Chapter 10 Page 431

CHAPTER 10: ANALYSIS OF BEHAVIOURAL ACCOUNTING

QUESTIONNAIRES

10.0 INTRODUCTION

In the previous chapter (Chapter 9), the findings of the Islamic Accounting Questionnaire

were presented and interpreted. The questionnaire concentrated on four main areas, the

ethical objectives of Islamic organisations, the suitability/unsuitability of conventional

accounting for Islamic organisations, the objectives and users of Islamic Accounting and the

nature and characteristics of Islamic Accounting information. The findings indicated that

Malaysian Muslim accounting academics and professional accountants in practice,

commerce and industry and the public sector all favoured the development of an Islamic

accounting system.

This chapter will discuss the results of the second part of the empirical study. This part of the

study is intended to elicit evidence on one particular area of this enquiry into the need for

Islamic Accounting i.e. whether conventional accounting leads to unIslamic behaviour in

actual practice in business organisations as opposed to the perceptions of respondents of

Accountants and Academics. This was carried out (as discussed in detail in chapter 7) using

two questionnaires; the finance questionnaire and the non-finance questionnaire.

The finance questionnaire was given to finance executives of Islamic, Muslim and

non-Muslim corporations, such as accountants and managers, who were responsible for

investment, financing decision and accounting functions. The results of the finance

questionnaires are reported and analysed in section 10.2 and the researcher’s interpretation

of the results is given in section 10.3.

The Non-finance questionnaire was given to employees of non-accounting function and

employees in the accounting function who were not managers. The purpose of this

questionnaire was to elicit information on whether accounting tools such as budgeting,

performance evaluation and financial reporting leads to unIslamic behaviour among

Chapter 10 Page 432

non-accounting personnel such as those in marketing, human resources or production and

non-managerial personnel in accounting functions. The results of this questionnaire are

reported in Section 10.4 and the researcher’s interpretation of the results is given in section

10.5.

The general conclusions of the chapter (reported in section 10.6) are that the results

provide some but not strong support, for the suggestion that conventional accounting leads

to unIslamic behaviour. However, Muslim users of conventional accounting in Islamic

organisations seem to weather the effects of conventional accounting better than Muslim

and non-Muslim organisations. Although conventional accounting1 does not seem to derail

the objectives of Islamic Business Organisations, this is less so in the case of Muslim

organisations and least in Non-Muslim organisations where conventional accounting profits

drive the organisations and may lead Muslims to unIslamic behaviour to a larger extent. Due

to the difficulty in defining and accessing the population of respondents and the

non-feasibility of using a random sample, the results cannot be inferred to the population. On

the other hand, the similarity of results obtained from two sets of sample (executive MBA

students and those delivered directly) indicated the general validity of the results, at least

prima facie. There is definitely scope for further research on this matter.

10.1 THE FINANCE QUESTIONNAIRE: AREAS OF ENQUIRY

As discussed in chapters 3 and 6, the researcher argued that as Accounting has both

positive and negative behavioural consequences (Prakash & Rappaport, 1977; Miller &

O’Leary, 1987) for employees and users within a firm. In particular it may lead to

unintended unethical and therefore unIslamic behaviour such as padding of budgets, friction

and tension between employees, an excessive focus on profits to the detriment of social and

environmental consequences.

1
Current dominant system of accounting originating in the practices and standards of Anglo-American
professional accountancy bodies, multinational audit firms and Anglo-American dominated standard setting
bodies such as the IASC.
Chapter 10 Page 433

The specific purpose of the finance was to investigate whether conventional accounting

leads to unIslamic behaviour in three specific areas:

• In the investment activities undertaken by the organisation

• In the financing activities undertaken by the organisation and

• In the operational areas, such as performance evaluation and employee treatment.

In addition, it was decided to explore the extent of Islamic commitment among various

components of the management team. Conventionally, senior management focuses on

maximising shareholder wealth and their own perks (Jensen & Meckling, 1976) which

can be at the cost of other stakeholders and the environment but such behaviour may be

considered to be unIslamic. As such, a low level of Islamic commitment by senior and middle

management can be seen to be evidence of the unIslamic behaviour impact of conventional

accounting.

Although it is possible that Islamic behaviour can be induced by the accounting system as

accounting can construct social reality (e.g. Hines 1988) but the culture and values of the

organisation would have a higher impact on behaviour. Hence, an Islamic organisation set

up to operate within an Islamic ethos would tend to behave more Islamically. Muslims

organisations, which are headed or manned by Muslims, might also see some Islamic

behaviour in the context of Muslims attempting to change their social and economic

environment around them, especially, in the context of the current Islamic resurgence.

However, in both these type of organisations, there is a danger that conventional accounting

with its financial profit focus may slowly damage the Islamic values and induce unIslamic

behaviour away from the goals of Islamic organisations and Muslim managers and

employees over time.

Non-Muslim organisations, however, headed by non-Muslims are not expected to exhibit

Islamic behaviour to any marked extent as their values and culture are different. However,

in a multicultural environment such as Malaysia, a significant number of employees in such

companies, especially in the lower levels are Muslims. Further, under the indigenisation
Chapter 10 Page 434

policies of the Malaysian government, corporations are encouraged and monitored on their

employment of indigenous “bumiputras” (who are mainly Muslims) in all employment

categories from managerial to technical. Under such conditions, the conventional

accounting system may exacerbate the unIslamic culture and may induce goal incongruence

and other dysfunctional effects not conducive to the spiritual growth of Muslim employees.

To gain insight to the behaviour in each of these organisations, the questionnaire was given

to Muslim managers in Islamic, Muslim and Non-Muslim organisations. The results of the

study are analysed by the three types of organisations; Islamic business organisations (IBO),

Muslim Business organisations (MBO) and Non-Muslim Business Organisations (NBO). The

definition of each type of organisation is the same as those followed in the Islamic

Accounting Questionnaire (see chapter 7).

Table 10-1 shows the frequency distribution of the respondents from the different type of

organisations. The table shows that of the 32 questionnaires returned, 4 could not be

classified into the type of organisation as no information was given to the appropriate

question in section 2 of the questionnaire. It should be noted that there is a preponderance

of responses from Islamic business organisations (46.4% of the valid responses). Hence, if

the type of organisation has any impact on the behavioural effects of conventional

accounting, the overall mean score could be pushed higher or lower that it would otherwise

be. Hence, the analysis of the questionnaire is undertaken by organisation type, partly to

overcome this problem.

TABLE 10-1:FINANCE QUESTIONNAIRE: RESPONDENTS BY COMPANY TYPE

Frequency % Valid % Cumulative %
Valid Islamic Organisation 13 40.6 46.4 46.4
Muslim Organisation 5 15.6 17.9 64.3
Non Muslim 10 31.3 35.7 100.0
Organisation
Total 28 87.5 100.0
Missing System 4 12.5
Total 32 100.0
Chapter 10 Page 435

Various questions in each of the investing, financing and operational areas were asked,

although the questionnaire itself was not divided into the respective sections. The responses

to each category of questions are grouped together and analysed from section 10.2.1

onwards. In addition, aggregate scores for financing, investment, operational and Islamic

commitment are computed and analysed to provide a summary.

A 1 to 5 ranking scale, a 1 being “not at all” to a 5 being “to a great extent”, was used to

measure responses in the finance questionnaire. As the number surveyed and the number

of respondents were low (32) and the responses were further classified by organisation type,

it was decided to summarise the response to a three point scale to make for easier

summarisation of the results. Thus a score of 1 and 2 was re-coded into the category “none

to some” with a point score of 1. A score of 3 was re-coded into the category “moderate” with

a numeric score of 2 and scores of 4 and 5 was re-coded into the category “high to a great

extent” with a numeric score of 3.

