Accounting Measurement in the Religious Perspective:

Conservatism or Optimism?

Dr. Saeed Askary

School of Accounting, Economics and Finance
Faculty of Business and Law
Deakin University
221 Burwood Hwy
Burwood Vic 3125
Australia
Tel: + 61 2 9244 6633
Fax: + 61 2 9244 6283
E- mail: saskary@deakin.edu.au

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 Accounting Measurement in the Religious Perspective:
Conservatism or Optimism?

ABSTRACT

This paper concerns about accounting measurements from the socio-cultural values’
perspectives. By applying Hofstede (1980), Gray (1988), and Perera (1989) studies, first of
all, the study develops a theory to concern about accounting values in a religious perception.
Then Islam, as one of the most debatable religion in the world, is considered as an instance.
Islamic compliance accounting measurement has developed in next stage to understand how
the accounting value could be different from this viewpoint from the Western conservative
historical cost. This study theoretically proves that Islamic compliance accounting
measurement conforms to the exit price method which is different from the Western
complaisance accounting measurement.

Key words: Accounting measurements, Culture, Exit price, Historical cost accounting, Islam,
Religion.

1. Introduction
Different forms of cultures preventing unified accounting practices globally are perceived to
have influenced accounting nationally and internationally. In this context culture is defined as
those environmental factors that strongly impact national accounting systems – a likely causal
factor of different national accounting practices in accord with differing national cultures. The
cultural environment is generally acknowledged to be a national (or regional) system
comprising language, religion, morals, values, attitudes, law, education, politics, social
organisation, technology, and material culture. The interaction of these cultural elements on
accounting are expected to be exceedingly complex.
Religion is a particular focus in this study. Religion is acknowledged to be significant
cultural factor that impacts all social institutions, of which accounting is declared to be one
(Briston and El-Ashker, 1986; Gambling, 1987; Thomas, 1989; Belkaoui, 1990). Due to the
influence of religion and other belief systems in the shaping of cultural values, in the context
of this study, investigation of the influence of religion on accounting is a critical issue (Hamid,
Craig and Clarke 1993, Gambling and Abdel-Karim, 1986, and 1993). The focus on Islam as
a religion of particular world significance is a particular case illustrative of the potential
influence of culture on accounting practice and the values that drive it.
According to Perera (1989) each accounting system is a product of its specific
environment. Mueller, Gernon, and Meek (1994) has also noted, “Accounting is shaped by
the environment in which it operates” (p.1). In other words, different patterns of accounting
are linked to the different societal values, religion, political systems, and previous histories
that have shaped the specific environment in which each functions.
In the Gray (1988) framework the potential conflicts across the environmental factors
influencing accounting entail the contrasts between the professionalism and statutory control
of practitioners, uniformity and flexibility in practitioners’ processing of accounting data,
conservatism and optimism in their measurement of the financial attributes of assets and

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equities, and secrecy and transparency in respect of financial disclosure. There, he established
a theory linking the potential conflicts in accounting practices in different societies with their
cultural and social values. Understandably, accounting practice in its service activities role is
fully exposed to the inevitable conflicts of values within and between societies. Nonetheless,
worldwide pressure mounts for uniform methods to be adopted in national accounting systems
and practices. Against that background, for research purposes here, three factors constitute the
general focus in the study: culture, religion and accounting values.

