firms, like Mudaraba Companies (MCos) in
Pakistan, supposed to function purely on a PLS basis, have a negligible proportion of

their funds invested on a Mudaraba3 or Musharaka4 basis. The authors specify that
nearly all Islamic banks, investment companies, and investment funds offer trade and
project finance on mark-up, commissioned manufacturing, or on leasing bases. The
problem is that these interest-bearing products are marketed and passed as Islamic by
Shariah Supervisory Boards5 with the support of AAOIFIs standards (Kuran, 2004;
El-Gamal, 2006). El-Gamal (2006) argues that in practice the Islamic banking tend to
end up replicating conventional products such as Sukuk or Islamic bonds that are
merely similar to embedded financial instruments. Some authors believe that the
community principles are rarely taken into account in Islamic banks decision making
process (Kuran, 2004). Others even reach the conclusion that according to the
concepts of Murabaha, Musharka and Mudaraba much of the conventional Western
finance wisdom is incompatible with Islamic traditions (Hamid et al., 1993:146).

2. CULTURE DETERMINANT OF ISLAMIC ECONOMIC BEHAVIOR

The issues presented in the previous paragraphs raise the question: Does religion
influence accounting? For instance, Hofstede (1991) defines culture as the collective
programming of the mind which distinguishes the members of one group or category
of people from another. Like him, we emphasize that culture is, at least partially,
learned, and not only inherited. Also, culture represents all those social, political and
other factors which influence individuals behavior (Hamid, et. al, 1993). Thus,
religion is a more complex factor with the potential to transcend national boundaries,
while often has less than universal acceptance within national boundaries (Hamid et
al., 1993:132). In addition it is argued that that Islam has the potential to influence the
structure, basic principles and accounting mechanisms in the Islamic World. The
effect of religion on cultural values, which affects financial reporting practices, is
discussed in Baydoun and Willett (1997). For example, they suggest that committed
Muslims could use accounting to provide an opportunity to show compliance with
religious requirements; thus, current cost accounting would better meet their needs
than historical cost accounting.
Thus, our research hypothesis can be drawn like:
H: There are some particularities of the Islamic accounting which are among
others generated by the characteristics of the specific Islamic cultural paradigm.
2.1. Hofstede and the key cultural dimensions
Considered to be the father of the cultural dimensions modeling, Hofstede (2001:1)
specified that culture manifests itself not only in values, but in more superficial
ways: in symbols, heroes, and rituals. Beginning from such a premise, Hofstede
created a model in which cultural differences and their consequences on national,
regional and international level can be described. Based on an attitude survey of a
multinational entitys employees (IBM) in 66 countries during the 1970s, Hofstede
developed country-based indices corresponding initially to four dimensions of
national culture for each and every country surveyed, later on adding a further
dimension (Hofstede and Bond, 1988) which all were meant to reflect Eastern and
Western values alike.
These key dimensions may be described as follows:

Power Distance Index (PDI) - represents the extent to which the less powerful
members of a society accept that power is unequally distributed;

Individualism (IDV) - describes individualistic societies as communities

where there are few ties beyond those of the nuclear family, while the opposite
societies - collectivism - are characterized by stronger cohesive in-group ties;

Masculinity (MAS) - opposes masculine societies and feminine societies.

In the first case, men are confident, tough, and more concerned with material
and professional success, while women are modest and more concerned in the
quality of life, by being. In the other case, both men and women are equally
concerned with quality of life;

Uncertainty Avoidance Index (UAI) deals with a society's tolerance for

uncertainty and ambiguity; it ultimately refers to man's search for Truth. It
indicates to what extent a culture programs its members to feel either
uncomfortable or comfortable in unstructured situations.

Long-Term Orientation (LTO) - represents the extent to which people favor a

pragmatic vision over a short-term thinking. It can be said to deal with Virtue
regardless of Truth. In order to design this dimension Hofstede undertook a
Chinese Value Survey.
In spite of the long time success of the model and of the numerous business-related
and psychological research studies either based on or validating it (Hoppe, 1990;
Sondergaard, 1994; Barkema and Vermeulen, 1997, Ding et al., 2004), this cultural
dimensions model has been constantly challenged respectively criticized by several
researchers (Bond, 1988; Smith et al., 1996 respectively by Gernon and Wallace,
1995; Baskerville, 2003).