10.2 FINANCE QUESTIONNAIRE: ANALYSIS OF FINDINGS

The analysis and findings of the finance questionnaire are presented in the sub-sections

below. The main areas of scrutiny are Investments comprising short-term, long-term, social

and environmental considerations and Islamic investment policies. In this category, fourteen

questions were asked of respondents, however only 12 are reported as two questions

(questions 1.3b and 1.3c) are left out of the analysis as it became increasingly apparent

during the interviews2 that answers to these questions, either way did not mean Islamic or

unIslamic behaviour. The results of these investment activities are summarised in section

10.2.5. In sub-section 10.2.6 the results of the financing activities, categorised into the use of

Islamic and non-Islamic financing instruments of the organisations, are analysed and

reported. Again the results for this section are summarised in sub-section 10.2.9. The results

2
Some interviews were conducted with departmental heads before the questionnaires were handed out to the
employees.
Chapter 10 Page 436

of operational activities, suitability of conventional accounting and Islamic commitment are

reported in sub-sections 10.2.10, 10.2.11 and 10.2.12 respectively.

10.2.1 Short Term Investments

As discussed in chapters 3 and 7, it was shown that Islam bans the giving or taking of

interest. However, modern financial management teaches managers to maximise their

income by investing short-term surpluses in risk-free, short term, interest based investments.

This is prohibited and contrary to Islam. As the profit-focused conventional accounting

system reports these results as a performance indicator, it may lead to an Islamically

unsanctioned behaviour by users as efficient and effective performance of their duties (in

increasing the shareholder wealth). Although short-term, riskless investments are still a

problem area for Islamic finance, some short-term Islamic money-market instruments have

been evolved, which are not entirely risk-free and with absolutely fixed return as

conventional interest-based instruments. Nevertheless these provide an alternative to

Muslim users but with the trade-off of greater risk and less certainty of return. Since, the

performance

evaluation tools of conventional accounting cannot reflect an organisation’s Islamic

behaviour favourably; this may lead them to continue to undertake investment activities

contrary to Islamic provisions.

The first two questions are meant to find out what is situation in this short-term investment

area .The responses are reported below:

TABLE 10-2: FINANCE QUESTIONNAIRE: RESPONSES TO QUESTIONS ON SHORT-TERM

INVESTMENT ACTIVITIES

1&2=none to some, 3= moderate, 4&5= high to great extent

No. Statement Org. Type----------> IBO MBO NMO Total
Response Values No. % No. % No. % No. %
1 We put short term surplus funds None to some 0 0 3 60 7 70 10 37
in Islamic Money Market or moderate 1 8 1 20 3 30 5 19
Islamic interest free investments high to great extent 11 92 1 20 0 0 12 44
Total 12 100 5 100 10 100 27 100

to increase profits. Org. Type----------> IBO MBO NMO Tota

l
Chapter 10 Page 437

2 We put any short term surplus Response Values No. % No. % No. % No. %
funds in the conventional Money None to some 13 100 3 60 2 20 18 64
Market or Interest based moderate 0 0 1 20 0 0 1 4
investments to increase profits. high to great extent 0 0 1 20 8 80 9 32
Total 13 100 5 100 10 100 28 100

From the above, it can be seen that 37% of the respondents made little or no use of Islamic

instruments to invest their short-term surpluses while another 19% only made use of them in

a moderate way. Interestingly about 30% of respondents in Non-Muslim organisations

reported using Islamic instruments to a moderate extent, which may indicate a growing

market for Islamic financial instruments. Of the 12 (44%) of the respondents who made the

greatest use of Islamic instruments, all except 1 were from Islamic organisations. In

contrast about 36% of the respondents put their short-term investments in interest based

funds with 80% of the respondents in Non-Muslim organisations and 40% of the respondents

in Muslim organisations continuing to use short-term financial instruments contrary to Islamic

provisions. None of the respondents from the Islamic business organisations used

interest-based instruments.

10.2.2 Long-term Investments

Companies in a capitalist framework invest directly or indirectly using interest-based debt,

equity or hybrid modes of financing. As discussed in chapters 3 and 7, the debt mode of

investment is prohibited in Islam when it carries a fixed return. Islamic companies should

seek to avoid debt-based investments. Further from a broader Islamic perspective of

pursuing social justice, Islamic businesses should not seek quick short-term profits and quick

capital gains but reasonable profits with corresponding risk over a longer-term, especially

when investing in stock markets. However, conventional accounting with its short-term

quarterly and interim reporting mentality focuses on quick profits which has already been

criticised in the business and accounting literature. Hence this may lead to a short- termist

profit-focused strategy.
Chapter 10 Page 438

To find out whether this was so; the following questions indicated in Table 10-3 were put

forward to respondents. The results are indicated in the same table. The responses to

Question 3a indicate that 76% of respondents favour quick profits from “a moderate to a

great extent”. What is interesting, is that 76% of the respondents of even Islamic business

organisations seem to favour quick profits. This does not seem to be consistent with the

responses to the next question (question 3d) where about 96% of the respondents seem to

follow a policy of reasonable profits (from a moderate to a great extent) over a longer term.

Perhaps both the policies are followed.

From the responses to question 4, it can be seen that about 40% of the respondents would

rather go for higher profits rather than sticking to Islamic norms. This figure jumps to 78%

and 60% for Non Muslim organisations and Muslim organisations. There is even one

response from an Islamic organisation taking the same stand! Overall the results indicate

that conventional accounting does seem to lead to a very short-term profit focus and thus

unIslamic behaviour irrespective of the type of organisation.

Chapter 10 Page 439

TABLE 10-3: FINANCE QUESTIONNAIRE: RESPONSES TO QUESTIONS ON INVESTMENT

STRATEGY
1&2=none to some, 3= moderate, 4&5= high to great extent
No. Statement Org. Type----------> IBO MBO NMO Total
Response Values No. % No. % No. % No. %
3 When we make direct or stock market None to some 3 24 1 20 2 24 6 24
investments, we look for:- moderate 5 38 2 40 3 38 10 38

3a Quick Returns high to great extent 5 38 2 40 3 38 10 38

Total 13 100 5 100 8 100 26 100

to increase profits. Org. Type----------> IBO MBO NMO Total

Response Values No. % No. % No. % No. %
3d Reasonable profits over a period of None to some 0 0 1 25 0 0 1 4
time with corresponding risk. moderate 1 8 1 25 1 13 3 13
high to great extent 11 92 2 50 7 88 20 83
Total 12 100 4 100 8 100 24 100
No. Statement Org. Type----------> IBO MBO NMO Total
4 We choose conventional interest based Response Values No. % No. % No. % No. %
financial instruments if their returns are None to some 12 92 2 40 2 22 16 60
higher than Islamic financial moderate 0 0 2 40 0 2 7
instruments, assuming equivalent risk high to great extent 1 8 1 20 7 78 9 33
levels. Total 13 100 5 100 9 100 27 100

10.2.3 Social and Environmental Investment Policy

Apart from avoiding a short-term profit focus and avoiding investment instruments prohibited

in Islam, Islamic organisations should also, in line with their Islamic world-view (as discussed

in Chapter 2), be aware of the social and environmental implications of their investments.

As the cause of prohibition of interest and uncertainty (gharar) in Islamic contracts is based

on the notion of avoiding injustice to the parties involved, investing in areas or companies

whose activities result in damage to the social /moral fabric of society or the environment is

itself a grave injustice. Undertaking such activities is akin to collaborating in “sin and

transgression” according to Qur’anic teachings. Hence Muslim investors must look at the

social and environmental consequences of their investments as well as the Islamic legal

position. Conventional financial accounting with its profit focus, however, may direct Muslim

behaviour towards profit irrespective of the social and environmental consequences of their

investments. To test whether this is the case, four questions (Questions 3h, 3i, 5 and 6) as to
Chapter 10 Page 440

whether the environmental and social consequences are considered when undertaking

investment decisions. The results are given in table 10-4.

