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Accounting & Auditing

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The Importance of Islamic Accounting in Modern Era by: Chusnul Asfadillah
Student of Airlangga University, Surabaya, Indonesia
+62899 372 1772

Ines Nur Latifah
Student of Airlangga University, Surabaya, Indonesia
+62878 8432 3738

DR. Raditya Sukmana
Lecturer of Airlangga University, Surabaya, Indonesia
+ 62 878 5421 6776

Purpose – This paper aims to determine the importance of the Islamic Accounting in modern era. In particular, the paper analyzes the values of the Islamic principles in the accounting process that prevent the unexpected activity such as fraud, dishonest etc to appear in reality. Arthur Anderson case was a result of the fraudulent activities that lead to its termination. Certainly this kind of case is expecting not to be happened in the future.
Design/methodology/approach – The paper adopts the descriptive analysis and elaboration of the important element of the Islamic principles used in the accounting process. Furthermore, this paper attempt to make clear distinction between values underlying the Islamic accounting and that of the conventional accounting.
Findings – the comparison of those two systems leads to the conclusion that the value in Islam such as honest, fair, truth (which is important in the Islamic accounting process) has more meaning than the similar value of in the conventional accounting. Hold firmly the Islamic value obviously leads to the decrease fraudulent practices and other unexpected activities. Moreover, it increases the social welfare of the stakeholders as Islam requests people to bring as much as benefit to other community.
Practical implication – The implication is that the current conventional modern accounting value must be redefined to bring the stakeholders in getting more benefit and creating less damage to the society. The reporting value should provide information to the stakeholders on the current state of the real condition and provide solution which leads to the increase of the stakeholders’ welfare.
Keywords – Islamic accounting, conventional accounting, Islamic principle
Paper type – Analysis paper

Accounting is the most important part in business and economy that processes information of business and economy activities into financial statement and financial reporting to be presented to the decision-makers. In addition, accounting is accountability tool of the agent (stewardship of the management) towards the principal (shareholders and other stakeholders). Based on the definition above, we can say that accounting is the universal language of business and economic. So that, accounting process must be done in good manner to produce good financial statement and financial reporting to make precise decision to manage financial aspect of business and to present proper accountability.
Unfortunately, there are so many unexpected activities pertaining to accounting processes such as the fraudulent or dishonesty practices in business and economy activities appeared in many occasions in this modern era. The most famous case of fraudulent practice pertaining to accounting process is the Enron and Arthur Anderson scandal that lead to the bankruptcy of those big company in 2000s. After the Enron and Arthur Anderson scandal happened in 2000s, there are so many changes that have been made in accounting and auditing system, especially about ethics in accounting and auditing in order to improve the relevance, faithfulness, reliability, and usefulness of financial statement and financial reporting.
In the other side, Islamic accounting that has existed since 1500s has its own principle that not only can decrease the degree of unexpected activities pertaining to accounting process but also increase the welfare of both internal and external parties of the business because the Islamic accounting has an aspect that has more meaning value than the similar aspect of in the conventional accounting comprising all values required to bring accounting process more preferable.
Therefore, this paper attempts to elaborate some reasons why Islamic accounting is important in Modern Era. The paper is divided into 4 sections. Section 1 introduces the overview of accounting and accountant in Islam. Section 2 elaborates the accountability concept in Islamic Accounting and Conventional Accounting. Section 3 explains the benefits of applying Islamic Accounting in modern era. Section 4 is the paper conclusion. AN OVERVIEW OF ACCOUNTING AND ACCOUNTANT IN ISLAM
In Islam, humans are considered to be vicegerents of God because Allah has proclaimed that “I will create a vicegerent on earth” (Al-Qur’an, Al-Baqarah: 30). Therefore everything a Muslim does is to be accordance with God’s wishes that must comply Sha’riah or Islamic law. Islamic law has two main sources. They are Al-Qur’an as the revealed words of God and the Sunnah containing God’s inspired acts: sayings of the Prophet Muhammad (s.a.w) and descriptions of his conducts. These sources are augmented also by the Ijma’ (the pronouncements representing the consensus of Islamic scholars), the Qiyas (the similarity with certain happening), and ‘Uruf (custom) that is not in contradiction with Al-Qur’an and the Sunnah on matters not addressed explicitly by the Al-Qur’an and the Sunnah
Allah, the Cherisher and the Sustainer of the world has already sent Al-Qur’an to explain everything in this world (Al-Qur’an, An-Nahl: 89) so that human (Muslims) have no excuse not to comply Al-Qur’an. Pertaining to the role of economic activities in Islam, the philosophy of all human activity should be directed towards the achievement of comprehensive human welfare in this life and also in the hereafter (falah). To achieve comprehensive human welfare in this life and also in the hereafter, the economic activities must be morally directed and not only maximize the wealth or profit nor the size of individual business enterprise and quantity of output.
We have known that business and economic activities cannot be separated with accounting process regarding decision-making in economic and business transaction. Even Allah does have His own accountant (Rakib and Atid) to record everything that human do in this world to be accountable at the Hereafter. Knowing the importance of accounting in this life, accounting is treated especially by stating in Q.S Al-Baqarah: 282 which is the longest verse in Al-Qur’an:
“O ye who believe! When ye deal with each other, in transactions involving future obligations in a fixed period time, reduce them to writing Let a scribe write down faithfully as between the parties: let not the scribe refuse to write: as Allah has taught him, so let him write. Let him who incurs the liability dictate, but let him fear Allah his Lord , and not diminish aught of what he owes. If the party liable is mentally deficient, or weak, or unable himself to dictate, Let his guardian dictate faithfully, and get two witnesses, out of your own men, and if there are not two men, the a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her. The witnesses should not refuse when they are called on (For evidence). Disdain not to reduce to writing (your contract) for a future period, whether it be small or big; it is more just in the sight of Allah. More suitable as evidence, and more convenient to prevent doubts among yourselves but if it be a transaction which ye carry out on the spot among yourselves, there is no blame on you if ye reduce it not to writing. But take witness whenever ye make a commercial contract; and let neither scribe nor witness suffer harm. If ye do (such harm), it would be wickedness in you. So fear Allah; for it is Allah that teaches you. And Allah is well acquainted with all things.”

