744 Book Reviews

KPMG LLP, S. M. Glover, and D. F. Prawitt. 2012. Enhancing board oversight: Avoiding judgment
traps and biases. Committee of Sponsoring Organizations of the Treadway Commission. Available
at: http://www.kpmg.com/cn/en/issuesandinsights/articlespublications/pages/enhancing-board-
oversight-201209.aspx
Kravitz, D. A., and B. Martin. 1986. Ringelmann rediscovered: The original article. Journal of Personality
and Social Psychology 50 (5): 936–941.
Schrand, C. M., and S. Zechman. 2012. Executive overconfidence and the slippery slope to financial
misreporting. Journal of Accounting and Economics 53: 311–329.
Swieringa, R., and K. Weick. 1982. An assessment of laboratory experiments in accounting. Journal of
Accounting Research 20 (Supplement): 56–101.

ROBERT J. SWIERINGA3
Professor of Accounting
Cornell University

CHRISTOPHER NAPIER and ROSZAINI HANIFFA (editors), Islamic Accounting

(Cheltenham, Glos, U.K.: Edward Elgar Publishing Limited, 2011, ISBN 978-1-
84844-220-7, pp. xx, 740).
What is to be understood by the term ‘‘Islamic accounting’’? The question has arisen in the context of the
development of the Islamic financial services industry (IFSI) in recent decades. The raison d’être of IFSI is
Islamic religious law, the Shari’a, and its interpretations in Islamic commercial jurisprudence, the Fiqh al
Muamalat, according to which certain forms of transactions and financial instruments that are widely employed
in conventional finance, as well as the conducting or financing of activities connected with alcohol, pork,
gambling, and armaments, are prohibited. These include (the Arabic terms are in brackets): any form of interest
receipts or payments [riba], short selling and speculation in general [maysir], and vagueness or ambiguity of
contractual outcomes [gharrar]. Islamic finance, therefore, uses forms of contract based on Fiqh al Muamalat
(known as the ‘‘nominate contracts’’) and financial instruments which avoid these prohibited elements. The
resulting transactions call for specific accounting treatments that may not be indicated within ‘‘generally
accepted accounting principles’’ such as U.S. GAAP or the International Accounting Standards Board’s
(IASB) IASs and IFRSs. For this reason, a specialized accounting standards body, the Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI), was set up in 1991, and has since issued
around 25 financial accounting standards.
In a narrow sense, ‘‘Islamic accounting’’ might, therefore, be understood as accounting as required by
AAOIFI’s standards, although such a usage is debatable for reasons I will give below. However, for the editors
of this weighty collection of 33 papers (most of which have been previously published in journals, and are
reproduced from the originals) plus an introductory chapter, the term has a much wider sense or set of senses.
In the introductory chapter, written by the editors and entitled ‘‘An Islamic Perspective of Accounting,’’ the
narrow sense is presented first. The second sense that they mention is associated with notions of social
responsibility within a framework of religious ethics: accounting is seen through the lens of a corporate
governance (CG) framework that, in contrast to the neo-liberal and secular perspective that characterizes the
U.S. and U.K. approach to CG, with its emphasis on the rights of investors and creditors, stresses
accountability to God for socially responsible behavior (including transparency and fair dealing, as well as
environmental sustainability). While the first, narrow sense of ‘‘Islamic accounting’’ is concerned with
technical issues such as recognition, classification, and measurement, as well as disclosure, this second sense is
particularly concerned with the latter, as well as with corporate governance more generally. A third sense of the
term is suggested by the need for accounting treatments to provide an appropriate basis for determining liability
to zakat, a type of wealth tax or obligatory (for Muslims) religious levy intended to finance social causes such
as the alleviation of poverty. The book also contains papers concerned with the auditing of Islamic financial