In table 10-4, , from responses to Question 3h, it can be seen that 57% of the respondents

in Non Muslim Organisations and 75% in Muslim organisations do not take into account the

environmental consciousness of the investee company. This figure for Islamic businesses

was only 15%. The results are somewhat different when it comes to undertaking their own

investment projects, where 22% of respondents in Non Muslim organisations and 25% of

respondents in Muslim organisations and only 15% of respondents in Islamic businesses do

not care for the environmental consequences of their investment projects. Though only 22%

of the respondents of Non-Muslim organisations and none of the respondents from Muslim

organisations consider the environmental consequences of their projects, 54% of the

respondents from Islamic businesses do so from a moderate to a great extent.

Responses to questions 3i, indicate that 40%, 100% and 17% of respondents of

Non-Muslim, Muslim and Islamic business do not avoid luxury projects. In fact, except for 5

respondents from Islamic businesses and only 1 respondent for Non-Muslim businesses, the

other respondents do not give high priority to avoiding luxury investment. The total number

of respondents who answered this question, (merely 21 that represented only 65% of total

respondents) probably indicates that the respondents are not comfortable in answering this

question. Question 5 was a direct question on the trade-off between focusing on accounting

measure of return compared to social consequences of investment. Although the

proportion of respondents from Non-Muslim, Muslim and Islamic businesses who do not look

into
Chapter 10 Page 441

TABLE 10-4: RESPONSES TO QUESTIONS ON SOCIAL AND ENVIRONMENTAL

CONSEQUENCES OF INVESTMENT
1&2=None To Some, 3= Moderate, 4&5= High To Great Extent
No. Statement Org. Type----------> IBO MBO NMO Tota
l
Response Values No. % No. % No. % No. %
3 When we make direct or stock market None to some 2 15 3 75 4 57 9 37
investments, we look for:- moderate 7 54 1 25 2 29 10 42
3h Environment consciousness of the high to great extent 4 31 0 1 14 5 21
investee. Total 13 100 4 100 7 100 24 100

to increase profits. Org. Type----------> IBO MBO NMO Tota

l
Response Values No. % No. % No. % No. %
3i luxury avoidance projects. None to some 2 17 4 100 2 40 8 38
moderate 5 42 0 0 2 40 7 33
high to great extent 5 42 0 0 1 20 6 29
Total 12 100 4 100 5 100 21 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
5 When we appraise a project, we look Response Values No. % No. % No. % No. %
at the possible benefits or harm to the None to some 2 15 1 25 1 11 4 16
community as well its accounting moderate 4 31 2 50 5 56 11 42
measures of return before accepting it. high to great extent 7 54 1 25 3 33 11 42
Total 13 100 4 100 9 100 26 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
6 When we appraise a project, we take Response Values No. % No. % No. % No. %
into account its environmental None to some 2 15 1 25 2 22 5 19
consequences. moderate 4 31 3 75 5 56 12 46
high to great extent 7 54 0 2 22 9 35
Total 13 100 4 100 9 100 26 100

social considerations at all were only 11%, 25% and 15%, the proportion who gave this high

and great importance were only 33%, 25% and 54% respectively. This may imply that profits

are given priority over social consequences. At 22%, 0% and 54% for the corresponding

categories, the responses to question 6, indicate a worse position for environmental

considerations. Overall, it can be concluded, that although conventional accounting does not

result in the abandonment of social and environment consideration in investment decisions,

these appear to be secondary and overridden by the profit motive.

Chapter 10 Page 442

10.2.4 Islamic Investment Policy

In addition to social and environmental considerations common to social and environmental

accounting, Islamic and Muslim organisations have to be concerned with specifically Islamic

moral and ethical issues. These moral/ethical issues delineated by the Shari’ah are both a

matters of law and morals as compared to the ethical criteria facing ethical investors in a

Non-Muslim environment. What is viewed by the Shari’ah as immoral (fawahish) is also

prohibited by Islamic Law (Shari’ah).

Hence these activities, for example, gambling, alcoholic drinks, pornography, interest-based

financing and pork products are all prohibited. Hence it is forbidden for Muslims and Islamic

organisations to invest in companies or undertake direct investments in which these

prohibited activities are carried out. Muslim organisations are supposed to follow suit and

Muslims should try to influence even Non-Muslims from carrying out these actives as

co-operating in forbidden acts even with Non-Muslims is forbidden.

In order to make the investment selection process more efficient, the Securities Commission

which is the regulatory body for the securities market in Malaysia has constituted a “ Shari’ah

Advisory Council” to advise on the permissibility of investing in listed companies on the

Kuala Lumpur Stock Exchange (Adawiah, 1999). This Board monitors and issues a list of

permitted companies, once every six months. The researcher (in Chapter 6) has discussed

the criteria used by this council for deciding permissibility.

Further, in contrast to investments in new projects, it is difficult to obtain a company which is

100% halal (permitted). Therefore, in common with the criterion adopted by some ethical

fund managers, a cut off point based on the percentage of earnings decides permissibility.

However, in investing in these companies, Islamic funds or companies would have to

calculate the percentage of unlawful earnings and donate the portion to charity to “purify” the

profits. In order to elicit information on these areas, Questions 3e, 3f and 7 were asked of the

respondents. The results are in Table 10-5.

TABLE 10-5:RESPONSES TO QUESTIONS ON ISLAMIC INVESTMENT POLICY

Chapter 10 Page 443

1&2=none to some, 3= moderate, 4&5= high to great extent

No. Statement Org. Type----------> IBO MBO NMO Tota
l
Response Values No. % No. % No. % No. %
3 When we make direct or stock market None to some 0 0 3 75 3 50 6 25
investments, we look for:- moderate 1 7 0 0 1 17 2 8
3e Investments approved as halal by the high to great extent 13 93 1 25 2 33 16 67
S C Shariah Board Total 14 100 4 100 6 100 24 100

board Org. Type----------> IBO MBO NMO Tota

l
No. Statement Response Values No. % No. % No. % No. %
3f The activities of the investee None to some 0 0 3 75 3 50 6 25
companies are halal. moderate 1 7 0 0 0 0 1 4
high to great extent 13 93 1 25 3 50 17 71
Total 14 100 4 100 6 100 24 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
7 In cases when we cannot find a purely Response Values No. % No. % No. % No. %
Islamic investment, we purify None to some 6 55 3 75 4 50 13 57
profits i.e. take the halal part of profits moderate 0 0 3 38 3 13
based on the proportion of halal and high to great extent 5 45 1 25 1 13 7 30
haram activities. Total 11 100 4 100 8 100 23 100

From table 10-5, it can be seen that 67% of respondents look to the shari’ah advisory council

(shari’ah board) of the securities commission for guidance to a high or great extent. 71% of

the respondents ensure that the activities of the investee companies are halal. the proportion

of respondents from muslim organisations (25% for both the questions) and non-muslim

organisations (33% and 50% for the respective questions, however show a different picture.

only 30% of the respondents seem to purify profits in cases where pure islamic investments

are not available.

10.2.5 Summary Results for Investment Activities

A summary score SINVACT being the mean of the investment questions in the finance

questionnaire was computed. The results are shown in Table 10-6.

