Decision Usefulness and Critics

towards the Conventional Accounting

Ade Wirman Syafei

Decision Usefulness

 It is believed that the determination of a goal

will lead on the promulgation of a certain rule
or principles.
 After a long controversial debates, the
conventional accounting had achieved its
objectives
Decision Usefulness

 According to the AAA (1966), Accounting is

defined as a process of identification of an
economic transaction and how to record,
classify, summary and report a financial
information the users.
Decision Usefulness

 AAA (1966) mentions clearly that the users

can be such as:
 Shareholders
 Creditors
 Others e.g. employee, government body,
public and etc.
Decision Usefulness

 The goal of conventional accounting has

affected the determination of the objectives
of conventional financial reporting.
 FASB (SFAC No. 1) states that the financial
reporting should provide information that is
useful to present and potential investors and
creditors and other users in making rational
investment, credit and similar decision (Para
34)
Decision Usefulness

 FR Should provide information to help

present and potential investors and creditors
and other users in assessing amounts, timing
and uncertainty of prospective cash and
dividends or interest proceeds from the sale,
redemption, maturity of securities or loan
(para 37)
 FR should provide information about the
economic enterprise, the claims to those
resources (obligations of the enterprise to
transfer resources to other entities and
owners equity) and the effects of transaction,
events and circumstances that change
resources and claim to those resources
(para.40)
Decision Usefulness

 Shahul (2001) believes that the

determination of those two first users are
much influenced by the capitalistic values.
 Shahul (2001) further argues that there are
two reasons to support his statement.
 Determination of the users of financial
reporting.
 The scope of financial reporting.
Decision Usefulness

 FASB mentions clearly the two first group of

users such as investors and creditors while
the other group of users are simplified in the
name of others.
 Shahul (2001) believes that the reason for
FASB to mention the first two groups of users
clearly is because they are the group which
have dominant power towards the company
in terms of money.
Decision Usefulness

 Shahul (2000) claims that the owners of a

business separated from the day-to-day
management of the business. Professional
managers started controlling and managing
large-scale business corporations. The
interest of shareholders became restricted to
dividend.
Decision Usefulness

 As a result the long-term business objectives

are to stay in business as long as possible
and be able to generate high profit for
company. It is in this economic context that
decision usefulness paradigm was arrived.
 Thus, the forms of reporting provided by an
enterprise would only be intended to meet
the interest of those first two groups.
Decision Usefulness

 Majority of the forms of financial reporting

shows information needed by those first two
group.
 Here, it is seen that the interest of other
group of users has been disregarded by the
conventional accounting
Critics towards the Conventional
Accounting

 Conventional accounting has been criticized

for various reasons.
 Lehman(1992) believes that conventional
accounting has created social conflict
(Lehman, 1992, Aygris, 1990).
 While Arnold and Cooper (1999) claims that
coventional accounting has created
unemployment and underemployment and
privatization of government property.
Critics towards the Conventional
Accounting

 Even worse, conventional accounting has

been believed to have contribution on the
destructive of the ecological environment
(Maunders & Burrit, 1991, Argyis, 1990,
Tinker 1985).
 Briloff (1990) argues that coventional
accoounting has produced financial
scandals and fraudulent investment.
Critics towards the Conventional
Accounting

 Alternative accountings have been slowly

forthcoming since the Corporate Report
(ASSC, 1975) addressed the issue of public
accountability of corporations.
 This report suggested that corporations
which are of a significant size use significant
community resources and as such, are
publicly accountable to a wide suite of
stakeholders as opposed to the traditional
shareholder and creditor groups.
Critics towards the Conventional
Accounting

 The Corporate Report suggested that in

addition to the traditional profit and loss
account and balance sheet, several other
statements be included in a company’s
annual report including a value added
statement, a statement of energy usage, an
employee report and a statement of
transactions with the government, amongst
others.
 Critics towards the Conventional
Accounting

 An increasing concerns with the environment

brought about accounting in the 1980’s and
1990’s led to calls for increasing the
accountability of corporations in these areas.
 Corporations increasingly started reporting on
these issues voluntarily. E.g. some companies
provide information on product and workplace
safety or the contribution the company itself has
made to the local community such as donations
for charitable causes (Gray et al. 1996 )
Critics towards the Conventional
Accounting

