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THE NEED FOR ISLAMIC ACCOUNTING; PERCEPTIONS OF ITS OBJECTIVES AND CHARACTERISTICS BY MALAYSIAN MUSLIM ACCOUNTANTS AND ACCOUNTING ACADEMICS
Shahul Hameed Bin Mohamed Ibrahim
THESIS PRESENTED IN FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DOCTOR OF PHILOSOPHY DEGREE IN ACCOUNTING
DEPARTMENT OF ACCOUNTANCY AND BUSINESS FINANCE UNIVERSITY OF DUNDEE APRIL 2000
DEDICATED TO ALLAH (EXALTED BE HIS MAJESTY) WHO GAVE US LIFE AND HIS GUIDANCE, HIS CHOSEN LAST MESSENGER MUHAMMAD (PEACE BE UPON HIM) WHO STRIVED FOR THE SALVATION OF MANKIND FROM THE DARKNESS OF IGNORANCE TO THE LIGHT OF ISLAM, MY BELOVED LATE FATHER, HJ. MOHAMMED IBRAHIM MOHD. ISMAIL (MAY ALLAH SWT HAVE MERCY ON HIM) WHO GAVE ME A GOOD EDUCATION BY HIS OWN GOOD EXAMPLE AND WHO INSPIRED THE LOVE OF ISLAM, MUSLIMS AND JUSTICE FOR HUMANITY IN ME, AND MY DEAR MOTHER WHOM I LOVE VERY MUCH (MAY ALLAH GIVE HER A LONG AND HEALTHY LIFE AND A SECURED PLACE IN PARADISE) AND WHOSE PRAYERS I CANNOT DO WITHOUT.
i
TABLE OF CONTENTS
Table of Figures........................................................................................................ vii List of Tables .............................................................................................................. ix Acknowledgements .................................................................................................... xi Declaration................................................................................................................ xiii Certificate ................................................................................................................. xiii Abstract ..................................................................................................................... xiv
CHAPTER 1: INTRODUCTION AND OUTLINE OF THE STUDY
1
1.0 Introduction 1.1 The Context: Conventional Accounting and Its Relationship to Society 1.2 The Problem: the Globalisation of Anglo-American Accounting in Diverse Cultures and Environments 1.3 The Imperative for the Research: Resurgence of Islam and Islamisation of Knowledge 1.4 The Aim and Objectives of the Research 1.5 Research Methodology and Methods 1.6 Original Contributions to Knowledge and Limitations of the Study. 1.7 Outline of the Thesis
1 1 2 3 7 10 12 15
CHAPTER 2: WORLD-VIEWS, VALUES AND ACCOUNTING; DIFFERENT “ACCOUNTINGS” FOR DIFFERENT WORLDVIEWS.
19
2.0 Outline of chapter 2.1 Worldviews,Values and Their Impact on Economic Objectives,Norms and Accounting 2.1.1 The Western Worldview and Values 2.1.2 Western Worldview 2.1.3 Democracy and Popular Sovereignty 2.1.4 Individualism, Liberalism and Utilitarianism 2.1.5 Empiricism 2.1.6 Secularism 2.2 Capitalism, Economic Norms and Accounting 2.3 Marxism: A Reaction Against Capitalism. 2.4 The Accounting Implications of Western Worldviews, Values and Economic Norms. 2.5 Islamic Worldview and Values 2.6 The Implication of Islamic Worldview and Values for Economic Norms and Codes: the Shari’ah and Economic Objectives 2.6.1 Circulation of Wealth 2.6.2 Security 2.6.3 Authenticity 2.6.4 Equity: 2.6.5 Dignity of Labour 2.6.6 Morally Filtered Consumption: 2.6.7 Prohibition of Immoral and Unsocial Contracts 2.7 Accounting Implications of Islamic Economic Values and Norms 2.8 A Comparative Analysis of Western and Islamic Values and Their Implications for Socioeconomic Norms and Accounting 2.9 Worldview and Values: A Comparison 2.10 Conclusion
19 19 21 21 22 23 26 27 28 33 34 39 45 48 49 50 50 51 51 54 54 55 57 63
ii CHAPTER 3: THE PROBLEMS WITH CONVENTIONAL ACCOUNTIN IMPLICATIONS FOR ISLAMIC ACCOUNTING
G AND 66