Chapter 10 Page 444

TABLE 10-6: DESCRIPTIVES FOR SUMMARY INVESTMENT ACTIVITY

1=none to some, 2= moderate, 3= high to great extent
Descriptive Statistics
Company Type N Minimum Maximum Mean Std. Deviation
. SINVACT 4 1.00 3.00 2.5000 1.0000
Islamic Organisation SINVACT 12 3.00 3.00 3.0000 .0000
Muslim Organisation SINVACT 5 1.00 3.00 2.0000 1.0000
Non Muslim Organisation SINVACT 9 1.00 3.00 1.3333 .7071

The above table shows that the mean of Investment activities for Islamic organisations was 3

meaning Islamic organisations conduct their investment activities in an Islamic manner to a

high and very large extent. The mean of investment activities for Muslim organisations is 2

meaning only moderate adherence and for Non-Muslim companies with a mean of 1.333,

meaning slight to moderate adherence.

10.2.6 Financing Activities

As Islam does not allow Muslims to give or take interest, Muslims cannot finance their

businesses through debt instruments such as bonds or obtaining interest based loans, even

thought they might be cheaper than equity-based capital. Conventional accounting and

finance, through its pecking order theory and the need to reduce the cost of capital through

choosing the cheapest form of capital, would naturally lead to choosing Islamically prohibited

instruments and means to raise finance.

However, there is Islamically allowable alternatives, although some may lead to higher

administrative costs and may lead to a slight loss of control in managing company assets

and may even be more costly. Muslims are supposed to opt for these alternatives even

though it might result in a lower bottom line.

10.2.7 Islamic Financing Instruments

In order to see whether conventional accounting leads to financing behaviour in line with

Islamic injunctions, questions 8(a), 8(e) and 8(f) were asked of participants. The results are

in Table 10.7.
Chapter 10 Page 445

TABLE 10-7: RESPONSES TO QUESTIONS ON ISLAMICALLY ALLOWABLE FINANCING

METHODS

1&2=none to some, 3= moderate, 4&5= high to great extent

No. Statement Org. Type----------> IBO MBO NMO Tota
l
8 When we raise long and medium term Response Values No. % No. % No. % No. %
finance; we use: None to some 2 20 1 33 0 3 15
8a Equity shares moderate 0 1 33 1 14 2 10
high to great extent 8 80 1 33 6 86 15 75
Total 10 100 3 100 7 100 20 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
8d Islamic debt instruments Response Values No. % No. % No. % No. %
None to some 2 20 2 50 4 50 8 36
moderate 0 0 0 0 0
high to great extent 8 80 2 50 4 50 14 64
Total 10 100 4 100 8 100 22 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
8e Murabaha/Al-Ijara Response Values No. % No. % No. % No. %
None to some 1 13 2 50 4 57 7 37
moderate 0 1 25 2 29 3 16
high to great extent 7 88 1 25 1 14 9 47
Total 8 4 4 100 7 100 19 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
8f Mudhararaba Certificate Response Values No. % No. % No. % No. %
None to some 3 38 2 67 4 57 9 50
moderate 0 0 2 29 2 11
high to great extent 5 63 1 33 1 14 7 39
Total 8 100 3 100 7 100 18 100

From the table 10-7, it can be seen that 75% and 64% of total respondents use equity

shares and Islamic debt instruments to a high or great extent respectively while 47% and

39% of the respondents use the purely Islamic instruments of Al-Ijara (Leasing) and

Mudharaba (Fixed term participation certificate) of financing to a high or great extent. As

expected, Islamic business organisations lead the pack with 80% for equity share and

Islamic debt financing and 88% and 63% respectively for Al-Ijara and Mudharaba

certificates. However, the respondents from Non-Muslim Business organisations do not

seem to use Islamic leasing and participation certificates to any great extent.
Chapter 10 Page 446

10.2.8 Non-Islamic Financing Instruments

In order to see whether conventional accounting leads to financing behaviour contrary to

Islamic injunctions, questions 8(b),and 8(c) were asked of participants. The results are in

Table 10.8.

TABLE 10-8: RESPONSE TO QUESTIONS ON NON-ISLAMIC FINANCING INSTRUMENTS

1&2=none to some, 3= moderate, 4&5= high to great extent
No. Statement Org. Type----------> IBO MBO NMO Tota
l
8b Debentures/bonds/Fixed Return Response Values No. % No. % No. % No. %
Instruments None to some 5 71 1 25 1 14 7 39
moderate 1 14 1 25 0 2 11
high to great extent 1 14 2 50 6 86 9 50
Total 7 100 4 100 7 100 18 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
8c Interest-based bank loan Response Values No. % No. % No. % No. %
None to some 6 86 1 25 0 7 37
moderate 1 14 1 25 3 38 5 26
high to great extent 0 2 50 5 63 7 37
Total 7 100 4 100 8 100 19 100

From the Table 10-8, it can be seen that 61% and 63% of the respondents used fixed return

instruments and interest based bank loans respectively from a moderate to a great extent.

Analysing further, it can be seen that this included 28% of the respondents from Islamic

business organisations, 75% of respondents in Muslim business organisations and 86% of

respondents in Non-Muslim organisations used long-term fixed return instruments. Further,

14%, 75% and 100% respectively of respondents from Islamic, Muslim and Non-Muslim

organisations respectively used interest-based bank loans. This means that Islamic

considerations were not prominent when using financing instruments in both Muslim and

Non-Muslim organisations. Although, the use of interest-based financing instruments is not

extensive in Islamic business organisations, contrary to their establishment objectives, these

organisations still may be using prohibited financing instruments.

10.2.9 Summary Financing Behaviour

In order to elicit information on the financing behaviour as a whole, a multi-item score

SFINACT, was computed, using the mean of Questions 8(a)-8(f). Questions 8(b) and
Chapter 10 Page 447

Question 8(c) were re-coded because these questions were posed in the reverse direction.

This implies that the higher the score, the more Islamic the behaviour. The results appear in

Table 10-9.

TABLE 10-9: SUMMARY OF FINANCING BEHAVIOUR

1=none to some, 2= moderate, 3= high to great extent
Descriptive Statistics
Company Type N Minimum Maximum Mean Std.
Deviation
. SFINACT 3 1.00 3.00 1.6667 1.1547
Islamic SFINACT 6 3.00 3.00 3.0000 .0000
Organisation
Muslim SFINACT 3 1.00 3.00 1.6667 1.1547
Organisation
Non Muslim SFINACT 8 1.00 3.00 1.5000 .9258
Organisation

The Table 10-9 shows that the mean score for the financing behaviour of Islamic

organisations is 3.0 meaning that these organisations undertake their financing activities in

line with Islamic norms to a high or great extent. The mean score for Muslim organisations at

1.67 and Non Muslim organisations at 1.5 indicate that their financing activities are Islamic

only to a low or moderate extent.

It can be seen that 69% and 52% of the respondents banked in Islamic banks/Interest free

counters and paid Zakat on their earnings in addition to tax, to a high or to a great extent.

The high proportion was due mainly to the preponderance of respondents from Islamic

organisations. To avoid this bias, a break down by category shows a more accurate picture.

It can be seen that while 100% of the respondents in Islamic organisations bank with Islamic

banks to a high or great extent, 50% of respondents in Muslim organisations and 44% of

respondents in Non-Muslim organisations do not bank with Islamic banks or Interest-free

counters to avoid interest. Further 27% of the respondents from Islamic organisations 75%

of the respondents from Muslim organisations and 86% of respondents from Non-Muslim

organisations do not pay Zakat on their company’s wealth. Further 46%, 50% and 63% of

respondents from Islamic, Muslim and Non-Muslim organisations do not provide interest-free

loans to employees.
Chapter 10 Page 448

10.2.10 OPERATIONAL ACTIVITIES

From a broader Islamic perspective, Islamic organisations need not only follow the Shari’ah

in terms of complying with it for their financing an investment activity but should do so in its

day to day operations involving employees, transactions and its responsibility to pay the

Zakat (or the poor-tax). Questions 9,10,11 and 12 were asked of the respondents to elicit

insight in this area. The results are in Table 10-10.