2.2. Hofstedes cultural dimensions applied to a sample of Islamic majority

countries
The Hofstede analysis for the Arab World presented on his website6 reveals that
Muslim faith plays a significant role in peoples lives. The sample used includes:
Egypt, Iraq, Kuwait, Lebanon, Libya, Saudi Arabia and the United Arab Emirates.
The predominant religion for these countries is Islam, the practice of the Muslim faith.
The interpretation of the cultural dimensions on the sample countries refer to:
a) Large Power Distance (80) and Uncertainty Avoidance (68) are predominant
characteristics for the countries in this region. These societies are more likely to
follow a caste system that does not allow significant upward mobility of its
citizens. They are also highly rule-oriented with laws, rules and regulations in
order to reduce the amount of uncertainty, while inequalities of power and wealth
have been allowed to grow within the society. The combination of these two
dimensions creates a situation where leaders have virtually ultimate power and
authority, and the rules, laws and regulations developed by those in power
reinforce their own leadership and control. It is not unusual for new leadership to
arise from armed insurrection the ultimate power, rather than from diplomatic or
democratic change.

The high Power Distance Index is indicative of a high level of inequality of

power and wealth within the society. These populations have an expectation
and acceptance that leaders will separate themselves from the group and this
condition is not necessarily subverted upon the population, but rather accepted
by the society as their cultural heritage.

The high Uncertainty Avoidance Index indicates the societys low level of
tolerance for uncertainty. In an effort to minimize or reduce this level of
uncertainty, strict rules, laws and regulations are adopted and implemented.
The ultimate goal of these populations is to control everything in order to
eliminate or avoid the unexpected. As a consequence, the society does not
willingly accept change and is very risk adverse.
b) The Masculinity Index (52), only slightly higher than the 50.2 average for all the
countries included in the Hofstede MAS Dimension.
c) The lowest Hofstede dimension for the Arab World is the Individualism (38),
compared to a world average ranking of 64. This translates into a Collectivist
society as compared to Individualist culture and is manifested in a close long-term
commitment to the member group, that being a family, extended family, or
extended relationships. Loyalty in a collectivist culture is paramount, and overrides most other societal rules.

In comparison to the countries that influenced the most the International Financial
Standards, represented by the United Kingdom and United States of America, the data
provided by Hofstedes cultural dimensions show (see Figure 1) that there are
significant differences in Power Distance Index (ranking of the Arab World being
double than that of UK and USA which are similar) and Individualism (ranking of the
Arab World being half of that of UK and USA which are similar).
Figure 1. Comparison of the cultural dimensions for Arab World, UK and USA
100
90
80
70
60
50
40
30
20
10
0

PDI

IDV

MAS

UAI

Arab world

80

38

52

68

United Kingdom

35

89

66

35

United States

40

91

62

46

(Source: Based on the data provided by http://www.geerthofstede.com/hofstede_dimensions.php accessed on April, 14, 2010)

Therefore, we can conclude that Arab countries taken into consideration by the
Hofstedes study show a lower tolerance to uncertainty and risks, higher commitment
to community both observations being in accordance with the key findings on
Islamic principles. The other significant issue is represented by the higher level of
inequality of power and wealth within the Arab societies in the survey, which may be
explained by the principle of trusteeship, the leaders being seen as endowed with a
special divine role and separated from the group.

3. STATE, RELIGION AND THE PREFERENCE FOR IFRS

In order to test the interlinkage that may exist between the interference of religion in
the matters of state based on constitution and the use of International Financial
Reporting Standards, we have selected the countries in which Islam is the religion of
the majority of the people (over 50%). The respective percentage shows the
proportional amount of Muslims out of the total population of each country. In total,
there are currently 48 Muslim majority countries, however considering the
information available on the use of IFRS (http://www.iasplus.com/
country/useias.htm) our sample consists in 38 countries. Within the sample, 4 groups
can be identified.
Table 1.The groups identified in the analysis
Group
codification:
NN

SS

Significance:

Countries included:

There is no indication of a state

religion, Islamic or secular
state
There is a clear indication of
the fact that government is
officially separated from
religion
(a secular state)

Syria, Albania, Nigeria,

Indonesia, Lebanon, Sierra
Leone
Niger, Bangladesh,
Uzbekistan, Senegal, Mali,
Burkina Faso, Turkey,
Azerbaijan, Kazakhstan,
Gambia, Kyrgyzstan,
Tajikistan
Libya, Tunisia, Malaysia,
Algeria, Morocco, United
Arab Emirates, Egypt, Qatar,
Jordan, Iraq, Maldives,
Brunei, Bahrain, Oman,
Kuwait
Pakistan, Saudi Arabia, Iran,
Mauritania, Yemen