3
Robert Swieringa has been serving on the board of directors of General Electric Company since 2002.

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Book Reviews 745

institutions and with the history of accounting in the Islamic world, as well as a paper on management
accounting systems in Islamic and conventional banks.
As its title suggests, the general thrust of the book’s contents is Islamic particularism in accounting;
namely, the thesis that accounting (in the broad sense together with corporate governance), as envisioned and
practiced from an Islamic perspective, is qualitatively and not just technically different from conventional
accounting. The second sense of the term ‘‘Islamic accounting’’ is, thus, clearly central to this thesis. However,
the book contains only a minority (less than 25 percent) of empirical papers, and it is to these that reference
must primarily be made in assessing to what extent the thesis is effectively supported.
After the introductory chapter by the editors, the book is divided into six parts: Conceptual Framework for
Islamic Accounting (three papers); Accounting Ethics and Social Responsibility (seven papers); Corporate
Reporting (nine papers); Accounting Practice and Zakat (seven papers); Auditing (three papers); and Islamic
History of Accounting (four papers).
In Part I, a particularly significant paper (Chapter 2) is that by Rifaat Ahmed Abdel Karim, who was at the
time secretary-general of AAOIFI. The author explains the rationale for the setting up of AAOIFI (under its
initial name, the Financial and Accounting Organization for Islamic Banks and Financial Institutions
[FAOIBFI]). The context of the financial reporting issues and problems faced by Islamic banks are also well
explained in the previous paper (Chapter 1), by Moustafa F. Adbel-Magid.
Dr. Karim states that two options were considered by FAOIBFI in developing objectives of financial
accounting (for Islamic financial institutions):

1. Establish objectives based on the principles of Islam and its teachings and then consider these
established objectives in relation to contemporary accounting thought; or
2. Start with objectives established in contemporary accounting thought, test them against Islamic
Shari’a, accept those that are consistent with Shari’a, and reject those that are not. (p. 31)
The author tells us that after a lengthy process of discussions involving accounting academics and
practitioners, Shari’a scholars, Islamic bankers, and officials in central banks, it was agreed that the second
approach should be adopted. Both approaches were considered to be in compliance with Shari’a precepts, so
that there was no reason to reject the second approach. Moreover, a similar approach was adopted in
developing the concepts of financial accounting, which comprised the following:

(a) The identification of accounting concepts which have been previously developed by other institutions,
which are consistent with the Islamic ideals of accuracy and fairness.
(b) The identification of concepts which are used in traditional financial accounting but which are
inconsistent with Islamic Shari’a, which were either rejected or sufficiently modified to comply with
the Shari’a.
(c) The development of those concepts defining certain aspects of financial accounting for Islamic banks
that are unique to the Islamic way of transacting business. (p. 32)
An example of the issue mentioned under (c), above, is the recognition of profit under a type of Islamic
credit sale transaction known by the name of the ‘‘nominate contract’’ employed as Murabaha, which is a sale
at cost (which must be disclosed) plus a mark-up or gross profit margin. Payment of the Murabaha price is
typically made by installments, which raises the question of how the profit element should be recognized.
According to IAS 18, the financial element of the profit (or interest) should be recognized pro rata temporis,
using the ‘‘effective interest rate’’ method, while the nonfinancial element should be recognized when the sale
takes place. However, the Murabaha mark-up is not interest, and Islamic banks could interpret IAS 18 in
various ways, either to recognize all of the mark-up as profit at the time of the sale, or to recognize it as profit at
the conclusion of the contract (when the final payment is made), or, indeed, by various methods of recognition
pro rata temporis. One might suggest that the mark-up could be decomposed into the ‘‘pure interest’’ element
and the ‘‘pure gross profit’’ element by reference to prevailing market interest rates, but that would in fact be an
example (to quote from (b), above) of a concept ‘‘used in traditional financial accounting but . . . inconsistent
with Islamic Shari’a.’’ AAOIFI, in its financial accounting standard on Murabaha, settled on a method of
recognition of the entire mark-up as profit pro rata temporis.
The author’s explanations of the raison d’être of AAOIFI and its standards are amplified in another paper
by him, which appears as Chapter 12 in Part III of the collection. A paper in Part IV of the collection, which
appears as Chapter 24, by Ros Aniza Mohd. Shariff and Abdul Rahim Abdul Rahman, provides further support