TABLE 10-10 RESPONSES TO QUESTION ON OPERATIONAL ACTIVITIES

1&2=none to some, 3= moderate, 4&5= high to great extent
No. Statement Org. Type----------> IBO MBO NMO Total
9 We bank with Islamic banks/Islamic Response Values No. % No. % No. % No. %
counters (e.g. SPTF) to avoid interest. None to some 0 2 50 4 44 6 23
moderate 0 0 2 22 2 8
high to great extent 13 100 2 50 3 33 18 69
Total 13 100 4 100 9 100 26 100
No. Statement Org. Type----------> IBO MBO NMO Total
10 We pay Zakat on the company’s Response Values No. % No. % No. % No. %
earnings in addition to tax. None to some 3 27 1 33 6 86 10 48
moderate 0 0 0 0 0
high to great extent 8 73 2 67 1 14 11 52
Total 11 100 3 100 7 100 21 100
No. Statement Org. Type----------> IBO MBO NMO Total
11 We pay Zakat on the company’s Response Values No. % No. % No. % No. %
wealth (net worth). None to some 3 27 3 75 6 86 12 55
moderate 0 0 0 0 0 0
high to great extent 8 73 1 25 1 14 10 45
Total 11 100 4 100 7 100 22 100
No. Statement Org. Type----------> IBO MBO NMO Total
12 The company provides interest free Response Values No. % No. % No. % No. %
loans to its employees. None to some 6 46 2 50 5 63 13 52
moderate 0 2 50 0 2 8
high to great extent 7 54 0 3 38 10 40
Total 13 100 4 100 8 100 25 100

A summary score for operational activities, SOPACT was computed using the above four

questions. The higher the score the more Islamic the behaviour. The descriptive statistics for

the score are given in Table 10-11.

TABLE 10-11:SUMMARY BEHAVIOUR IN OPERATIONAL ACTIVITIES

1=none to some, 2= moderate, 3= high to great extent
Chapter 10 Page 449

Descriptive Statistics for variable SOPACT

Company N Minimum Maximum Mean Std.
Type Deviation
All 1.00 3.00 2.00 .8165
Organisations
Islamic 12 1.00 3.00 2.4167 .7930
Organisation
Muslim 5 1.00 3.00 2.6000 .8944
Organisation
Non Muslim 10 1.00 2.00 1.1000 .3162
Organisation

From table 10-11, it can be seen that the operational activities of Islamic and Muslim

organisations were viewed by the respondents as following Islamic norms to a great extent

with means 2.4 and 2.6 respectively, whereas Non-Muslim organisations had a mean of 1.1

which shows that these organisations may not do likewise. The surprise finding here is that

Muslim organisations seem to exhibit more Islamic operational behaviour than Islamic

organisations. However due to the small proportionate number of respondents in this

category this result must be treated with caution.

Overall there appears to be a moderate level of Islamic operational behaviour in Islamic and

Muslim organisations. Non Muslim organisations behave more in an unIslamic manner than

Islamic or Muslim organisations.

10.2.11 Suitability of conventional accounting

Ethical fund managers use financial statements to a great extent to provide information

regarding suitability of investments (Harte et al 1991). Conventional accounting may not

provide suitable information for managers to make Islamic investment decisions i.e. to direct

investment in companies or activities which are Islamically acceptable or recommended. In

order to obtain information on this question, the finance questionnaire included question 13.

The results are reported in Table 10-12.

TABLE 10-12: RESPONSES TO SUITABILITY OF CONVENTIONAL ACCOUNTING

1&2=none to some, 3= moderate, 4&5= high to great extent

No. Statement Org. Type----------> IBO MBO NMO Tota
l
Chapter 10 Page 450

13 Conventional financial statements Response Values No. % No. % No. % No. %

provide sufficient information for our None to some 5 45 3 75 4 57 12 55
Islamic investment decisions. moderate 4 36 0 2 29 6 27
high to great extent 2 18 1 25 1 14 4 18
Total 11 100 4 100 7 100 22 100

From Table 10-12, it can be seen that 55% of the respondents viewed conventional

accounting as almost totally unsuitable as almost no useful information is produced by

conventional accounting from an Islamic perspective for investment decisions. 27% of the

respondents viewed conventional accounting moderately useful in this area while only 18%

saw conventional accounting as useful in making Islamic investment decisions.

10.2.12 Islamic commitment

Commitment to the values and goals of an organisation, especially by management and

employees is essential to the achievement of an organisation’s goals. However, agency

theory (Jensen & Mackling, 1976) teaches us that management consumes perks at the

expense of other stakeholders because they tend to maximise self-interest. In many cases,

accounting is manipulated by income smoothing and other creative accounting activities,

especially when rewards depend on accounting numbers. The recent trend of emphasising

shareholder value has made accounting very important as accounting information affect

share prices (Beaver, 1981). In the case of an Islamic organisation, the use of conventional

accounting may direct management and employee behaviour in a way detrimental to its

social/ethical objectives. It is thus important to have an Islamic culture in the organisation

reflected by the commitment of the directors, managers and employees to Islamic norms.

To elicit information on this area, questions 14(a) to 14(d) were asked of the respondents.

The answers are set out in Table 10-13. It can be seen from this table that only 42%, 40%,

and 32% of respondents viewed the employee group, manager group, government

shareholder group, local directors groups, and non-executive directors group respectively as

Islamically committed to a high or great extent. Only 7% and 9% of the respondents viewed
Chapter 10 Page 451

foreign directors and labour union representatives as Islamically committed to a high or large

extent.
Chapter 10 Page 452

TABLE 10-13: ISLAMIC COMMITMENT

1&2=none to some, 3= moderate, 4&5= high to great extent
No. Statement Org. Type----------> IBO MBO NMO Total
14 Would you say the following groups in Response Values No. % No. % No. % No. %
14a your company are committed to run None to some 0 1 25 2 22 3 12
the company in accordance with moderate 4 31 2 50 6 67 12 46
Islamic values? high to great extent 9 69 1 25 1 11 11 42
a) Employees. Total 13 100 4 100 9 100 26 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
14b b) Management. Response Values No. % No. % No. % No. %
None to some 0 2 50 5 56 7 27
moderate 5 38 0 3 33 8 31
high to great extent 8 62 2 50 1 11 11 42
Total 13 100 4 100 9 100 26 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
14c c) Govt. Shareholder/Representative. Response Values No. % No. % No. % No. %
None to some 1 9 2 50 4 50 7 30
moderate 4 36 1 25 2 25 7 30
high to great extent 6 55 1 25 2 25 9 40
Total 11 100 4 100 8 100 23 100

No. Statement Org. Type----------> IBO MBO NMO Tota

l
14d d) Local Directors. Response Values No. % No. % No. % No. %
None to some 0 2 50 5 56 7 28
moderate 4 33 0 4 44 8 32
high to great extent 8 67 2 50 0 10 40
Total 12 100 4 100 9 100 25 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
14e e) Foreign partners/Directors, if any. Response Values No. % No. % No. % No. %
None to some 1 20 2 100 6 75 9 60
moderate 3 60 0 2 25 5 33
high to great extent 1 20 0 0 1 7
Total 5 100 2 100 8 100 15 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
14f f) Labour union representative. Response Values No. % No. % No. % No. %
None to some 0 1 100 2 33 3 27
moderate 3 75 0 0 4 67 7 64
high to great extent 1 25 0 0 1 9
Total 4 100 1 100 6 100 11 100
No. Statement Org. Type----------> IBO MBO NMO Tota
l
14g g) Non-Executive Directors. Response Values No. % No. % No. % No. %
None to some 1 13 1 33 4 50 6 32
moderate 3 38 0 0 4 50 7 36
high to great extent 4 50 2 67 0 0 6 32
Total 8 100 3 100 8 100 19 100
 Chapter 10 Page 453

From the chart displayed in Figure 10-1, (analysed by organisation type), it can be seen that

except in the case of Labour union representatives, the proportion of respondents from

Islamic business organisations who viewed the level of Islamic commitment of the various

groups to a “high and great extent” is highest, ranging from 69% for employees to 20% for

foreign partners/directors.

