Islamic Accounting, Auditing & Governance

Assignment 1

1. Please mention the fundamental differences between Islamic Accounting and Conventional
Accounting

The main differences between Islamic Accounting (“IA”) and Conventional Accounting (“CA”) lie in the
following:

 Objectives of the information being presented

The basic objective of CA is to allow the users of the information to make educated financial and
economic decisions including investors, lenders and other stakeholders. The basic objective of IA is
twofold, as it aims to ensure users that the Islamic entity in question has carried out its activities within
the rules of Shariah as well as to assess if the entity has met its financial and social objectives as
encouraged by Islam which sets out an obligation to protect public interest.

 Type of information presented

CA focuses on the presentation of financial and economic dealings and transactions carried out during a
reporting period. The scope of IA, on the other hand, aims to identify socio-economic as well as religious
events and transactions during the period. As such, under IA both financial and non-financial events
(social, environmental, religious etc.) are reported to the users as per the above highlighted objective to
serve public interest.

 Measurement, Valuation, Recording and Communication of information

Under CA, as per the international reporting standards, the majority of assets and liabilities are
recognized and subsequently measured at historical value. In IA, there is a higher emphasis on reporting
of the fair value of balances with the calculation of Zakat being recorded strictly in current value.
Furthermore, in IA, the focus of the income statement is not purely to communicate financial gains
during the year as this is not the only objective of an Islamic entity. As such, recent recommendations
have been made by experts in the field to change this to a Value-Added statement instead as it would be
more in line with the Islamically prescribed objectives.

 Users of information

While officially CA is meant to provide information to all stakeholders of an entity, an argument can be
made that is mainly used to serve the purposes of shareholders and lenders to the entity. IA,
meanwhile, aims to serve all stakeholders besides the financiers of an entity. Through its reporting it
enables society to ensure that the entity has met the Shariah requirements, distributed its wealth
appropriately and that it has been ethical it is profitability.
2. Why will religion and accounting when mixed together not become an explosive mix?

The two points to consider in order to assess whether religion and accounting can mix are as follows:

 Impairment of objectivity
 Nature and sources of knowledge

Objectivity is considered to be an integral part of the accounting profession. Hence, society is generally
of the opinion that tagging accounting with religion can hinder the level objectivity since religions and
religious views are often considered to be biased towards the ideology they are trying to serve.
However, the counter argument to this is that accounting as it is today is mainly focused presentation of
profitability of organizations and their ability create of wealth. These are the objectives driven by the
philosophy and ideology of capitalism. Accordingly, it can be argued that accounting is already being
mixed with a form of ideology which is another form religious as it comprises with a set of views and
principles. Hence, there should be no issue in mixing it with the Islamic religion and religious views

In the modern world, a lot of emphasis is placed on scientific knowledge and its findings and this drives
people’s belief system. Science depends the observation of physical phenomena as the cornerstone for
its findings and this works well analyzing the physical universe. But this is limited to analysis of how it is
at the present moment and not how it should ideally be. Furthermore, it can be used to analyses human
beings, given the inconsistent behavior of humans. This is where religions come in, as it gives humans
the knowledge and guidance on how they should be and their social, mental emotional and spiritual
well-being. From this point of view science and religion go hand in hand, since together they can allow
society to analyses the current state of things and know what they need to do to reach the ideal stage
them should be in.

3. Why should Conventional Accounting in fact be called capitalist accounting?

Conventional Accounting, in its current adopted and generally accepted version, is mainly focused on
profitability of organizations and their ability to create wealth. These are the cornerstones of the
ideology of capitalism. We can thus argue that since accounting is mainly focused on these measuring
these outputs of entities, it is there to serve a capitalist purpose and hence can be labelled capitalist
accounting

4. How will the development of Islamic accounting standards support the development of Islamic
Finance?

The development of Islamic accounting standards will allow the standardization of reporting for Islamic
banks around the world. This will give users of the information more comfort to rely on the information
as well as improve comparability which would enhance decision making.

Furthermore, through its objectives highlighted above, following IA allows stakeholders to ensure that
an entity has been in compliance with Shariah requirements when carrying out its activities, as well as
assessing if the entity has met both its social and economic objectives as require by Islam. These
requirements and objectives apply to all Islamic institutions which include Islamic Banks. Hence, by
following these standards, Islamic Banks will give stakeholders and society a higher level of comfort from
an accountability point of view, which in the long-term will aid the development and growth of Islamic
finance.