3.0 Introduction and Chapter Outline 66 3.1 An Outline of Various Accounting Critiques. 68 3.2 The Objectives and Assumptions of Conventional Accounting: Some Problems With the Decision Usefulness Paradigm. 73 3.2.1 The Economic Environment of Decision Usefulness 75 3.2.2 The “Ceteris Paribus” of Decision Usefulness. 76 3.2.3 The Question of Social Welfare: 79 3.2.4 The Societal Assumptions of Decision-usefulness 81 3.2.5 The Dysfunctional Effects of Decision Usefulness: 84 3.2.6 Conclusions on the Decision-Usefulness Objectives of Conventional Accounting. 85 3.3 The Characteristics of Conventional Accounting; the Problem With ‘Accounting Principles’ 86 3.4 The Macro Consequences of Conventional Accounting 90 3.4.1 Multinational Exploitation 92 3.4.2 Privatisation , Loss of Work and Public Property 93 3.4.3 Environmental Problems 96 3.5 The Micro Consequences of Conventional Accounting - Behavioural Problems. 100 3.5.1 Behavioural Research: Human Problems of Budgets 101 3.5.2 Management Control and Performance Measurement 103 3.6 Conventional Accounting Critique: An Islamic Perspective. 105 3.6.1 The Inappropriateness of Conventional Accounting Objectives and Fundamental Assumptions From An Islamic Perspective 105 3.6.1.1 Environment and Fundamental Assumptions of Muslim Society and Islamic Economic System. 108 3.6.2. Characteristics of Conventional Accounting 109 3.6.2.1 The Unsuitability of the Historical Cost and the Prudence Concept. 109 3.6.2.2 The Calculation of Income From An Islamic Perspective 110 3.6.3 Unislamic Consequences of Conventional Accounting 112 3.6.3.1 Privatisation 112 3.6.3.2 Environmental Problems: Islamic Perspectives 113 3.6.3.3 Micro Behavioural Consequences 115 3.7 Conclusion 115 CHAPTER 4: THE NEED FOR ISLAMIC ACCOUNTING: PULL FACTOR 1– THE ISLAMISATION OF KNOWLEDGE
118
4.0 Chapter Outline: the Pull Factors 4.1 The Islamisation of Knowledge 4.1.1 Islamisation of Knowledge and Islamisation. 4.1.2 The Need for Islamisation of Knowledge- the Malaise of the Muslim Ummah. 4.1.3 Reactions to the Malaise 4.1.4 The Movement towards Islamisation of Knowledge 4.2 The Methodology of Islamisation of Knowledge 4.2.1 The Three-Step Approach 4.2.2 A Work Plan for the Islamisation of Knowledge 4.2.3 Islamisation of Knowledge through discourses 4.2.3.1 Articulating the Islamic paradigm of knowledge 4.2.3.2 Developing Qur’anic (or Islamic) methodology 4.2.3.3 Methodology for dealing with the Qur’an 4.2.3.4 Methodology for dealing with the Sunnah 4.2.3.5 Re-examining the Islamic intellectual Heritage 4.2.3.6 Dealing with the Western Intellectual paradigm 4.2.4 The Two Processes Approach 4.3 Islamisation of Knowledge, A Paradigm Shift In Epistemology? 4.3.1 Epistemology: the Development and Schools of Western Epistemology.
118 120 120 122 126 128 129 130 133 135 136 136 136 137 137 137 138 142 142
iii 4.3.2 Scientific revolutions and Sociological Paradigms 4.3.3 The Implications and critique of the paradigms. 4.3.4 Theoretical assumptions of this research 4.3.5 Locating this research 4.4 An Intial Attempt At Islamisation of Accounting. 4.5 Conclusion
145 152 156 157 163 164
CHAPTER 5: THE NEED FOR ISLAMIC ACCOUNTING: PULL FACTORS 2- THE ESTABLISHMENT OF ISLAMIC ORGANISATIONS
166
5.0 Introduction 5.1 The Islamic economic and financial system and the problem of riba. 5.1.1 The objectives and characteristics of the Islamic Economic System 5.1.2 Definition and classification of Riba 5.1.3 Reasons for the prohibition of Riba 5.1.4 Controversies on the prohibition of Riba 5.2 Islamic Organisations 5.2.1 Islamic businesses 5.2.1.1 forms of Business Organisation 5.2.1.2 Objectives and Operations of Islamic Organisations. 5.2.1.3 Accounting implications 5.2.2 Zakat collection and distribution 5.2.3 Insurance companies 5.3 Islamic banks and Financial Institutions: history, nature and operations 5.3.1 Classification of Islamic banks 5.3.2 Development of Islamic banks and financial institutions 5.3.3 Modus operandi of Islamic Banks 5.4 The Asset side of islamic banks: Islamic Financial Instruments: 5.4.1 Murabaha and Bai al-Mu’ajjal 5.4.2 Mudharaba 5.4.3 Musharaka 5.4.4 Ijara 5.4.5 Salaam 5.4.6 Istisna 5.5 Accounting problems of Islamic banks 5.5.1 Profit sharing 5.5.2 Capital Adequacy Ratio 5.5.3 Confounding International Accounting Standards 5.5.4 Non-Financial Disclosure 5.6 Conclusion