SR

There is a clear indication of

the fact that Islam is the official
state religion

IS

There is the case of the Islamic

states where Shariah law or
the Quran are used as
legislation

(Source: Based on several resources7)

In assessing the preference for IFRS, some remarks must be made:

sometimes, the jurisdiction's local GAAP is not in English;

often, even if many jurisdictions that maintain their own local GAAP claim that
these is based on or similar to or converged with IFRS, not all IFRS have
been adopted;

often, there is a time lag in adopting an IFRS as local GAAP;

the following observations are based on the direct use of IFRS as reported in the
basis of preparation note and the auditor's report;

the syntax all companies refers to all listed and not listed companies.
In our sample, 55% of the countries have officially embraced, in a form or another,
the principles promoted by IFRS, showing a preference for this set of standards.

Table2. The preference for IFRS

Group
codification:
NN
SS
SR

IS

Use of IFRS
67% IFRS are not permitted to all companies
50% IFRS are not permitted to all companies;
17% IFRS are required to all companies.
33% IFRS are required all listed companies;
27% IFRS are not permitted to all companies;
20% IFRS are required to all companies;
13% IFRS are permitted to all companies.
60% IFRS are not permitted to all companies.

(Source: Based on information available on http://www.iasplus.com/ country/useias.htm

accessed on April, 12, 2010)

In the group NN we remark the particular cases of Lebanon where IFRS are required
to all listed companies and Sierra Leone where IFRS are required to all companies.
However, even among the 67% of cases in which IFRS are not formally permitted to
all companies, there may be plans to converge with IFRS. For instance, on 23
December 2008, the Indonesian Institute of Accountants (Ikatan Akuntan Indonesia IAI) issued a formal statement announcing its plan to have Indonesian GAAP fully
converged with the IFRSs by 1 January 2012. Indonesia is the largest Muslim
majority country in the world, and its standard-setting body is the Financial
Accounting Standards Board (Dewan Standar Akuntansi Keuangan - DSAK) under
the IAI. According to Indonesian law, both public and private companies must
comply with accounting standards issued by the DSAK-IAI. So far, there are 62
Statements of Financial Accounting Standards (Pernyataan Standar Akuntansi
Keuangan - PSAKs), which consist of 55 PSAKs for conventional transactions and 7
PSAKs for Syari'ah banking transactions, 8 Interpretations of Financial Accounting
Standards and 3 Technical Bulletins.
In the second group SS, we remark the extremes represented by 50% of countries
where IFRS are not permitted to all companies and 17% where IFRS are required to
all companies. In between, each of the 4 countries left experiences a different
situation: Gambia IFRS permitted to all companies; Kazakhstan - IFRS required to
all listed companies; Azerbaijan - IFRS required for some listed companies; and
Turkey IFRS permitted listed companies. In the case of Turkey, there is a general
opinion that it had adopted deliberately secular policies and looked to the West for its
accounting practices (Orten, 2006). In addition, Communique Serial: XI No: 25 settles
the delays in translating IFRS into Turkish by allowing one of the options:
a listed company can follow the official English version of IFRS as published by
the IASB, so the audit report and basis of presentation shall include an explicit
statement of compliance with IFRS;
a listed company can follow the Turkish translation of IFRS. Thus, the audit report
and basis of presentation state that financial statements comply with IFRS as
adopted for use in Turkey.
In the group SR we notice a diversity of situations.
For instance, in Jordan, full IFRS are required for all listed companies by Jordanian
Securities Commission. In addition, the Companies Law requires all public

shareholding companies, general partnerships, limited partnerships, limited liability