The explicit understanding about the verse above is about Islamic accounting principles policy1: 1. Proper, complete, and transparent recording of both financial and business transactions by responsible accountants. 2. Written contract must be made as the evidence especially for a debt contract. 3. The written contracts must have at least 2 truthful witnesses to provide check and balance mechanism, ensure proper accountability, and ensure parties of the contract properly honor their financial obligations. 4. Materiality is important to ensure correct recognition of the amount of financial and business transactions, both rights and obligations of the contractual parties. 5. Fear God (Allah) for all the transaction parties to ensure fairness and justice in accounting for financial and business transactions.
From the verses above, simply accounting in Islamic overview has the main objective to ensure fair and just financial transactions between parties to fulfill accountability to principal, management, and social at large and the most ultimate accountability to Allah swt. In the other side, accounting in Conventional overview has objective to provide financial information about the reporting entity for the users in making decisions to allocate limited resources to get maximum profit.
Based on the objective of conventional accounting, it could be possible for the accountant to do the fraudulent practice because the objective of conventional accounting is how to make decision to get the maximum profit by using the minimum cost and when the success of the company is measured through profit that the company can gets, not through the welfare of the shareholders and society that the company can give. As we know that in accounting process, an accountant has important role. Accountant has a responsibility to the users to clearly communicate information for decision-making purpose. In addition, accountant is functioned as gatekeepers of financial markets because without accountant that ensures quality and integrity of financial information, the market capital would be by far less efficient, the cost of capital would be higher, and the standard of living would be lower2. So, an accountant must present the most useful financial statement and financial reporting that lie on the truth, justice, fair, goodwill, honesty, benevolence, and reliability in order to be used for precise decision making. Unfortunately, on many occasions accountants fail to do their jobs ethically or even do fraudulent and the reason is the apparently low moral standard of some accountants and they do not understand the meaning of their accountability. So, in Islam Allah has settled up about the characteristics of human based on Shari’ah foundations which an accountant must have to reduce the possibilities of fraudulent such as follows3: 1. Integrity, in which an accountant must be competent and adequately qualified. Allah states:
“Truly the best of men to employ is the man who is strong and trustworthy.”
(Al-Qur’an, Al-Qasas: 26) 2. Vicegerency of humanity on earth, in which the ultimate authority belongs to Allah and human are only vicegerent of Allah whose ownership of property is not an end in itself, but a means to provide a proper life for his, his family, and society. Consequently, human will be held accountable for the way he has acquired the wealth and how she/he used it.
“…I will create a vicegerent on earth…”
(Al-Qur’an, Al-Baqarah: 30) 3. Sincerity, in which an accountant must obey Allah in performing his /her duty and not influenced by anything, so his /her work, can become a form of worship of Allah.
“…making your devotion sincere such as He created you in the beginning, so shall ye return.”
(Al-Qur’an, Al-A’raf: 29) 4. Piety, in which an accountant must fear Allah in secret and public by doing Allah’s commandments and avoiding Allah’s prohibitions so an accountant performs righteous deeds not evil deeds.
“…Fear Allah, and let every soul look to what (provision) he has sent to forth for the morrow. Yea, fear Allah: for Allah is well acquainted with (all) that ye do”
(Al-Qur’an, Al-Hasyr: 18) 5. Righteousness, in which an accountant should strive to accomplish the high degree of righteousness and perfection in his/her duty in the possible manner inasmuch as Allah has given us intelligence to perform our duties in this world.
“…He instructs you, that ye may receive admonition.”
(Al-Qur’an, An-Nahl: 90) 6. Accountability before Allah, accountant must first, primary, and foremost fear Allah as the supreme authority before the shareholders and the stakeholders because in Islam, an accountant personally will be accountable to all his/her deeds in this world at the Judgement Day.
“Not one of the beings in the heaven and the earth but must come to the Most Gracious as a servant. He does take an account of them (all), and hath numbered them (all) exactly. And every one of them will come to Him singly on the Day of Judgment.”
(Al-Qur’an, Maryam: 93-95)
Then from the explanation above, we can conclude that Islamic Accounting is the accounting processes that have to comply with Shari’ah or Islamic Law to ensure fair and just financial transaction between parties to fulfill accountability purpose. And the question now is what aspect that makes Islamic Accounting has more meaning values than Conventional Accounting; the answer is the accountability concept. So, the next section will elaborate values of accountability concept in Islamic Accounting.