166 168 169 172 173 173 178 181 181 181 183 184 190 192 193 194 198 201 201 202 203 204 204 204 205 205 211 215 217 219
CHAPTER 6:THE OBJECTIVES & CHARACTERISTICS OF ISLAMIC ACCOUNTING 221 6.0 Introduction 6.1 The Construction of Accounting Theories: Methodologies, Approaches and Methods. 6.1.1 The Empirical Inductive Approach: 6.1.2 The Deductive Approach 6.1.3 The Methodology of this research. 6.2 Ethics, Business and Accounting 6.2.1 Ethics and Business Ethics: 6.2.2 The Islamic Economic Paradigm and its objectives 6.3 Accountability and Islamic Accountability : the objective and premise of Islamic accounting. 6.3.1 Stewardship 6.3.2 Accountability 6.3.3 Extensions of Accountability Framework & Islamic Accountability 6.3.4 Islamic Accountability; the Basis of Islamic Accounting 6.4 Subsidiary objectives of Islamic Accounting 6.4.1 Shari’ah Compliance. 6.4.2 Assessment and Distribution of Zakat
221 223 223 225 230 232 234 238 242 243 245 249 252 260 260 261
iv 6.4.3 Equitable distribution of wealth among stakeholders 6.4.4 The creation of an co-operative environment and solidarity 6.5 Users of Islamic Accounting Information 6.6 Characteristics of Islamic Accounting 6.6.1 Conventional and Islamic Accounting Information: Similarities and Differences. 6.6.2 Information on the Shari’ah Compliance of the Entity. 6.6.3 Wealth distribution 6.6.4 Employee-Manager relationships 6.6.5 The Social and Environmental Impact of the Organisations Activities. 6.6.6 Some other considerations of Islamic Accounting 6.6.6.1 Monetary Measurement Concept 6.6.6.2 Islamic Auditing 6.6.7 Income Measurement and Valuation in the Islamic Accounting system. 6.7 Conclusion
263 264 265 268 268 271 273 274 275 276 276 277 278 284
CHAPTER 7: RESEARCH DESIGN AND DATA COLLECTION
287
7.0 Introduction 7.1 Data Gathering Techniques: Matching Methodology and Methods. 7.1.1 Questionnaires and the survey method 7.1.2 Postal Questionnaires 7.1.3 Personally Administered Questionnaires 7.1.4 Interviews 7.1.4.1 Definition: 7.1.4.2 Classification of Interviews 7.1.4.3 Advantages and Disadvantages of interviews versus Postal Questionnaires 7.1.5 Telephone Surveys 7.2 Methods and the Rationale for the Methods 7.2.1 The Data Collection Methods: From The Ideal to Reality 7.2.2 The Choice of Malaysia as the Research Environment 7.2.2.1 Some background information on Malaysia 7.2.2.2 Islamic revivalism in Malaysia 7.2.2.3 Islamisation of business life 7.2.2.4 Malaysia as the Country of Choice for this Project. 7.2.3 Questionnaires and Interviews from an Islamic perspective. 7.3 The Islamic Accounting Perception Questionnaire (IAQ) 7.3.1 The Objective of the Questionnaire 7.3.2 The Construction of the Questionnaire 7.3.3 The Structure of the Islamic Accounting Questionnaire. 7.3.3.1 Section 1: The ethical/ moral context of Islamic and Muslim Business organisations. 7.3.3.2 Section 2: Suitability (or otherwise) of Conventional Anglo-American Accounting for Islamic organisations and Muslim users. 7.3.3.3 Section 3: The Objectives, Users, Nature and Characteristics of Islamic Accounting. 7.3.3.4 Section 4:Personal & Organisational Details. 7.3.4 The Population and Sample Statistics of Participants Surveyed. 7.3.4.1 The Accounting Academics 7.3.4.2 The Accounting Professionals 7.3.5 Method of Delivery and Difficulties Encountered 7.4 The Finance Questionnaire on the Behavioural Effects of Conventional Accounting. 7.4.1 The Objective of the Finance Questionnaire. 7.4.2 The Structure and Construction of the Finance Questionnaire 7.4.3 Method of Delivery and Difficulties Encountered 7.4.4 Sample Statistics and Response Rate for the Finance Questionnaire 7.5 Non-Finance Questionnaire on the Behavioural Effects of Conventional Accounting. 7.5.1 The Structure of the Non-Finance Questionnaire 7.5.2 Sample Statistics for the Non-Finance Questionnaire, Delivery and Difficulties Encountered 7.6 Conclusion