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to the proposition that accounting practices for Islamic transactions (in this case, Islamic leases) are divergent
in the absence of generally accepted and applicable financial reporting standards.
The papers by Dr. Karim present a particularly well-informed view of what may be meant by ‘‘Islamic
accounting’’ in the first, narrow sense mentioned above in a financial accounting standard-setting context,
namely, accounting based on the second of the two options considered by FAOIBFI/AAOIFI. In contrast, most
other papers in the collection seem to favor the first of the two options. For example, in the following paper
(Chapter 3), Roszaini Haniffa (one of the editors) and Mohammad Abdullah Hudaib take the view that
‘‘[b]ased on the limitations of conventional Western accounting, the Shari’a Islami’iah is proposed as the
foundation in building a theoretical framework for IPA [the Islamic perspective of accounting]’’ (p. 43). Other
papers in the collection also seek to link the notion of ‘‘the Islamic perspective of accounting’’ with a more
general critical perspective on accounting; for example, in Chapter 17 by Rania Kamla, Sonja Gallhofer and
Jim Haslam, which links Islamic principles and accounting for the environment within a critical perspective.
We have, therefore, in this collection a contrast between:

(a) a minimalist version of the first sense of ‘‘Islamic accounting’’ mentioned above; namely, a practical
view of the need to improve the quality of financial accounting and reporting of Islamic financial
institutions; i.e., not ‘‘Islamic accounting’’ as such, but rather accounting that fairly presents the results
of certain transactions that comply with the Islamic Shari’a when the application of conventional U.S.
or IASB GAAP would not do so (see the Murabaha example above); and
(b) the second, broader, and more radical sense of ‘‘Islamic accounting’’ mentioned above; namely, a
view of Islamic accounting (or financial accounting, reporting, and corporate governance) as
reflecting Islamic religious ethics in such a way as to make these different in principle from
conventional financial accounting, reporting, and corporate governance, which are seen as reflecting a
secular, materialist, and arguably amoral world view.
Whether this more radical sense of ‘‘Islamic accounting’’ is significantly reflected in practice is an issue on
which the empirically based papers in this collection should be able to shed light. It is, therefore, to these that I
will now turn. While none of the papers in Part II, Accounting Ethics and Social Responsibility, are empirically
based, three of the papers in Part III, Corporate Reporting, are. The same is true of one paper in Part IV,
Accounting Practice and Zakat. These papers cast light on the extent to which the more radical sense of
‘‘Islamic accounting’’ is significantly reflected in practice. Three other empirically based papers are included in
the collection, Chapters 25 and 26 in Part VI and Chapter 29 in Part V, but as they do not bear on the issue
identified above, they will not be examined here.
Chapter 16, a paper by Maliah Sulaiman, reports the results of a ‘‘laboratory experiment’’ using students
as surrogates for investors in testing whether certain financial reporting methods developed by Baydoun and
Willett (1994, 2000), namely, a current value balance sheet (CVBS) and a value added statement (VAS), which
the authors argue are more consistent with Islamic principles than a historical cost balance sheet (HCBS) and a
statement of profit and loss (PL), would in practice be found to be preferable to, or more important than, the
latter. The results indicated that Muslim subjects did not accord significantly greater importance to the CVBS
and VAS compared to the HCBS and PL. Nor were the Muslim subjects’ responses significantly different from
those of non-Muslims. The author concluded that ‘‘the suggestion that Muslims ought to be provided with
financial information of a different character from what is normally disclosed in Western-based accounting
systems, seems to have little support’’ (p. 380; emphasis in the original).
Chapter 18, a paper by Bassam Maali, Peter Casson, and Christopher Napier (the latter being one of the
editors), examines the extent to which social reporting by Islamic banks conforms to a ‘‘benchmark set of social
disclosures . . . derived by applying Islamic principles in an a priori manner’’ (p. 417). The authors conclude:
‘‘Contrary to our expectations, the empirical findings suggest that social issues are not of major concern for
most Islamic banks’’ (p. 425).
In Chapter 19, a paper by Roszaini Haniffa and Mohammad Hudaib, the authors ‘‘attempt to assess the
degree of variation of communicated ethical identity . . . against a benchmark of ideal ethical identity’’ for
Islamic banks (p. 431). This variation is measured by what the authors call the Ethical Identity Index (EII). The
EII is composed of 78 constructs grouped under eight dimensions. The dimensions are: vision and mission
statement; board of directors and top management; products; Zakah, charity, and benevolent loans; employees;
debtors; community; and Shari’a supervisory board (internal supervision of Shari’a compliance). Using
content analysis, the corporate annual reports of seven Islamic banks for the period 2002–2004 were scored on