companies, private shareholding companies, and foreign companies operating in
Jordan to prepare annual audited financial statements in accordance with
internationally recognized accounting and auditing principles - that can be
understood as IFRS. In addressing these circumstances, http://www.iasplus.com
/index.htm informs on April, 13, 2010 that as the IFRS for SMEs is an IFRS, the IFRS
for SMEs may be used by all companies other than those regulated by the JSC and
that no special adoption of the IFRS for SMEs is needed yet in Jordan.
As an exception, Morocco requires IFRS for some listed entities. The Central Bank of
Morocco (Bank Al Maghrib) requires that all banks and similar financial institutions
use IFRS since 1 January 2008. The Moroccan Stock Exchange Law requires all
companies listed on the Casablanca Stock Exchange other than banks and similar
financial institutions to choose between IFRSs and Moroccan GAAP.
Interesting enough, Bahrain which is the nerve centre of financial institutions
Shariah regulation IFRSs required for all companies listed and not listed. At the
extreme, even if IFRS not permitted for all entities, Malaysia has announced a plan to
fully converge Malaysian GAAP with IFRS effective 1 January 2012. From January
2011, Malaysian companies are expected to prepare their first set IFRS-based
comparative financial statements, while March 2010 is the target date for first interim
financial statements. Despite the relatively long lead-time provided to companies by
the Malaysian accounting standard setting body, there seems to be little appreciation
of the complexity of work required to implement properly IFRS (Zain, 2009). Many
companies could have sensed the urgency of the mandatory implementation and
reporting requirements by the Securities Commission and Bank Negara, but may be
struggling to find a reference point to start from; while the conversion costs may vary
from a few million Ringgit for the top market capitalized company to close to a
million Ringgit for MASDEQ company (Zain, 2009).
On the other hand, when studying the situation of The United Arab Emirates, we
had to consider the possibility that it is a federation of seven emirates (Abu Dhabi,
Dubai, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah and Fujairah), which may
have different approach towards IFRS. Abu Dhabi is the capital, the second largest
city of the UAE and the country's center of political, industrial, and cultural activities.
The overall situation is that all companies listed on the Abu Dhabi Securities Markets
and Dubai International Financial Exchange are required to publish IFRS financial
statements. Note that companies from UAE Emirates other than Dubai are listed on
the ADSM, in addition to Abu Dhabi companies. In addition, all banks in the United
Arab Emirates are required by the Central Bank of UAE to publish IFRS financial
statements.
Among the group represented by the Islamic states, 60% of these do not permit IFRS
to all companies. Saudi Arabia even if does not permit the use of IFRS by unlisted
companies, it requires all banks and insurance companies listed on the Saudi Stock
Exchange to use IFRSs. Whereas Yemen permits IFRS to all companies unlisted
(occasionally used in practice), since it does not have a stock exchange and there are
no domestic accounting standards or accounting regulation. Audit reports in Yemen
generally refer to conformity with generally accepted accounting principles without
indicating whether that is IFRS or US GAAP or some other framework.

CONCLUSIONS AND FURTHER RESEARCH

The main objective of this paper is to provide a synopsis of the Islamic accounting
characteristics as well as to identify some factors which led to its specificities. The
output of our analysis can be resumed by the next findings:
The Islamic accounting framework shows particular features generated by the
appeal to Islamic community and ethics principles. These particularities are
reflected by the core accounting principles and structures involved;
A significant determinant of the Islamic accounting recent developments is the
expansion of the Islamic financial sector and its structural transformation;
From the institutional point of view, the key entity involved in the regulation of
the Islamic financial institutions is AAOIFI. While its objective is to promote the
use of accounting and auditing principles relevant to Islamic financial institutions
in accordance with the precepts of Islamic Shariah, its activity in practice is
modulated by the diversity of implementation conditions of these principles and
by the consequences of the interactions with non-Islamic financial institutions and
organizations;
There appears to be some relevant empirical support for our H hypothesis. More
exactly, the characteristics of the Islamic cultural paradigm especially the lower
tolerance to uncertainty and risks and the higher commitment to community seem to exercise an important influence on the design of Islamic accounting.
However, the nature, amplitude and transmission channels of such an influence
should be further analyzed in greater detail, since it looks like a diversity of
situations and several other variables might interfere in the chain of causality.
Among these variables, the development degree of the financial sectors
components - banking and capital markets - plays a significant role.
Certainly, there are several limits of this analysis. Among these, one can notice: 1)
The absence of a formal structured framework for explaining the differencing
mechanisms; 2) The absence of an empirical model able to provide an estimation of
the impact exercised by economic and non-economic explanatory variables (such as
the type of political structures, the predominance of Islamic population, the
institutionalized adherence to Islamic views and beliefs and so on); 3) The use of
Hofstedes cultural dimensions which has been criticized for their Western paradigm
focus versus the use of more general approaches.
Therefore, we consider that in spite of the above mentioned research limits, it
emerges from this paper the image of Islamic accountings complex nature, which
may be seen as a distinct alternative to the principles and views promoted by IFRS.