287 288 289 290 292 293 293 293 294 295 296 296 297 297 298 300 300 301 303 303 305 306 306 311 314 319 320 321 323 325 327 327 328 329 330 331 332 332 333
v CHAPTER 8: DATA ANALYSIS OF THE ISLAMIC ACCOUNTING QUESTIONNAIRE 335 8.0 Introduction 8.1 Research Design, Variables, Scales and Statistical Techniques 8.1.1 Research Design 8.1.2 Variables 8.1.3 Scales or levels of measurement 8.1.4 Measurement scales 8.1.5 Statistical Techniques 8.2 Validity and Reliability 8.2.1 Validity 8.2.2 Tests for Reliability 8.2.3 Sampling Error 8.3 Dependent Variables: Findings 8.3.1 Analysis & Findings of Section 1 of Islamic Accounting Questionnaire (IAQ). 8.3.1.1 Aggregate Scores for Section 1 of IAQ 8.3.1.2 Interpretations of aggregate scores 8.3.1.3 Aggregate scores for Section 1 of the IAQ. 8.3.2 Analysis & Findings of Section 2 of the Questionnaire 8.3.2.1 Aggregate scores for Section 2 of the IAQ. 8.3.3 Analysis & Findings of Section 3 of the Questionnaire 8.3.3.1 Objectives of Islamic Accounting 8.3.3.2 Importance of other stakeholders 8.3.3.3 The type of Information which Islamic accounting should provide 8.3.3.4 The characteristics and nature of Islamic accounting 8.3.3.5 Aggregate scores for Section 3 of the IAQ. 8.4 Interpretation of the Findings As A Whole 8.5 Independent Variables: Findings 8.5.1 Working Sector 8.5.2 Accountancy Related Experience: 8.5.3 Education. 8.5.4 Islamic Education 8.5.5 Social and Environmental Accounting Education 8.6 Significance Tests of Association Between Independent and Dependent Variables 8.7 Conclusion
335 335 335 337 339 342 343 345 346 350 351 353 354 359 362 362 364 368 370 370 372 373 374 375 376 376 377 377 378 380 382 383 386
CHAPTER 9: HYPOTHESES TESTING OF THE ISLAMIC ACCOUNTING QUESTIONNAIRE
387
9.0 Introduction 9.1 Socio-Economic Principles of Islamic Business Organisations 9.2 The Adequacy of Islamic Sources (Qur’an, Sunnah) As A Base for Developing An Islamic Accounting and Economic System for Contemporary Organisations. 9.3 The Appropriateness of Conventional Accounting for Islamic Business Organisations and Muslim Users 9.3.1 Conventional accounting results in UnIslamic behaviour 9.3.2 Conventional accounting provides inappropriate information 9.3.3 Conventional accounting concepts (principles) are not suitable for Islamic organisations. 9.4 The Objectives and Characteristics of Islamic Accounting 9.4.1 The Objectives of Islamic Accounting. 9.4.2 The Subsidiary Objectives of Islamic Accounting 9.4.3 The Users of Islamic Accounting 9.4.4 The characteristics of Islamic accounting 9.5 Interpretation of Results 9.6 Conclusion
387 388
399 400 403 405 407 408 411 413 416 420 426
APPENDIX 9-1: RESULTS OF IAQ HYPOTHESIS TESTING BY SECTORS
429
397
vi CHAPTER 10: ANALYSIS OF BEHAVIOURAL ACCOUNTING QUESTIONNAIRES
431
10.0 Introduction 10.1 The Finance Questionnaire: Areas of Enquiry 10.2 Finance Questionnaire: Analysis of Findings 10.2.1 Short Term Investments 10.2.2 Long-term Investments 10.2.3 Social and Environmental Investment Policy 10.2.4 Islamic Investment Policy 10.2.5 Summary Results for Investment Activities 10.2.6 Financing Activities 10.2.7 Islamic Financing Instruments 10.2.8 Non-Islamic Financing Instruments 10.2.9 Summary Financing Behaviour 10.2.10 Operational Activities 10.2.11 Suitability of conventional accounting 10.2.12 Islamic commitment 10.3 Interpretation of Findings of Finance Questionnaire 10.4 Non-Finance Questionnaire: Areas of Enquiry and Results 10.4.1 Budget Pressures 10.4.2 Performance Evaluation 10.4.3 Profit Focus 10.5 Interpretation of the Results of Non-Finance Questionnaire 10.6 Conclusion
431 432 435 436 437 439 442 443 444 444 446 447 448 449 450 454 461 462 466 468 471 473
CHAPTER 11: SUMMARY, CONCLUSIONS AND SUGGESTIONS FOR FURTHER RESEARCH
475