In Islam, human in this life require to maintain good relationship with God (Hablun Min’Allah), with fellow being (Hablun Min’An-Nas) and with the nature (Hablun Min’Alam). It means the accountants in Islam are required to be accountable either to the principal (shareholders and other stakeholders) and management as in Coventional Accounting concept or to society, environment, and the most principal to God.
The explanation below will elaborate the differences between accountability concept in Islamic Accounting and Conventional Accounting. 1. Accountability to God.
Islamic Accounting and Conventional Accounting have different concept about accountability to God. The table below elaborates some reasons (thoughts) why accountability concept to God in Islamic Accounting and Conventional Accounting are different. No | Islamic Accounting | Conventional Accounting | 1. | Unity of God and Power is hold by God, in which human treats reason as the basis of belief in God | Economic rationalism and Power hold by human (ratio), in which human treating reason as the basis of belief and knowledge of economic. | 2. | Concerning in religious aspect and believe that there is Judgment Day in which mankind must responsible and accountable to God at the Judgment Day and there is hell and heaven. | Concerning in the only worldly matters or not religious matters and believe that there is no Judgment Day, world is the end of the life and there is no hell and no heaven. | 3. | Influenced by Shari’ah (Islamic Law), in which it is not allowed riba’ (usury or interest on credit), doing unlawful (haram) business, speculative transaction, gambling, uncertainty, free market interference, exploitation, hoarding, etc. | Influenced by Capitalist Ideology based on modern commercial law permissive and accounting law, in which it is allowed riba’ (usury or interest on credit), doing unlawful (haram) business, speculative transaction, gambling, uncertainty, free market interference, exploitation, hoarding, etc. |
The reasons (thoughts) in Islamic Accounting about why accountant must be accountable to God will lead to the accounting process that lie on the truth, justice, fair, goodwill, honesty, benevolence, and reliability. For example: * the relevance and faithful representation of financial statement and financial reporting to provide the most useful information for decision making; * the full transparency of disclosure in financial statement and financial reporting to satisfy any reasonable demand for information in accordance with the Shari’ah and there is no excuse for an accountant to make limited disclosure subjecting to some interests; * in operational it is forbidden to permit everything that can hurt justice such as hoarding, free market interference, exploitation, etc to reach highest profit but it is a must to do everything in boundaries of Shari’ah to get the reasonable profit.