Is la m ic C o m m itm e n t
% respondents in org. category

80
70
60
50 IB O
40
30 MBO
20 NMO
10
0
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La
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G ro u p s h o w in g c o m m itm e n t to h ig h a n d g re a t e x te n t

FIGURE 10-1: ISLAMIC COMMITMENT OF VARIOUS GROUPS: FINANCE QUESTIONNAIRE

The same groups in Muslim Business organisations, having Islamic commitment to a high

and great extent came second, ranging from 50% for management and 0% for foreign

directors. The lowest proportion of respondents who viewed the groups (25% for Govt.

Representative to 0% for foreign directors and union representatives) as having a high level

of Islamic commitment came from Non Muslim organisations.

The summary score SISLAMCOMI was computed using a mean of the scores of the

respective questions in each group. The results are given in Table 10-14.
Chapter 10 Page 454

TABLE 10-14: DESCRIPTIVE STATISTICS FOR ISALMIC COMMITMENT

1=none to some, 2= moderate, 3= high to great extent

Descriptive Statistics for Variable SISLAMCOMI
Company Type N Minimum Maximum Mean Std.
Deviation
. 4 1.00 3.00 1.5000 1.0000
Islamic 12 1.00 3.00 1.8333 .9374
Organisation
Muslim 5 1.00 2.00 1.2000 .4472
Organisation
Non Muslim 10 1.00 2.00 1.1000 .3162
Organisation

Table 10-14 shows that the mean score of Islamic commitment is 1.5, meaning that it is near

the lower end of the moderate level. The level of Islamic commitment in Islamic

organisation is the highest at 1.83, which is towards the higher end of the moderate level.

The mean level of Islamic commitment in Muslim and Non Muslim organisations are 1.2 and

1.1 respectively meaning that the level of commitment is low.

10.3 INTERPRETATION OF FINDINGS OF FINANCE QUESTIONNAIRE

Figure 10-2 shows the mean scores for the four summary variables computed from the

finance questionnaire on the original scale of 1 – 5. In computing the variables, certain

questions have been re-coded as they were in the reverse direction. As such, a higher

value of the score must be interpreted as higher Islamic behaviour. From figure 10-2, it can

be seen that the mean scores for all three areas of activities; investment, financing and

operational vary depending on the type of organisation.

 Chapter 10 Page 455

Finance Questionnaire: Mean

Response of Summary variable
5
Islamic behaviour

4.5

4 4.00
3.78 Islamic
3.5 3.56 Organisation
3.35

3 3.00 Non Muslim

2.92
2.73 Organisation
2.5
2.2399 Muslim
2.075 2.06
2 1.9857 Organisation
1.6833
1.5

1
INVACT FINACT OPACT ISLCOMIT
Islamic Organisation

Activity Areas
FIGURE 10-2: MEAN RESPONSE FOR SUMMARY VARIABLES

This clearly implies that the type of organisation is a strong moderating variable diminishing

the power of accounting in influencing investing, financing and operational behaviour. The

culture of the organisation does have a profound effect on its behaviour. Islamic business

organisations tend to behave in a more Islamic manner than their Muslim counterparts who

in turn behave more Islamically than Non-Muslim business organisations. This implies that

the power of accounting is not enough to drastically overturn the mission, objectives and the

operations of Islamic organisations, but accounting has more effect in Muslim and

Non-Muslim organisations where the Islamic culture is not so strong. Hence, there seem to

be no strong evidence that conventional accounting is not suitable for Islamic companies as

they tend to cause dysfunctional behaviour.

Chapter 10 Page 456

However, there is also no strong evidence to support the contrary thesis that conventional

accounting provides information is suitable for the attainment of Islamic Company objectives.

In particular the response to question 13 (section 10.2.11) had a mean of only 2.2 and a

t-test of mean=3 was rejected with a p value of 0.006 meaning that a moderate level of

usefulness for Islamic investment decisions had to be rejected at the 5% level. This implies

conventional accounting does not provide sufficient information for Islamic investment

decisions.

Conventional accounting does not seem to influence short-term investment decisions in

Islamic business organisations as Islamic money market instruments are used to a large

extent. Further, while Islamic business organisations do not seem to use prohibited interest

based money market instruments, roughly half the respondents in Muslim business

organisations and about 80% of respondents in Non-Muslim business organisations report

using interest-based deposits or money market instruments to increase their profits. This

shows that the conventional accounting focus on profits does influence short-term

investment behaviour in Non-Muslim and Muslim organisations.

Perhaps, the best evidence of the negative influence of accounting is the response to

questions of investment policy. Roughly 40% of respondents from all types of organisations

reported seeking quick returns. This may be due to the short-termist attitude to investment

arising from the use of conventional financial accounting (e.g. quarterly and interim reporting

pressures) and management investment appraisal tools reported in the literature (e.g.

Kaplan & Atkinson, 1998). Although not technically prohibited in Islam, the broad objectives

of the Shari’ah do not encourage quick returns which most probably arises out of speculative

activity. In this case, even the Islamicity of the organisation does not seem to moderate this

short-term profit focus.

However, conventional accounting does not seem to influence Islamic organisations to opt

for prohibited instruments even if the returns are higher although this is not completely ruled

out. About 60% of respondents from Muslim organisations however, opt for the prohibited
Chapter 10 Page 457

instruments from a moderate to a great extent. This is higher in Non-Muslim organisations

where 78% of respondents reported opting for prohibited investments to a great extent if this

resulted in higher profits. It can thus be concluded that conventional accounting does seem

to influence all types of organisations to be focused on quick and short-term profits even at

the expense of infringing Islamic prohibitions, although Islamic organisations do not go to

that extent in most cases.

The response frequencies for the questions on social and environmental consequences of

investment show a higher concern for these considerations among Islamic business

organisations than for Muslim and Non-Muslim organisations. Islamic organisations seem

to make more allowances for the environment in their own projects but do not look too

closely at the environmental impact of investee companies. Luxury project avoidance also

does not seem to be a priority. There seems to be almost no concern for social and

environmental effect of investments by Muslim business organisation and Non-Muslim

organisations do only slightly better.

Conventional accounting does not seem to influence the investment behaviour of Islamic

business organisations when it comes to ensuring that the (non-financial instrument)

investment is halal or permitted by Islam. Almost all respondents from Islamic business

organisations reported that they ensured the permissibility of investments. However as only

25% and 13% respectively of respondents in Muslim organisations and Non-Muslim

organisations reported positively on this matter, conventional accounting does seem to have

a negative influence on this investment behaviour.

From the financing side, Islamic business organisations seem to abide by the Islamic

Shari’ah rather than being influenced by pecking order finance theories when they clash with

Islam. Only one respondent form this type of organisation reported that they used Islamically

prohibited financing instruments. However at 50% and 86% respectively for Muslim and Non

Muslim organisations, accounting does seem to highly influence financing behaviour in these

two types of organisations.

Chapter 10 Page 458

The operational behaviour of organisations in relation to Islamic matters especially the

payment of the religious tax (Zakat) does not seem to too influenced by conventional

accounting as 73% of respondents reported paying Zakat on organisational profits. However

only 25% and 14% of respondents reported paying Zakat in Muslim and Non-Muslim

organisations. While this might not be important if the majority of shareholders or employees

in Non-Muslim or Muslim organisation are non-Muslims (as Islam does not force

non-Muslims to pay Zakat), if the majority of employees or shareholders are Muslims, then

this issue becomes important.