11.0 Introduction 11.1 Aims and Objectives of the Study 11.2 The Case for An Islamic Accounting 11.2.1 Development of values underlying conventional accounting. 11.2.2 The Push factors: Why conventional accounting is inappropriate for Islamic organisations and users 11.2.3 Pull Factors 1: The theoretical imperative 11.2.4 Pull Factors 2: The practical imperative 11.3 Islamic Accountability, the Objectives and Characteristics of Islamic Accounting 11.4 Research Design and Empirical Results 11.5 Limitations and Suggestions for Further Research 11.6 Original Contributions of the Research
475 475 476 476 478 479 480 481 483 490 491
BIBLIOGRAPHY
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vii TABLE OF FIGURES Figure 1-1:Structure of Thesis
16
Figure 2-1:The Society / Accounting Interface
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Figure 2-2: Comparative World-View and Values of Islam and Western Civilisation
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Figure 2-3: Comparison of Western (Capitalist) Economic Norms vs. Islamic Economic Norms
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Figure 2-4: Accounting Implications of Different Economic/Value Systems
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Figure 2-5: Result of Incongruency between Economic System and Accounting System
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Figure 3-1: Accounting Route to Social Welfare
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Figure 3-2:The Need for Islamic Accounting: Push Factors
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Figure 4-1:The Need for Islamic Accounting: Push and Pull Factors
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Figure 4-2:The Four Paradigms of Burrell & Morgan (1979)
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Figure 4-3: The Subjective- Objective Dimension of Meta-theoretical Assumptions
147
Figure 4-4:Locating This Research: Islamic Paradigm as a Third Dimension
158
Figure 6-1:The Accountability Model & Framework
246
Figure 6-2: An Alternate Definition of Accountability
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Figure 6-3:The Islamic Accountability Model
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Figure 7-1: Research Questions Underlying the Islamic Accounting Questionnaire.
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Figure 7-2: Section 1 of the Islamic Accounting Questionnaire
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Figure 7-3: Section 2 of the IAQ
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Figure 7-4: IAQ: Section 3 (Part 1)
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Figure 7-5: IAQ: Section 3 (Part 2)
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Figure 7-6: IAQ Section 3, Part 3
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Figure 7-7: IAQ, Section 3, Part 4.
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Figure 7-8: IAQ, Section 3, Part 5
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Figure 7-9: IAQ, Part 4: Personal and Organisational Details
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Figure 8-1:Moderating and Intervening Variables
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Figure 8-2 :Dendrogram Using Ward Method for Section 1 of the IAQ
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Figure 8-3: Dendrogram Using Ward Method for Section 2 of the IAQ
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Figure 8-4: Dendrogram Using Ward Method for Section 3 of the IAQ
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Figure 9-1: Hypothesis 1: IBO’s Concentrate on Social Welfare
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Figure 9-2: Questions on Ethical Nature of Islamic Business
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Figure 9-3: Hypothesis 2: IBO’s Do Not Participate In unIslamic Activities
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Figure 9-4:Questions on Investment Activities of IBOs.