2. Accountability to The Principal and Management
In this case, accountability to principal and management, both in Islamic Accounting and Conventional Accounting has the same concept in which becomes one of the objectives of the accounting process, but in Conventional Accounting, accountability to the principal and management is the first and foremost accountability that have to be fulfilled, whereas in Islamic Accounting accountability to the principal and management is in the second position after accountability to God which become the main and the foremost accountability because Islam hold firmly that “verily Allah is well acquainted with all that you do”(Al-Qur;an, An-Nisaa’: 135).

3. Accountability to Society and Environment
Accountability to society and environment in Islamic Accounting has different concept with the concept in Conventional Accounting. In this case accountability concept to the society and environment can be in form of concerning in Corporate Social Responsibility (CSR). CSR will give benefits to the corporation such as increased profits, customers’ loyalty, trust, positive brand attitude, combating negative publicity, and having a rightful place in the business world by contributing to the betterment of society, caring for employees, being ethical in trading, protecting the environment, and getting involved in the local community.
According to Sutan Emir Hidayat and Suliman Abdulrahman Alhur in their article about “Corporate Social Responsibility for Islamic Banks” (2012), general concept of CSR has three aspects namely sustainability, accountability, and transparency, whereas Islamic concept of CSR based on AAOIFI’s Governance Standard No. 7 has five aspect of responsibilities namely religious, economic, legal, ethical, and discretionary. a. Aspects in general concept of CSR * Sustainability which is not permitted to do natural resources exploitation unless it can be regenerated. * Accountability which is the corporation has responsibility for the effects of its activities on the external environment. * Transparency which is the corporation should communicate truthful information to the public about its operations. b. Aspects in Islamic concept of CSR * Religious Responsibility refers to the obligation to obey Shari’ah in all dealings and operations. * Economic Responsibility refers to be financially viable, profitable, and efficient. * Legal Responsibility refers to the obligation to obey the laws and regulations of the country of operation. * Ethical Responsibility refers to the obligation to respect mass of societal, religious, and customary norms which are not codified in law. * Discretionary Responsibility refers to the expectation from stakeholders to perform a social role in implementing Islamic deals over and above the religious, economic, legal, and ethical responsibility.
So, in Islamic Accounting, when performing their jobs, accountants must consider the aspect in Islamic concept of CSR which is more complex than general concept of CSR to seriously fulfill their accountability to society and environment that require the transparency, accurateness, justice, and goodwill to mainly share happiness to the others as Allah command us and not mainly subjected to establish good reputation of the corporation (worldly gain).
“But seek, with the (wealth) which Allah has bestowed on thee, the Home of the Hereafter, nor forget thy portion in this world: but do thou good, as Allah has been good to thee, and seek not (occasion for) mischief in the land: for Allah loves not those who do mischief.” (Al-Qur’an, Al-Qasas: 77).

For examples: a. Zakat Accounting on Business Wealth and Financial Assets that aims to distribute wealth to reduce gap between the poor and rich, to achieve the economic and spiritual well-being of zakat payer and zakat recipients, and to act of submission to God. In this case calculation zakat must be objectively determined by Shari’ah. Thus to enable zakat assessment to be true and fair, the zakat payer needs to truthfully disclose all of his/her financial facts.
“…but that which you give for charity, seeking the Countenance of Allah, (will increase): it is these who will get a recompense multiplied.”
(Al-Qur’an, Ar-Ruum: 39) b. Maintaining the welfare of employees and their family such as health and education facilities.
“Pay wages to your employees before their sweat has been dry, and tell their salary provision forwhat they do” (HR. Baihaki) c. Using the Green Accounting concept in which in accounting practice the accountant should include indirect costs and benefits of a product/activity needed to minimize its environmental impact such as waste cost although it will reduce the profit at first because of increasing cost. d. Reduction of adverse impact on the environment by using renewable resources and minimizing the usage of non-renewable sources, making the best use of natural resources, using energy more efficient, etc.
“And withhold not things justly due to men, nor do evil in the land, working mischief.”
(Al-Qur’an, Asy-Syu’araa’:183)