 Recently, new methods of measuring ecological inputs

and outputs have been suggested as the basis on
which full blown environmental accounting reports can
be made, instead of merely providing qualitative non-
financial information (Gray et al., 1993).
 Some accounting professional bodies such as the
Association of Chartered Certified Accountants have
even instituted annual environmental awards for
companies for producing the best environmental
information in their annual reports besides funding
research studies on the issue.
Corporation and Society

 “Corporation have emerged as the dominant

governance institution on the planet, with the
largest among them reaching into virtually
every country in the world an exceeding
most government in size and power,
increasingly”.
Contd…

 its implication have gone largely unnoticed

and unaddressed” (Korten, 1995).
 Accounting Western Model contributes to this
situation
Critics on Conventional
Accounting

 Externalities is not included in financial report

(Lee Parker, environmental accounting)
 Intangible asset cannot be measured
adequately(Lev Baruch)
 Human resources and employee reporting
interest are not included.
Contd…

 Social Interest is overlooked

 Promote the exploitation of capitalist
over labor and society.
 Promote the concentration of wealth
and power o the hand of the rich.
Contd.

 Even worse, conventional accounting has

contributed on the destructive of the
ecological environment (Maunders & Burrit,
1991, Argyis, 1990, Tinker 1985).
 Briloff (1990) argues that coventional
accoounting has produced financial
scandals and fraudulent investment.
Accounting and Culture

 Culture (i.e. religion) influences

accounting (Hofstede, 1983, Gray, 1998)
 Culture: “all those social, political, and
other factors which influence individual’s
behavior” (Hamid, et. al, 1993)
Contd…

 Different culture, different economico-sociol-

politico systems demand different accounting
system
 Islam is different from Occident (Capitalist
ideology), so it must have its own
accounting system (Gambling and Karim,
1986: Triyuwono, 2001: Hameed, 2001)
What is Islam?
 Literallymeaning:
 “Peace” (in this world and
hereafter)
 “obedience” to Allah as his/her
God, comply with the motivation of
God’s creation of Man, which is “to
serve Allah”, to be “his viceregent
on earth”.
Contd…

 A comprehensive worldview, a unity of God,

and an integration between world and
hereafter.
 Islamic principles: truth, justice, fair, goodwill,
honesty, benevolent, accountability before
the God.
 Islamic Worldviews

“A worldview can be thought of as the

set of implicit and explicit
assumptions about the origin of the
universe and the nature and purpose
of human life” (Chapra, 1992)
Contd…

“A worldview is the way in which a

person sees and explain the world and
his place in it. Your worldview not only
affects the way you think. It also
affects the way you act or behave.
Your worldview shapes the quality of
your life” (Al-Faruqi, 1992)
Contd…

“Islamic ontology presents a dual

worldview, this world (universe) and
the hereafter. What man does (in all
areas) in this short life affects his
prospects in the hereafter” (Shahul,
2000).
Western/Capitalist
Western/CapitalistWV
WV Islamic
IslamicWV
WV Western/Capitalist
Western/CapitalistEc
EcNN Islamic
IslamicEc
EcNN

•Material •Dual worldview •Capitalism, •Primacy of justice

worldview Primacy and social welfare
•Khilafah "Shura” of profit • Generally non-
•Democracy •Deregulated inter vention in
•Tawhid market markets
•Secularism •Amanah, Trust •Obey God's Laws
•Individualism •Empiricism •Property as trust
•Ikhtisab, •Sanctity of private from God
•Utilitarianism Accountability property •Moral Filter
•Public benefit •Consumerism
•Welfare •Responsibility •Zakat fulfillment
•Liberalism and •Welfare benefit •Market values,
freedom •Market values, negotiation-
competition cooperation

(Adapted Shahul, 2001)COMPARISON OF WESTERN CAPITALIST VS ISLAMIC

WORLDVIEWS AND ECON. NORMS
 ISLAMIC AND WESTERN PHYLOSOPHY, PRINCIPLES
AND CRITERIA IN FINANCIAL REPORTING

Characteristics Western fin. Acc. System Islamic Corp. R

Philosophical Economic rationalism Tawhid

viewpoint

Principles Secular Religious

Individualistic Communal
Profit maximization Reasonable profit
Survival of fittest Equity
Process Environment

Criteria Based upon modern com- Based upon ethical law ori-
mercial law ginating in the Islamic Law
Limited disclosure Full disclosure
Personnal accountability Public accountability

(Baydoun & Willet, 2000)

 The Foundation of the Shari’ah Islami’iah Paradigm
Philosophical Tawhid (Unity of Allah)
viewpoint:

Al Qur’an
Hadith
Ijma’
Qiyas

Divine Law for

Human Conduct:
Objectives Shari’ah Islami’iah: :
•Al-adl and Al-ihsan
(social justice and compassion for fellow human) 
•Barakah
(Allah’s blessings)
•Al Falah
•(Realise benefit for the people in this world
and hereafter)
Devine Ethical Ethics/Morality:
Concepts Iman (Faith)
Taqwa (Piety)
Birr (Righteousness)
Ibadah (Worship)
Fardh (Responsibility)
Ikhtiy’ar (Free will)
Amanah (Trust)
Hablun min’Allah
(Believe in Allah and enjoin what Qur’an
recognises to be right and forbid what it considers to be wrong)
Hablun min’an-nas
(Striving for the good of humanity)

Economics:
Zakat (Religious levy) , Halal (Lawful means) , Nizam (Order)
I’tidal (Moderation) , Islah (Noble)

(Adapted from Haniffa, 2000)

Islamic accounting: Hayashi

 “is an integrated discipline with social,

political and economic domain ruled by Allah
or “meta rule”. Islamic accounting should
regulate and establish a harmonious
integration among the parties of these
diverse domain”.
Conventional Vs Islamic
Accounting
 Conventional Accounting:  Islamic Accounting:
 Based upon modern  Based upon ethical law
commercial law- originating in the Qur’an
permissive rather than (Islamic law, As-Sunnah)
ethical   Full disclosure (to satisfy
 Limited disclosure any reasonable demand
(provision of information for information in
accordance with the
subject to public interest)
Shari’a)
  Personal accountability    Public accountability
(focus on individuals who (focus on the community
control resources) who participate in
exploiting resources)
Islamic Accounting is A
Substitution to Conventional
Accounting

 The Islamic accounting which has implicit

economic, political and religious meaning (an
integrated world view system, author), has
the possibility to show the key to a post
Newtonian Accounting (Western Secular
based accounting, author)” (Hayashi, 1989)
The practice of Islamic Accounting

 The development of Islamic Banks has been

very rapid in the whole world.
 Suleiman (1999) says that there are 189
Islamic Financial Institutions as in 1999.
 In Indonesia, there are three IBs, 28 Islamic
Banking Unit and 126 Islamic Rural Banks
(Bank Indonesia, 2008)
Contd…

 The existence of Islamic banks creates the

need for different accounting.
 It is because the characteristics and
operational of Islamic Bank different as
compared to Conventional Banks.
Contd…

 In Indonesia, IAI has anticipated this need by

promulgating PSAK no. 59 and it was
replaced for with PSAK no. 101-106
 However, some accounting matters which
are not covered by PSAK 101-106 still refer
to PSAK No. 59, such as for Ijarah
Transaction.
Result of Incongruence between Eco. System and Acc.
System
THE
THESOCIO
SOCIOECONOMIC
ECONOMICOBJECTIVE
OBJECTIVEOF
OF
THE SOCIO ECONOMICS OBJECTIVES THE SHARI’AH
OF THE SECULAR CAPITALIST THE SHARI’AH
ECONOMIC SYSTEM

THE
THEISLAMIC
ISLAMICECONOMICS
ECONOMICSSYSTEM
SYSTEM

CAPITALIST ECONOMICS INSTITUTIONS

THE
THEESTABLISHMENT
ESTABLISHMENTOF
OFISLAMIC
ISLAMICSOCIO
SOCIOECO
ECO
ENTERPRISES & INSTITUTIONS
ENTERPRISES & INSTITUTIONS

ISLAMIC
ISLAMICACC
ACCCONSISTENT
CONSISTENTWITH
WITH
ISLAMIC VALUES
ISLAMIC VALUES
USE OF CONVENTIONAL ACC
BASED ON ‘SECULAR
PHYLOSOPHYCAL
VALUES’ INCONSISTENT CONSISTENT BEHAVIOR IN LINE WITH
WITH ISLAMIC VALUES ISLAMIC NORMS
(HOMO ISLAMICUS)

INCONSISTENT OR DEVIANT
BEHAVIOR
OF MUSLIM USERS
(HOMO ECONOMICUS)

(Shahul,
Muslim’s Countries Exposures

 Belkoui (2001) argues that accounting is a

language of business.
 It should be acknowledged that out of Islamic
financial industries, it is rare to find that the
business in Muslim countries are much
influenced by the Islamic values.
 To Implement Islamic Accounting, there is a
need to Islamize our behaviour