2. Background
It would appear that Jaggi (1975) was at least one of the first to posit a relationship
between religion and accounting, it being one of the many cultural variables possibly
influencing accounting values and ultimately financial disclosure practices. There, Jaggi
appreciated that the cultural environment (including the family, religion and educational
system) was an independent variable that could influence financial disclosure practices in
response to value orientations.
Violet (1983a) also pursued an interrelationship between culture and religion in
developing international accounting standards, this time, from an anthropological point of
view. He perceived accounting to be a product “ . . .of its culture” (pp2-3). Carrying that idea
through to religion he noted that “…the religion of a society incorporates the philosophical
beliefs and very often the legal statutes of the society” (p.3). And linking culture, accounting
and religion he explained that “. . .since accounting is culturally determined, other cultural
customs, beliefs and institutions influence it” (p.9). That is, he perceived an alliance between
religious values and accounting practices.
Consistent with Violet’s theme Gambling and Abdel-Karim (1986) and Gambling
(1987) directly debated the relationship between the belief system of Islam and the way it
could, and arguably should, influence accounting in Muslim societies - there, in the context of
a perceived relationship between religion, culture and accounting. In that context Gambling
and Abdel-Karim (1986) reasoned that:
. . . accounting theory is part of the personality and hence part of the culture. If the
individuals are Muslims, their personalities are Islamic and their culture is Islamic.
Therefore, their accounting theory is Islamic and encompasses the Shaira along with
much else.(p.39)
The purpose of the study is to know how social values of the Islamic State can
influence accounting measurement. The study suggests the following justifications for why
accounting measurements should be viewed from the Islamic state. First, the study may
provide the possibility of an improved framework to release from inherent problems of
accounting measurements. This issue may also provide an innovative alternative to measure
more realistic accounting elements such as asset, liabilities, profit, etc. Third, the study find
those differences between Islamic accounting measurement as an alternative in compare with
classic Western accounting measurement system.
The rest of the paper is divided into four sections. First, an initiation of relationship
between culture, religion and accounting direct the discussion toward Hofstede (1980), Gray
(1988) and Perera (1989) model of social and accounting values. Then, accounting
measurement will be reviewed in an Islamic perspective. The last section contain the
conclusions of the paper, its limitations, and some suggestions for future research.

3. Culture, Religion, and Accounting

For about four decades the influence of culture on accounting has been a subject in
accounting research. That focus indicates the perception of a considerable influence of culture
on the accounting environment and that the existence of diversity between national

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accounting systems is perceived to be due to the differences in their cultural environments.
That is, the many different accounting practices in the world are due to the manifold forms of
culture. Culture is a vast domain and cannot be considered effectively in particular contexts
such as accounting without reduction into separate cultural elements, of which religion is
identified as one of particular relevance.
The relationships between the influence of cultural factors on accounting
environments have been examined in the literature from many different perspectives. In
respect of cultural relativism in international accounting by Violet (1983 a and b), Belkaoui
(1990), and Doupnik and Salter (1995); culture and corporate financial disclosures by
Harrison and Mckinnon (1986), Belkaoui (1996 and 1997); and for example, in respect of
culture and international accounting systems by Gray (1988), Perera (1989) and Fechner and
Kilgore (1994). Whereas most of those enquires have been establishing a prime facie case
that culture affects (influences) accounting practices, it also is indicative of the acknowledged
importance of exploring the factors underlying and driving different accounting practices
within different societies and countries.
Gambling and Abdel-Karim (1993) considered culture a collective version of the
individual’s personal world-view, close to Belkaoui’s (1991) view that culture is “…a system
of cognition or knowledge of belief” (p.119). Perera (1989) declared his allegiance to
Hostede’s dictum that members of a given culture tend to share a common framework of
meanings, social understanding, values, beliefs and symbols. He also regarded culture to be
often an expression of norms, values and customs that reflect typical behavioral
characteristics within a defined social grouping (a collective). A culture definition by Violet
(1983a) supposed it to be a system that encompasses and determines the evolution of social
institutions (of which accounting might be considered one), social phenomena and indeed of
humankind itself. In his opinion those elements (social institutions, social phenomena and
humankind) formulate and create culture.
Definitions such as those by the researchers provide a micro to macro view of culture
- that is, as a system of individuals’ common beliefs to formulate social institutions. Each of
those authors posited, then developed, a rationale for a likely strong influence of culture on
different aspects of accounting. Thus it is to be taken, that their comments were meant to be
foundation for further exploration of the impact of culture on accounting.
Considering the influence of religion as a cultural factor on accounting is a relatively
new aspect of inquiry. Academic inquiry of such a relationship may allow one to unveil many
unanswered questions about the culture/accounting relationship. Unquestionably, religion
must be accorded the status of being a powerful force underlying human behavior. In this
study that relationship is pursued to set the framework in which to obtain a clear workable
perception of the relationship between cultural elements, the relationship with religion in
particular, and the accounting measurement.
After the decades of discussion on the cultural influences on accounting environments,
research moved a step toward understanding the potential influence of religion on accounting
(for example see Gambling and Abdel-Karim, 1986; Gambling, 1987; Gambling and Abdel-
Karim, 1993; Hamid, et al. 1993; Clarke, Craig and Hamid, 1996). The case was made and
the rationale developed. Interestingly, most of the studies focus on Islam and Muslim
countries, not the cultural drivers of them. The importance of expanding accounting
knowledge through the study of culture and religion generally and Islam as a global religion
in particular, can only increase cognition of the different factors impacting the accounting
environment internationally. Hamid et al, (1993) reasoned that the religion of Islam
transcends the national and cultural boundaries of Muslim countries, though their inhabitants
may differ significantly in many aspects; for example, in respect of their ethnicity, native
languages and their special indigenous customs. Be that as it may, it is necessary to identify