Based on some analysis above, applying Islamic Accounting Principle in Modern Era will give some benefits directly and indirectly to the internal and external parties of the business. 1. When the accountants hold firmly to Shari’ah by believing that human must responsible and accountable his/her action in this world to God at the Judgment Day, so automatically accountant will present financial statement and financial reporting that lie on the truth, justice, fair, goodwill, honesty, transparency, accurateness, and benevolent because although the fraudulent can be unknown by their supervisor in this world, but actually in the Hereafter he/she must be accountable for what he/she had done, Allah knows all thing well. Therefore, It will give some benefits to the business * There will be fewer possibilities that accountants do unexpected activities such as fraudulent in business and society. * The shareholders/investor and creditor will feel more secure to put their funds in the business thus indirectly it will interest the other investors and their funds. * The users of the financial statement and financial reporting will get the most useful of them to minimize the possibilities doing mistakes in decision making. 2. By concerning in accountability to the employees and their family when performing their jobs in which accountability is the purpose of Islamic Accounting, indirectly it can give benefits: * Reducing the exploitation of labors because in Islamic Accounting, it is not permitted to do everything to reach the maximum profit by exploiting the labors as the decision to compress the operational cost. * Increasing the welfare of the employees and their family * When the welfare of the employees and their family is maintained well, the employees will be loyal to the business so that it can reduce recruitment cost for the new employee. 3. By appreciating Islamic concept for CSR activities such as Zakat and reduction of adverse impact on the environment, it can give benefits: * Reducing the destruction of environment, * Reducing poverty and increasing the welfare of the society around the business then indirectly it will increase the purchasing power of the poor that will give positive contribution to the economic growth through the increasing of consumption expenditures and aggregate demand.
Then, the company itself will also get some benefits such as increased profits, customers’ loyalty, trust, positive brand attitude, combating negative publicity, and having a rightful place in the business world by contributing to the betterment of society, being ethical in trading, protecting the environment, and getting involved in the local community and the most important is the sustainability of the company for the long time as long as the company has intention for sharing happiness not for good reputation.

CONCLUSION Islamic Accounting is the accounting process that have to comply with Shari’ah (Islamic Law) to ensure fair and just financial transaction between parties to fulfill accountability purpose to the most ultimate accountability to Allah swt.
If Islamic Accounting values that have existed since 1500s are hold firmly, it will lead to the accounting process that lie on the truth, justice, fair, goodwill, honesty, benevolence, and reliability. Consequently, it can give more benefits to principal, management, employee, society, and environment which is so important in this modern era where there are so many fraudulent and poverty because if we try to figure out accounting more deeply, actually accounting will not only influence economic and business aspect but also influence other aspects in this life.

1Abdul Rahman Abdul Rahim, “An Introduction to Islamic Accounting Theory and Practice”, CERT, Kuala Lumpur, Malaysia, 2010, page 14.
2Ibid. page 39.
3Ibid. page 41-42.

Al-Qur’an and Hadist
Erik, Johnson. (2009). Green Accounting: Environmental Accounting, accessed February 19, 2012, [available at]
Harahap, Sofyan S. (2011). The Difference of Conventional and Islamic Accounting, accessed January 1, 2012, [available at seminar 040205/sofyan.ppt]
Hidayat, Sutan E. and Suliman A. Alhur. Corporate Social Responsibility for Islamic Banks. Islamic Finance News (February 15, 2012), 21-23.
Kieso, Donald S., Jerry J. Weygandt., & Terry D. Warfield. (2011). Intermediate Accounting IFRS Edition Vol. 1. New Jersey: Quad/Graphics, Inc.
Muhammad. (2005). Pengantar Akuntansi Syariah. Jakarta: Salemba Empat.
Rahman, A. R. A. (2010). An Introduction to Islamic Accounting Theory and Practice. Kuala Lumpur: CERT.

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