Finally, all types of organisations reported very low Islamic commitment among foreign

directors and Labour union leaders. This is not surprising as most foreign directors in

Malaysian companies tend to be Non-Muslim European, American, Japanese or Taiwanese

expatriates. However, if these people are employed in very senior positions in Islamic

organisations, their profit focused conventional accounting training may disorient the

company from its Islamic mission. Even in Islamic organisations only 20% of respondents

reported a high level of Islamic commitment among this group. However, generally Islamic

commitment appears to be high (around 55-70% of respondents reporting high commitment)

among employees, managers, local directors and non-executive directors. This is natural

and to be expected due to the organisation culture. However, it would be interesting to study

how long the groups keep their commitment in view of continuing global economic

pressures.

The Islamic commitment in Muslim business organisation appears to be low for all groups

except Non-executive directors. In Non-Muslim organisations less than 25% of respondents

report any Islamic commitment in the groups mentioned.

Islamic commitment as a set of values may assumed to be strongly influenced by the

environment, upbringing and education of the individual. It is not clear whether conventional

accounting causes lower Islamic commitment or Islamic commitment serves to moderate its

effects. If Islamic commitment arises from prior education, culture of Islamic organisations
Chapter 10 Page 459

provides a suitable nurturing environment, then it may be the independent variable

moderating the negative effects of conventional accounting.

In order to discern the correlation of the type of company with the overall behaviour, a

variable SISLBEH (summary Islamic behaviour) was computed using the mean of

investment, financing and operational variables (sinvact, sfinact ,soptact discussed in section

10.2.5, 10.2.9 and 10.2.10 above. A correlation test was run using the computed variable

SISLBEH with the company type (1 for IBO, 2 for MBO and 3 for NMO). The relationship

between company type and Islamic behaviour can be seen more clearly from the scatterplot

in figure 10-3.

Y AXIS
1= NONE AT
ALL TO 3
SLIGHT

2= MODERATE
SISLBEH

2
3= HIGH TO A
A GREAT
EXTENT X AXIS:COMPANY
TYPE:
1
1= IBO
2= MBO
1 2 3
3= NMO
CO MPTYPE

FIGURE 10-3: SCATTERPLOT OF ISLAMIC BEHAVIOUR VS COMPANY TYPE

The scatterplot in figure 10-3 above shows that the summary variable SISLBEH is

negatively correlated with the type of company. As Islamic business organisation and Muslim

Business organisations were coded 1 and 2 respectively, this means that Islamic business

organisations exhibited more Islamic behaviour followed by Muslim business organisations

and lastly NonMuslim Organisations.

TABLE 10-15: CORRELATION TEST FOR CO TYPE AND ISLAMIC BEHAVIOUR

Correlation (Pearson)
Chapter 10 Page 460

Correlation of SISLBEH and COMPTYPE = -0.796, P-Value = 0.000

The Pearson’s correlation co-efficient test conducted (exhibited in table 10-15) showed the

correlation coefficient at –0.796 which shows a strong negative correlation between the type

of company and Islamic behaviour. The correlation was significant at the 1% confidence

level. Hence, overall, the results of the finance questionnaire indicate that although

conventional accounting does affect the behaviour of Muslim users and organisations, the

type of organisations has a strong moderating influence.

An initial Islamic commitment may serve to moderate or mitigate the unIslamic effects of

conventional accounting. An Islamically committed manager may not care so much for

financial performance as for the social and Islamic performance. The generally higher

Islamic behaviour of Islamic organisations indicated by the results of this survey (see figure

10-2) may be due to this commitment rather than the positive consequences of conventional

accounting. However, as accounting constructs social reality and the environment, Islamic

commitment itself could become a dependent variable as an inverse function of conventional

accounting. If this were true, an alternative Islamic accounting could help to maintain Islamic

commitment, whereas conventional accounting would cause it to degrade and finally cause

unIslamic behaviour. This calls for an experimental design and case studies of companies

over time. This is certainly an area for future research.

10.4 NON-FINANCE QUESTIONNAIRE: AREAS OF ENQUIRY AND RESULTS

The “Non-finance” questionnaire was given to personnel working in non-accounting functions

such as marketing, production, personnel as well as non-managerial staff of the accounting

function such as clerks and supervisors. The objective of the questionnaire was to elicit

information on the effect of accounting on the behaviour of the personnel concerned.

Although the researcher tried to be unbiased as possible, the sample could not be random

because the population could not be defined. Hence, it is not possible strictly to draw
Chapter 10 Page 461

inferences to the population. However the similar results from the two sets of independent

samples except for performance evaluation adds some weight to the findings, as this is an

indication of the unbiased nature of the sample selected. However, since this is an

exploratory study on one aspect of the research, the objective was to gain some initial

insights in the area as a prelude to possible future research rather than to generalise

theories about a universal phenomenon.

Specifically, the questionnaire was handed to personnel of Islamic business organisations

and given to part-time MBA students in the International Islamic University of Malaysia and

Institute Technology Mara who were full time working executives and managers in various

functions in different organisations in and around Kuala Lumpur. The number for each type

of respondent for the non-finance questionnaire is given in Table 10-16. It can be seen that

about 71% of respondents were executives who were MBA students and 29% working

executives and non-executives who were not MBA students.

TABLE 10-16: RESPONDENTS TYPE: NON-FINANCE QUESTIONNAIRE

Respondent Type Number % Valid Percent Cum %

Working MBA Students 46 70.8 70.8 70.8
delivered personally 19 29.2 29.2 100
Total 65 100 100

The specific areas of enquiry of the questionnaire were:

• Whether budget pressures caused unIslamic behaviour

• Whether performance evaluation was accounting based and whether this affected the

respondent’s behaviour.

• Whether conventional accounting’s focus on profits resulted in any unIslamic behaviour.

A five point Likert scale 1= Strongly Disagree, 2= Disagree, 3= Neither Agree nor

Disagree, 4= Agree and 5= Strongly Agree was used to measure responses. As the sample
Chapter 10 Page 462

was quite small (65), the responses were aggregated into a 3 point scale, where 1= Strongly

Disagree and Disagree, 2= Neither Agree nor Disagree and 3 = Strongly Agree and Agree.

Summary multi-item scores (summary variables) were computed for each area. The results

are described under each area below. Unlike the finance questionnaire in the previous

section, the summary variables are computed so as to make a higher score to a mean more

unIslamic behaviour.

10.4.1 Budget Pressures

Since the Argyris article on the behavioural effects of budgets (Argyris, 1953), there has

been a proliferation of articles on how budgets affect behaviour. These studies show that

budgets influence people, sometime to be dishonest by padding- behaviour condemned by

all religions including Islam. In other instances, budgets give rise to friction between

employees and management and between employees. Budgets can be used as tools to

punish people and project power (Roberts, 1991). Competition between budget centres may

lead to intra organisation conflicts . Since budgeting is mainly in terms of accounting data

and is itself an accounting tool, therefore conventional accounting via budgeting may cause

unIslamic behaviour. Budgets have been used as controlling devices over geographical and

cultural boundaries. This tends to have a negative effect if control is imposed as a projection

of power without considering local conditions. The use of budgets as remote control levers of

power to manipulate people is not moral or Islamic.