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logically how religions such as Islam can influence accounting practices within the culture of
a specific country or different cross-culture countries globally, if that understanding is to be
translated into active accounting policy-making and implementation.

4. Hofstede (1980), Gray (1988) and Perera (1989) Model

Gray (1988) developed significant accounting hypotheses by utilising the generic
cultural values developed by Hofstede (1980, 1983). Gray’s hypotheses addressed the
influence of the culture of different countries on their accounting systems through the
tendencies of their distinct societal values. In Gray’s Hofstede-based model religion was
presented to be an institutional element, enjoying equal status with other basic national social
infrastructure. Thus, it was perceived that the legal system, corporate ownership, capital
markets, professional associations and education, for example, were to be influenced by
societal values. In turn, institutional elements including religion were taken to influence the
accounting systems and the values driving them (p.7). Consequently, religion was considered,
there, to be one of cultural factors that has a potential to influence accounting systems of
those societies impacted by their religious values. Gray’s Hofstede-based model of accounting
values is drawn upon explicitly in this enquiry as a widely referenced and almost
institutionalized background for both the research undertaken and the conclusions to be drawn
from it.
Pursuing an argument complementary to the Hofstede/Gray theme, Chua (1988)
considered the role of values and beliefs as fundamental matters underlying the development
of accounting knowledge. She argued that “Values and beliefs play a fundamental role in the
constitution of accounting knowledge; they help determine the validity of particular research
questions and different forms of research evidence”(p.29). In doing so she criticized cross-
sectional studies of values and beliefs that had employed a static snapshot of particular
accounting constituencies; the likely influences on accounting were thus perceived by her to
be much more complex than these studies implied. The enquiry undertaken in this study is
consistent with that observatio n.
It will be recalled that Hofstede (1997) defined culture as “the collective programming
of the mind which distinguishes the members of one group or category of people from
another.”(p. 5). He had defined cultural differences at four different levels – symbols, heroes,
rituals, and values. There, he argued that values are the most difficult part to explain. “Values
are broad tendencies to prefer certain states of affairs over others” (Hofstede, 1997, p. 8).
Values are perceived to be at the core of cultural differences within different societies and to
evoke different feelings and perceptions. “Feelings that are often unconscious and rarely
discussible, cannot be observed” (Pratt and Beaulieu, 1992, p.668). Thus, values are specific
modes of conduct tha t are preferred by individuals and the society of which they are members.
Thus, different values, or shared values within national boundaries, have the potential to
promote and sustain significant differences in social behavior and in social artifacts such as
accounting practices.
Differences in accounting practices are manifestations of nationally different social
systems. By virtue thereof, culture and accounting are inextricably linked. This is the
foundation upon which most of the discussion of how accounting functions in different
cultures has proceeded. If this is true, then Islamic culture and values should prescribe an
specific accounting system in which match those accounting practices and values with
Muslim social values.
Hofstede (1980) had identified four distinct contrasting (opposite) sets of dimensions
of cultural mores: individualism versus collectivism, strong versus weak uncertainty
avoidance, large versus small power distance, masculinity versus femininity. It is to be noted