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Figure 9-5:Hypothesis on the Inherent Development Capacity of the Islamic Sources of Law
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Figure 9-6: Hypothesis on Consequences of Conventional Accounting Information
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Figure 9-7:Questions on the Behavioural Implications of Conventional Accounting
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Figure 9-8:Hypothesis on Appropriateness of Conventional Accounting Information
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Figure 9-9: Questions on Appropriateness of Conventional Accounting Information
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Figure 9-10: Hypothesis on Suitability of Conventional Accounting Concepts
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Figure 9-11:Qustions on Appropriateness of Conventional Accounting Concepts
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Figure 9-12:Hypothesis on the Main Objective of Islamic Accounting
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Figure 9-13: Hypothesis on the Subsidiary Objectives of Islamic Accounting
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viii Figure 9-14:Questions on the Subsidiary Objectives of Islamic Accounting
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Figure 9-15:Questions on the Relative Importance of Various Stakeholders Compared to Shareholders
414
Figure 9-16:Hypothesis on the Relative Importance of Islamic Accounting Users
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Figure 9-17: Hypothesis on the Information Characteristics of Islamic Accounting
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Figure 9-18:Questions on the Characteristics on Islamic Accounting Information
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Figure 10-1: Islamic Commitment of Various Groups: Finance Questionnaire
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Figure 10-2: Mean Response for Summary Variables
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Figure 10-3: Scatterplot of Islamic Behaviour Vs Company Type
459
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LIST OF TABLES Table 4-1:Classfication and Evolution of Islamisation of Knowledge Methodologies
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Table 5-1:Profit Distribution Method in the Faisal Islamic Bank of Sudan
208
Table 7-1: Population and Sample Statistics of Accounting Academics In Malaysian Universities Surveyed.
323
Table 7-2: Malaysian Professional Accountants Sample Surveyed.
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Table 7-3: Finance Questionnaires Sample
331
Table 7-4:Non Finance Questionnaire Sample and Responses
333
Table 8-1: Reliability Analysis for Islamic Accounting Questionnaire
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Table 8-2:Distribution and Receipt of Islamic Accounting Questionnaires
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Table 8-3: χ2-Test for Sample Representation of Population Sectoral Characteristics
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Table 8-4: Response Frequencies for Dependent Variables (Likert Scale) - IAQ
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Table 8-5: Response Frequencies for Independent Variables (1-5 Ranking Scale) - IAQ
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Table 8-6:Response Frequencies of Dependent Variables (Categorical Scale)-IAQ
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Table 8-7: IAQ Aggregate Scores – Descriptives
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Table 8-8: IAQ Aggregate Scores – Response Frequencies
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Table 8-9:IAQ Aggregate Scores – Frequencies (Continued)
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Table 8-10: Participants by Working Sector
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Table 8-11:Grouped Experience Frequency Table
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Table 8-12: Qualifications/Place of Education of Participants
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Table 8-13: Highest Islamic Qualifications
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Table 8-14: Formally Studied Social & Environmental Accounting
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Table 8-15: Firm Receives Technical Assistance
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Table 8-16: Significance Levels: Kruskal-Wallis Tests of Differences of Ranked Means between Populations Grouped By Independent Variables –IAQ
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Table 9-1: Statistical Results for Hypothesis Testing of ETH1
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Table 9-2: Statistical Results for Hypothesis Testing of ETH2
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Table 9-3: Statistical Results of Hypothesis Testing for QSREL
399
Table 9-4: Statistical Results for Hypothesis Testing of UNISL
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Table 9-5: Statistical Results for Hypothesis Testing of Appropriateness of Conventional Accounting Information for Muslim Users (CAINF).
404
Table 9-6: Statistical Results for Hypothesis Testing of CAPRIN
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Table 9-7: Results of Testing the Decision-Usefulness Hypothesis
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Table 9-8: Results of Hypothesis Testing of Social vs. Economic Objectives of Islamic Accounting413 Table 9-9: Results of Hypothesis Testing of STIMP
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Table 9-10:Results of Hypothesis Testing of SEI
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Table 9-11results of Tests of IAQ Hypothesis At Mean/Median=4.0
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Table 9-12: Proportion Test of Variables for Academic and Professional Accountants
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Table A9-1: Means Test of Hypotheses by Sector
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Table A9-2: Median Tests of Hypotheses by Sector
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Table 10-1:Finance Questionnaire: Respondents by Company Type
435
x Table 10-2: Finance Questionnaire: Responses to Questions on Short-term Investment Activities437 Table 10-3: Finance Questionnaire: Responses to Questions on Investment Strategy
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Table 10-4: Responses to Questions on Social and Environmental Consequences of Investment441 Table 10-5:Responses to Questions on Islamic Investment Policy