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Appendix 1: AAOIFIs standards8

ACCOUNTING STANDARDS
1. Objective of financial accounting for
Islamic banks and financial institution
(IFIs).
2. Concept of financial accounting for IFIs.
3. General presentation and disclosure in
the financial statements of IFIs.
4. Murabaha and Murabaha to the purchase
orderer.
5. Mudaraba financing.
6. Musharaka financing.
7. Disclosure of bases for profit allocation
between owners equity and investment
account holders.
8. Equity of investment account holders and
their equivalent.
9. Salam and Parallel Salam.
10. Ijarah and Ijarah Muntahia Bittamleek.
11. Zakah.
12. Istisnaa and Parallel Istisnaa.
13. Provisions and Reserves.
14. General Presentation and Disclosure in
the Financial Statements of Islamic
Insurance Companies.
15. Disclosure of Bases for Determining and
Allocating Surplus or Deficit in Islamic
Insurance Companies.
16. Investment Funds.
17. Provisions and Reserves in Islamic
Insurance Companies.
18. Foreign Currency Transactions and
Foreign Operation.
19. Investments.
20. Islamic Financial Services Offered by
Conventional Financial Institutions.
21. Contributions in Islamic Insurance
Companies.
22. Deferred Payment Sale.
23. Disclosure on Transfer of Assets.
24. Segment Reporting.
25. Consolidation.
26. Investment in Associates.
AUDITING STANDARDS
1. Objective and principles of auditing.
2. The Auditors Report.
3. Terms of Audit Engagement.
4. Testing for Compliance with Sharia
Rules and Principles by an External
Auditor.
5. The Auditors Responsibility to Consider
Fraud and Error in an Audit of Financial
Statements

SHARIAH STANDARDS
1. Trading in currencies.
2. Debit Card, Charge Card and Credit
Card.
3. Default in Payment by a Debtor.
4. Settlement of Debt by Set-Off.
5. Guarantees.
6. Conversion of a Conventional Bank to
an Islamic Bank.
7. Hawala.
8. Murabaha to the Purchase Orderer.
9. Ijarah and Ijarah Muntahia Bittamleek.
10. Salam and Parallel Salam.
11. Istisnaa and Parallel Istisnaa.
12. Sharika (Musharaka) and Modern
Corporations.
13. Mudaraba.
14. Documentary Credit.
15. Juala.
16. Commercial Papers.
17. Investment Sukuk.
18. Possession (Qabd).
19. Loan (Qard).
20. Commodities in Organised Markets.
21. Financial Papers (Shares and Bonds).
22. Concession Contracts.
23. Agency.
24. Syndicated Financing.
25. Combination of Contracts.
26. Islamic Insurance.
27. Indices.
28. Banking Services.
29. Ethics and stipulations for Fatwa.
30. Monetization (Tawarruq)
31. Gharar Stipulations in Financial
Transactions
32. Arbitration
33. Waqf
34. Ijarah on Labour (Individuals)
35. 35. Zakah

GOVERNANCE STANDARDS
1. Sharia Supervisory Board: Appointment,
Composition and Report.
2. Sharia Review.
3. Internal Sharia Review.
4. Audit and Governance Committee for IFIs.
5. Independence of Sharia Supervisory
Board.
6. Statement on Governance Principles for
IFIs.

7. Corporate Social Responsibility

ETHICS STANDARDS
1. Code of ethics for accountants and
auditors of IFIs.
2. Code of ethics for employees of IFIs.
1

Information available on the website http://www.islamicpopulation.com/ accessed on April 11, 2010.

Information available on the website http://www.aaoifi.com/ accessed on April 7, 2010.
3
Mudaraba represents a partnership in profit between the provider(s) of labor and the providers of
capital. Profit is shared as agreed by the two parties and the losses are borne by the provider(s) of
funds.
4
Musharaka represents an investment based technique, each party contributing to a partnerships
capital in equal or varying degrees, with losses shared in proportion to the contributed capital.
5
SSBs are in-house religious advisors to Islamic banks (Karim, 1989).
6
Information available on Hofstedes website on Cultural Dimensions: http://www.geert-hofstede.com
/hofstede_arab_ world.shtml accessed on April 12, 2010.
7
Information available on: The library of Congress: Country studies http://lcweb2.loc.gov/frd/cs
/cshome.html; CIA Fact Sheet, https://www.cia.gov/library/publications/the-world-factbook/index.
html; Population Reference Bureau, http://www.prb.org/; International Monetary Fund, World
Economic Outlook Database, October 2009, http://ddp-ext.worldbank.org/ext/DDPQQ/showReport.do?
method=showReport accesed on April 8, 2010
8
Available on-line at http://www.aaoifi.com/keypublications.html accessed on March 6, 2010
2