5
that Hofstede’s study has enjoyed considerable attention by different fields of study. Indeed, it
has been cited in nearly six hundred stud ies between 1981-1992 (Sudarwan and Fogarty,
1996). Thus, its use in the context of accounting research is quite justified.
Hofstede’s (1980) study was the catalyst for a new paradigm in international
accounting research during the decade. Indeed, it became the dominant paradigm. Likewise
the adoption of his culture definition - a collective programming process by a society, which
distinguishes the belief systems of its members from other societies became the expected
mantra. Hofstede had specified four characteristics of culture: symbols, heroes, rituals and
values. Indeed, later accounting researchers (such as Gray 1988, Perera 1989 and 1994,
Wuthnow 1994, and Baydoun and Willett, 1995) adopted these and, as with virtually every
piece of Hofstede-like wisdom, they were swept into the context of accounting. To that end
his research was embraced almost entirely by researchers who explored accounting within a
value system paradigm (Pourjalali and Meek, 1995).
Curiously, the accounting researchers did not question (to any significant extent) the
applicability of Hofstede's framework to the accounting context. It was inferred as an act of
faith. That his research sample (containing IBM workers only) was designed and selected to
avoid diversity did not deter the use of its results by accounting researchers in the specific
context of, and to explain national diversities in, accounting. Consequently, cultural studies in
accounting have pursued the cause of the differences in accounting practices within countries.
Whereas Hofstede's paradigm has not always been applied explicitly, his "cultural thesis" can
be read into the text of most enq uiries and the analyses of accounting on an international front
produced during the decade.
Perera (1989, p.43) reasoned two associated ways of analysing the cultural influences
on accounting practices. The first entails determining a set of specific societal values or
cultural factors likely to be directly linked with accounting practice. The second is to verify
any association between societal values and specific accounting practices. By reviewing
Hofstede and Gray’s (1988) studies, Perera (1989) expanded a theoretical framework for
analysing the impact of culture on accounting. He argued that the accounting practices and
systems of different countries are influenced by their cultural values that, in turn, shape their
accounting practices. He posited that the findings of previous studies demonstrate a
worldwide diversity of accounting requirements and practices that are (mostly) explicable in
terms of the national cultural differences. He also argued that “ . . . any exercise to analyse
the cultural influence on accounting should identify a set of specific societal values or cultural
factors which are likely to be directly associated with accounting practices...”(p.43). The
following table describes Perera’s model of accounting practices drawn from the essence of
Gray’s (1988) study.
Table i. Gray/Perera’s Model of Accounting Practices
Low High
Authority Statutory control Professionalism
Disclosure Secrecy Transparency
Enforcement Uniformity Flexibility
Measurement Conservatism Optimism
Source: Perera (1989), p. 47

5. Accounting Measurement in an Islamic Perspective

Gray (1988) noted that conservatism or prudence in asset and income measurement and
reporting is a fundamental stance of western culture of accounting. It varies from country to
country and ranged from a strongly conservative approach in the Continental European
countries to less conservative practices by accountants elsewhere as in the U.S. and U.K. (p.