443
Table 10-6: Descriptives for Summary Investment Activity
444
Table 10-7: Responses to Questions on Islamically Allowable Financing Methods
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Table 10-8: Response to Questions on Non-Islamic Financing Instruments
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Table 10-9: Summary of Financing Behaviour
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Table 10-10 Responses to Question on Operational Activities
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Table 10-11:Summary Behaviour in Operational Activities
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Table 10-12: Responses to Suitability of Conventional Accounting
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Table 10-13: Islamic Commitment
452
Table 10-14: Descriptive Statistics for Islamic Commitment
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Table 10-15: Correlation Test for Co Type and Islamic Behaviour
460
Table 10-16: Respondents Type: Non-Finance Questionnaire
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Table 10-17: Summarised Response Frequency Non-Finance Questionnaire: Effect of Budget Pressures
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Table 10-18:Non-Finance Questionnaire Descriptive Statistics (Summarised Responses): Budget Pressures
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Table 10-19:Summarised Response Frequency Non-Finance Questionnaire: Performance Evaluation Table 10-20: Non-Finance Questionnaire Descriptive Statistics (Summarised Responses)
466 467
Table 10-21:Summarised Response Frequency
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Table 10-22:Non-Finance Questionnaire Descriptive Statistics (Summarised Responses)
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Table 10-23: Correlation Tests By Respondent Type
472
xi
Acknowledgments I wish to express my sincere thanks to the following persons who made this thesis possible: I would first thank Dr. Kouhy and Professor John Innes who together supervised the thesis. Dr. Kouhy took a deep interest in the project from the beginning and was very insightful and thorough in the review of the chapters of this thesis. He continued to be interested in the project and the researcher despite his illness towards the end of the project. Prof. J. Innes always reviewed my work speedily and was very constructive and friendly in his criticism of my work. Thank you for toning down my thesis and getting rid of my silly grammatical mistakes! I am sorry that I could not keep up with him, as I should have! I also thank Prof. Grinyer who was involved in the early stages of the project. Special thanks goes to Prof. Rob Gray whose lectures on social and environmental accounting inspired me to change my topic from Islamic banking problems to a theoretical enquiry into Islamic accounting. Prof. Gray’s criticisms of conventional accounting was the basis of my own critique and although we don’t agree on what is meant by ‘social’ and the basis of ethics and morality, the issues in his studies of social accounting have relevance to many of the Islamic concerns of my project. Mr. Donald Sinclair also deserves special mention in this thesis as well as all theses undertaken in this department for helping all accounting students including myself with the statistical techniques used in the research. He is a patient and helpful guide who has made the dread of statistics a bit more bearable. Prof. David Power is also thanked for his trenchant criticisms and “rubbishing” my earlier drafts of the thesis. He is responsible for saving the readers of this thesis from the burden of reading what “Plato had for breakfast”! I am especially thankful to him (along with Prof. Innes) for correcting my grammar and editorial mistakes and making my writing more readable and academic. I also like to thank Prof. Jan Bebbington, Dr. Christos Tzovas, Dr. Khalid al-khater, Dr. Jassim al-Rumaihi, Dr. Mustapha Mahmud, Br. Jalaal al-Attar, Dr. Collin Dey, Dr. Bruce Burton, Allan Murray, Niklas Kreander, Dr. Rishma Vedd, Emily, Dr. Claire, Margarita Basabikova and Br. Khalid Abdul Qader who all contributed their thoughts, help and food (especailly
Khalid al-khater, Jalaal al-Attar and Margarita who
supplied caviar) at various times.
xii Special thanks also goes to Br. Kamaruddin Taha, CEO of Abrar Discounts Bhd., the managers and employees of the Abrar Group, Tabung Haji and Bank Islam Malaysia Bhd., the executive MBA students of UIA and Dr. Obiyathulla, Dr. Omar Azmi, Br. Yusuf Ismail, my niece Firdaus binti Mohd. Farouk and the secretaries at both UIA and Dept. of Accounting and Business Finance at the University of Dundee. I am totally in debt to the Malaysian accountants and accounting academics and the employees and managers of Islamic organisations in Malaysia who took their time and trouble to answer my questionnaires and pray that Allah swt. reward them generously for their contribution to Islamic accounting. Lastly I must thank my own family members especially my aged mother who has forgone four years of service from me. I pray Allah swt. rewards her with good health, long life and an assured place in paradise with my late father (Allah yarham). My brother Dr. Rafiq who took care of her in my absence is especially thanked. I also thank my wife who put up with my hours and emotions during the past 19 years and especially the past 3.5 years in Dundee. Also my children who were deprived of a higher level of care during my research period. I would also like to thank Mr. Farouk bin Abdul Majeed and Mrs. Hajoor Farouk, my co-brother and sister in law, who managed my finances and property voluntarily in Malaysia while I was studying and for their hospitality during my empiricial investigation. May Allah reward them for their kindness. I also would like to express my sincere gratitude to the Hill Town Islamic centre and the Muslim community of Dundee especially the Imams of the Hilltown mosque and Dr. Hafiz Ayub Patel who is the 1st emergency service to all the Muslims of Dundee and a true friend in need. May Allah swt. bless them and reward them amply. Also a special thanks to Dr. Ridah al-Gazzar for being a good friend and Muslim counsel for the whole period of my stay in Dundee. Last but not least, I would like to thank the Malaysian Government and my fellow Malaysians for funding my research and the International Islamic University Malaysia for granting me study leave to enable me undertake this study.