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the basis of the EII. The highest score was 65 percent, while the lowest was only 16 percent, and the three-year
means for the other five banks ranged from 28 percent to 48 percent, which, as the authors note (with surprise),
‘‘suggest[ed] a large disparity between the communicated and the ideal ethical identities’’ (p. 444, italics in the
original).
The findings of these empirically based papers strongly suggest that the more radical sense of ‘‘Islamic
accounting’’ is an ideal that is present in the minds of a number of academicians (and maybe others), but is not
reflected in practice. In other words, the notion of ‘‘compliance with the Shari’a,’’ which is reflected in the
practice of Islamic banks, does not encompass, to any significant degree, ‘‘Islamic accounting’’ in this sense
(including financial reporting and corporate governance). Nevertheless, compliance with the Shari’a is the
raison d’être of Islamic banks. Hence, such compliance must apparently be understood as not implying the
need to practice ‘‘Islamic accounting’’ in the more radical sense.
How, then, is such compliance to be understood? What seems to be important is the avoidance of
prohibited types of transactions such as charging or paying interest or speculation by short selling, and of
strictly prohibited business activities, such as those associated with arms manufacture, alcohol, pork, and
gambling, and, in particular, the use of the Shari’a-compliant nominate contracts provided by the Fiqh al
Muamalat (Islamic commercial jurisprudence) as a basis for financial transactions and instruments. Apart from
avoidance of the prohibited business activities, the use of such contracts as a basis for an Islamic bank’s
operations constitutes compliance in a narrow, formal ( juristic or legalistic) sense, rather than in the broader
and more substantive sense of compliance in practice with Islamic ethical precepts, such as those of socially
and environmentally responsible business conduct.
Thus, what appears to be the thesis of the editors of this collection of papers, namely, that accounting, in a
broad sense encompassing financial reporting and corporate governance, as envisioned and practiced from an
Islamic perspective is qualitatively (and not just technically) different from conventional accounting, is not, in
fact, borne out when the empirically based papers in the collection are considered. Even the technical
differences, due to the need for specific rules for the financial reporting of the results of certain
Shari’a-compliant transactions, barely constitute ‘‘Islamic accounting.’’
Notwithstanding this lack of coherence, the papers in the collection are well written and well presented
(although some are quite old), and a number of them are very informative for readers such as academicians and
graduate students interested in Islamic finance. These papers include the editors’ introduction, the two papers
by Rifaat Ahmed Abdel Karim, and the various empirically based papers cited above. I would not recommend
the book to practitioners or to undergraduate students.

REFERENCES
Baydoun, N., and R. Willett. 1994. Islamic accounting theory. Paper presented at the AAANZ Annual
Conference, Sydney, Australia.
Baydoun, N., and R. Willett. 2000. Islamic corporate reports. Abacus 36 (1): 71–90.

SIMON ARCHER
Visiting Professor in Islamic Finance
University of Reading

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