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10). To Gray, conservatism is linked most closely with Hofstede's uncertainty avoidance
dimension. More conservatism in measuring profits is seen to be consistent with a strong
aversion to the inherent uncertainty of future events. Hofstede's individualism and masculinity
dimensions are perceived to be linked with a weak uncertainty avoidance and therefore to a
less conservative approach in measurement practices.
The Public Company Accounting Oversight Board (PCAOB) and Securities and
Exchange Commission (SEC) are two regulatory bodies in US in which are responsible for
bringing religion to the accounting profession (Rankin, 2005). Accounting measurements in
an Islamic context require consideration of both Islamic (societal and cultural) values and,
unquestionably, Islamic laws. Islamic societal values were argued to evoke tendencies
towards collectivism, weak uncertainty avoidance and gender equality (Askary, 2001).
According to Gray’s hypotheses, collectivism causes a tendency towards conservatism whilst,
in contrast, uncertainty avoidance in the Islamic context has a weak tendency which augurs
towards optimism. Therefore, to identify Islamic compliant measurement practices it is
necessary to confirm that expectation by recourse to the guidance of the Sharia 1 that
underpins conservatism or optimism. It is important to note that the Sharia must be
controlled by an Islamic State to be correctly followed and implemented by the followers.
Accounting measurements under an Islamic State to be followed within Sharia
framework is different from the western society. The reason is due to difference in social and
cultural values in which they are originated from Sharia. Recognition of those differences is
crucial for harmonization of accounting practice globally, getting knowledge of accounting
from other religion perspective, and a profound understanding of the Islamic paradigm in
accounting. Baydon and Willett (1994) note:
“...Islamic accounting theory has the nature of prescription about how things should
be done to satisfy Islamic objectives rather than description about how things are
actually done in practice” (p.1).

Islamic accounting boundaries can be defined by the differences between a professed

normative Islamic Compliant Accounting system and the non-Islamic (conventional western)
accounting practices. With that achieved, inquiry into the current accounting practices in
Islamic countries can be undertaken with a view to identifying the non-Islamic compliant
influences on their accounting systems. It is these that have to be changed were the Islamic
compliant system to be implemented in Muslim countries.
Gray linked the greater the uncertainty, stress and risk, in a society to the greater
desire to have conservative accounting measurements in regard to assets and income
components. It was reasoned that some Islamic cultural values support weak uncertainty
avoidance (Askary, 2001). These are, ‘uncertainty is a normal feature of life and each day is
accepted as it comes’; ‘aggression and emotions should not be shown’ and ‘comfortable in
ambiguous situations and with unfamiliar risks’(Hofstede, 1997). Islamic societies are
expected to be incapable of uncertainty, for all has been revealed by Allah, and even were it
not, every thing is under the control of Allah. From this view, the future is certain for
members of an Islamic society even if unknown by them. Therefore, it is reasonable to
presume that an Islamic Compliant Accounting system should have a greater tendency
towards optimistic than conservative accounting measurement methods. For conservatism is
rooted in the uncertainty that expectations might not accrue in the future and is incompatible
with Islam (Gambling and Abdel-Karim, 1993).
Conformity with the Sharia would entail, as a general objective of Islamic financial
measurement, that ‘there is no distinction to be drawn between business, public affairs, and

1
Sharia is the law system of Muslim.

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even private life in Islam’; all are subject to the requirements of the Sharia (Gambling and
Abdel-Karim, 1993, p.48). In this respect, an Islamic accounting system would conflict with
the conventional western accounting doctrine of deliberate ‘conservatism’. Accordingly,
Gambling and Abdel-Karim (1993) have pointed out “a number of rulings cast doubt on the
relevance of the concept of conservatism for Islamic financial reporting. Many of these
related to Zakat tax” (p. 92).
Measurement of financial values in Islam is emphasized to be on pragmatic grounds.
Some verses in the Koran directly stress the importance of financial measurement in business
(4:29) 2 . Precise financial measurement in business affairs (equating everything with justice)
entails measuring the true and correct worth of financial statement elements and requires
measuring assets and profits in real values. No ‘measuring’ at lower or higher than the true
worth, is the focus of the verses. In (6:152) for example “. . . and give full measure and
weight with justice . . .” places emphasis on a true measurement of all activities, including
business transactions. In (5:8) 3 the focus is on how evidence (including recording
transactions) should be given as to the true measure. Table ii depicts the factors in respect of
measurement that imply differences between Islamic Compliant Accounting measurement
and the accounting conventions underpinning western measurement practices.