xiii
Declaration
I hereby declare that I am the author of this thesis; that the work of which this thesis is a record has been done by myself, and that it has not previously been accepted for a higher degree.
Signed: ............................................ Shahul Hameed Mohamed Ibrahim
Date:
......................................
Certificate I certify that Shahul Hameed Mohamed Ibrahim has worked the equivalent of nine terms on this research and that the conditions of Ordinance 39 and related regulations have been fulfilled.
Signed: ............................................ Dr. R. Kouhy Date:
......................................
xiv
Abstract This study investigates the need for an alternative “Islamic accounting” which is consistent with the worldview, values and socioeconomic norms of Islamic society. It proposes an outline of an Islamic accounting theory together with empirical investigations of (i) the perception of Malaysian Muslim accountants and accounting academics on Islamic accounting and (ii) the unIslamic behavioural consequences of conventional accounting on users. The researcher starts from a premise that the worldviews and values of a society affect its economic objectives and norms, which in turn affect the accounting system, and vice versa. An examination of the worldviews, values and economic objectives of Western society and the capitalist economic system which underlie conventional (Anglo-American) accounting shows them to be different from those of an Islamic society. This presents a prima facie case for Islamic accounting. The need for an Islamic accounting is classified into “push” and “pull” factors and then examined in detail. It is argued that conventional accounting with its: • • •
Decision-usefulness framework of providing information to increase the wealth of shareholders and creditors in an advanced capital market framework, Measurement and valuation characteristics, and Socioeconomic and behavioural consequences,
may be inappropriate for an Islamic society trying to implement an Islamic economic system. Further, recent attempts at the “Islamisation of knowledge” are examined and shown to provide the theoretical imperative for the development of an Islamic accounting system. The study also examines the objectives, nature and operations of Islamic economic institutions such as Islamic banks together with their accounting implications. It is shown that the accounting requirements of these institutions vary from conventional capitalistic economic institutions.
Thus, a practical imperative for the
development of an Islamic accounting system is thereby demonstrated. From the worldview, socioeconomic objectives and values of Islam, an outline of an Islamic accounting theory is developed based on a proposed “Islamic
xv Accountability” model. The model envisages dual accountability for Islamic organisations to take cognisance of the Islamic concept of Khilafa (vicegerancy) which embodies trusteeship of economic resources and accountability not only to finance providers but to God as well by ensuring the compliance of the organisation’s operations to Islamic Law and morality (Shari’ah).
Hence, Islamic accounting focuses on various stakeholders in
addition to shareholders and creditors, measures and reports on Shari’ah compliance in addition to economic activities, and may use non-financial quantitative and qualitative measures in its reporting. The theoretical concerns are then investigated using three sets of questionnaires. The first set of questionnaires was posted to Malaysian Muslim Accountants and Accounting Academics. Although the respondents supported retaining the conventional accounting principles of historical cost, prudence and monetary measurement, they generally agreed to the unsuitability of conventional accounting information. They also showed strong support for an Islamic accountability framework and a more holistic, integrated reporting regime to varied stakeholders, instead of focusing on shareholders. The behavioural questionnaires were addressed to executives and employees in the finance and non-finance functions of various companies in Malaysia to elicit evidence on the unIslamic behavioural consequences of conventional accounting. Although, there is no strong evidence from this research to indicate that conventional accounting lead to unIslamic behaviour or otherwise, the findings indicate that Islamic organisations are better able to withstand
the
negative
consequences
of
conventional
accounting.
Organisations owned or run by Muslims (not specifically Islamic) and NonMuslim organisations, however, tend to use accounting to focus on profits irrespective of unIslamic consequences. This study has made some initial contributions to the Islamisation of accounting and can be the basis of future research, which seeks to make Islamic accounting a reality in practice.