Table ii: A Gray/Hofstede Model of Islamic Accounting Values

Islamic Statutory
Uniformity Conservatism Secrecy
Cultural values Control
Collectivism Positive Positive Positive Positive
Small power distance Negative Negative N/A Negative
Weak uncertainty avoidance Negative Negative Negative Negative
Gender equality ∞ ∞ ∞ ∞
Islamic accounting values based
Professionalism Flexibility Optimism Transparency
on Hofstede/Gray model
Source: Askary (2001), p.111

As the table implies, due to Islamic accounting values have tendency towards
professionalism and flexibility, then it is quite reasonable to draw a preliminary conclusion
that Islamic accounting measurement has tendency toward to be more optimism in
Gray/Perera model. If this point is simply accepted, then historical cost accounting can not
entirely acceptable and justify in the Sharia (Islamic law) specially for the purpose of Zakat
(Islamic tax) calculation in which is one of an Islamic State’s responsibility to collect the levy.
Clarke, Craig and Hamid (1996) noted “Zakat requires that the relevant assets be valued at the
price they will be exchanged for in the market” (p.204). They concluded that ‘cost’ is
inapplicable for the purposes of determining Zakat. Historical cost would thus be inapplicable
for the calculation of income and loss in a truly Islamic accounting framework and
inapplicable for asset valuations set out in Islamic compliant balance sheets.
The valuation of marketable equity securities should be on the basis of net realisable
value for Zakat purposes too (Gambling and Abdel-Karim, 1993, p. 92). Thus, it is the current
monetary characteristic of assets that is relevant in respect of Zakat. Measuring the financial
worth of fixed assets and other assets according to their net realisable values, does not
recognise any contingent liabilities as true liabilities, and does not recognise any conditional
2
O you who believe! do not devour your property among yourselves falsely, except that it be trading by your
mutual consent; and do not kill your people; surely Allah is Merciful to you.
3
O you who believe! Be upright for Allah, bearers of witness with justice, and let not hatred of a people incite
you not to act equitably; act equitably, that is nearer to piety, and he careful of (your duty to) Allah; surely Allah
is Aware of what you do.

8
losses (provision for doubtful debts, for example) as deductible from the revenue to calculate
periodic profits or losses. Islamic measurement would emphasise real valuations and reflect
optimism rather than conservatism, provided it reflected the best approximation of the truth,
leaving uncertainty to be the concern of Allah. In western accounting conservatism is decreed
in order to prevent overstatement. It is promoted as a “safety net” device, more directed to
understatement than to reflecting the truth. One can conclude in that context that optimism
would pervade the measurement of the worth of physical assets (fixed and current) and the
calculation of profits and losses in an Islamic compliant accounting system.
Valuation method is recommended by the majority of Islamic jurists is based on the selling
price (or exit price, current cash equivalent, or net realizable value) for the Zakat calculation
(Clarke et al, 1996). That is, “cost” or “historical cost system” is irrelevant for Zakat
purposes. This matter is notable in regard to inventory (stock) and receivables valuation.
Figure 1 summarise the discussion of the paper in regard to how religion, as one of cultural
factor, affect accounting measurements in accounting.

Figure 1: Culture, religion and accounting measurement: A conceptual Framework

Culture Social Accounting

Religion Values Values

Accounting Measurements
Conservatism…………..…….…………………………………………….Optimism
(Historical cost)………………………………………………...…...(Exit price)

Western Islamic
Compliance……………………………………………………….. Compliance

6. Conclusion
If religion is one of cultural factor and cultural (social) values can affect accounting values,
then religion can affect accounting values. Islam as one of the most affecting religion in the
world and a quest about the influence of the religion on accounting is not a new issue.
However, the study showed that Islamic compliance accounting is different from the Western
compliance accounting measurements. The study illustrated that due to different social values,
the accounting values in regard to measuring assets is different from historical cost
accounting. Asset valuation for purpose of Zakat is a case in this study. In this case, Islamic
accounting measurement conforms to the exit price measurement.

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