In order to obtain information on this area, the following questions, shown in Table 10-17,

were asked of the participants in the non-finance questionnaire:

TABLE 10-17: SUMMARISED RESPONSE FREQUENCY

NON-FINANCE QUESTIONNAIRE:EFFECT OF BUDGET PRESSURES
1= strongly disagree & disagree, 2= neither disagree or agree, 3= agree and strongly agree
1.00 2.00 3.00
Quest No. Statement
Count % Count % Count %
The budget based appraisal
SQ1.4 system in my company
17 27.9% 28 45.9% 16 26.2%
creates friction among
employees.
Chapter 10 Page 463

The budget based appraisal

SQ1.5 system in my company
20 31.3% 26 40.6% 18 28.1%
creates friction between
employees and managers.
I am forced to cut corners, e.g.
SQ1.6 on safety, training and well
26 41.3% 16 25.4% 21 33.3%
being of subordinates in order
to achieve my budget.
I am forced to use sub
standard materials in our
SQ1.7 production or underqualified 31 50.8% 21 34.4% 9 14.8%
personnel in providing service,
in order to keep within budget.
I lose temper often at my
SQ1.8 subordinates for not achieving 36 59.0% 19 31.1% 6 9.8%
budgets.
My boss loses temper when I
SQ1.9 don’t meet budget 23 37.7% 20 32.8% 18 29.5%
expectations.
I am forced to pad my budgets
SQ1.10 to ensure adequate funding for 19 30.6% 21 33.9% 22 35.5%
my department.

From table 10-17, the proportion of respondents who indicate that budgets lead to unIslamic

behaviour i.e. inter-personnel friction, cutting safety and welfare standards and padding of

budgets is about one third. This is evidenced by responses to Questions SQ1.4, (26.2%),

SQ1.5(28.1%),SQ1.6(413%),SQ1.9 (37.7%) and SQ1.10 (35.5%). Similarly, the proportion

of respondents who indicate that budgets do not lead to unIslamic behaviour is also about

one-third indicating disagreement. The proportion of respondents who disagreed to

Questions SQ1.4, (27.9%), SQ1.5 (31.3%), SQ1.6 (33.3%), SQ1.9 (29.3%) and SQ1.10

(30.6%) evidence this. This means that about one-third of respondents neither agree nor

disagree as to whether budgeting causes unIslamic behaviour.

An exception to this is shown by responses to questions SQ1.8 where only 9.8% of the

respondents agreed that they (as bosses) lose their temper at subordinates when budgets

are not met. However, the answer to this question seems to be inconsistent to the response

to question SQ1.9 where 29.9% agreed that their bosses did lose their temper. Perhaps, this

throws some doubt on the validity of responses to SQ1.8 as human nature usually resists

perceiving oneself in a negative light. If we discount question SQ1.8 then the response seem

to be about equally divided in to three response categories agree, disagree and neutral.
 Chapter 10 Page 464

The only other exception (beside SQ1.8) is the question (SQ1.7) where 50.8% of the

respondents disagreed that budget lead to compromises in material and service quality. This

again seem to be inconsistent with responses to question SQ1.16 (see table 10-21, section

10.4.3 below) where 72.9% of respondents agreed that safety and working conditions are

sacrificed to increase profits.

However, even discounting these two questions, we do not seem to have sufficient evidence

to conclude that budgeting pressures leads to unIslamic behaviour nor do we have evidence

to the contrary.

The descriptive statistics in table 10.18 indicates a mean of 1.91 and a median of 1.88 for

the summary variable BUDPRES, which is computed as the mean of all the responses to the

questions in this section. These figures which are close to 2 implies that there is no

evidence to suggest budget pressures cause unIslamic behaviour or otherwise. The

responses to question SQ1.7 and SQ1.8 both with medians of 1 seem to suggest a lack of

unIslamic behaviour in these areas.

TABLE 10-18:NON-FINANCE QUESTIONNAIRE

DESCRIPTIVE STATISTICS (SUMMARISED RESPONSES) : BUDGET PRESSURES
1= Strongly Disagree & disagree, 2= Neither Disagree or Agree, 3= Agree and Strongly Agree
Statement Percentile Percentile Std Valid
Mean Median
25 75 Deviation N
The budget based appraisal system in
SQ1.4 my company creates friction among 1.98 2.00 1.00 3.00 .74 N=61
employees.
SQ1.5 The budget based appraisal system in
my company creates friction between 1.97 2.00 1.00 3.00 .78 N=64
employees and managers.
SQ1.6 I am forced to cut corners, e.g. on
safety, training and well being of
subordinates in order to achieve my 1.92 2.00 1.00 3.00 .87 N=63
budget.
SQ1.7 I am forced to use sub standard
materials in our production or
underqualified personnel in providing 1.64 1.00 1.00 2.00 .73 N=61
service, in order to keep within budget.
SQ1.8 I lose temper often at my subordinates
for not achieving budgets. 1.51 1.00 1.00 2.00 .67 N=61
SQ1.9 My boss loses temper when I don’t meet
budget expectations. 1.92 2.00 1.00 3.00 .82 N=61
SQ1.10 I am forced to pad my budgets to ensure
adequate funding for my department. 2.05 2.00 1.00 3.00 .82 N=62

Variable Mean Median Percentile 25 Percentile 75 Std Deviation Valid N

SBUDPRES 1.91 1.88 1.50 2.25 .4595 N=61
Chapter 10 Page 465

Overall, there seem to be a lack of evidence that budget pressures lead to the use of

sub-standard materials and service and managerial tension. However there seem to be

some evidence for padding and inter-personnel friction, through the budgeting process but

the evidence is not strong.

Chapter 10 Page 466

10.4.2 Performance Evaluation

TABLE 10-19:SUMMARISED RESPONSE FREQUENCY

NON-FINANCE QUESTIONNAIRE:RESEARCH AREA: PERFORMANCE EVALUATION
1= Strongly Disagree & disagree, 2= Neither Disagree nor Agree, 3= Agree and Strongly Agree
1.00 2.00 3.00
Quest No. Statement
Count % Count % Count %
Divisional /personnel
SQ1.2 performance is based on 5 8.1% 17 27.4% 40 64.5%
budget achievement.
Rewards are based on
SQ1.3 accounting numbers e.g. 12 18.5% 9 13.8% 44 67.7%
profit, sales etc.
Extraneous circumstances,
e.g. economic circumstances
beyond the control of
SQ1.12 employees are taken into 7 11.1% 13 20.6% 43 68.3%
account when performance
assessment is made.

Performance review includes

SQ1.13 social/community/Islamic work 23 35.9% 14 21.9% 27 42.2%
done by employees.

From the above table of response frequencies (Table 10-19), response frequencies to

SQ1.2, SQ1.3 of 64.5% and 67.7% respectively scoring a three (Strongly Agree and Agree)

show the importance of budget achievement and accounting numbers in performance

evaluation of employees and divisions. The answer to question SQ1.13 shows that only

42.2% of respondents agreed perceive their community and Islamic work are included in

their performance review while 35.9% of the respondents disagreed. This seems to imply

that financial considerations outstrip social ones when performance evaluation is undertaken

but again the evidence is not strong.

The descriptive statistics for this area in Table 10.20 shows that the first two questions

(SQ1.2 and SQ1.3) have median scores of 3 with means of 2.56 and 2.49 respectively. This

means that performance evaluation is based strongly on accounting numbers. Question 1.13

however has a mean of 2.57and a median of 2. This shows that the respondents tend to

agree or at best are neutral as to whether community work is included in performance

evaluation. However, the median of 3 for question sq1.12 indicates that extraneous

circumstances are considered for performance evaluation.

 Chapter 10 Page 467

TABLE 10-20: NON-FINANCE QUESTIONNAIRE

DESCRIPTIVE STATISTICS (SUMMARISED RESPONSES)
1= Strongly Disagree & disagree, 2= Neither Disagree nor Agree, 3= Agree and Strongly Agree
Statement Percentile Percentile Std
Performance Evaluation Mean Median Valid N
25 75 Deviation
SQ1.2 Divisional /personnel performance is based
on budget achievement. 2.56 3.00 2.00 3.00 .64 N=62
SQ1.3 Rewards are based on accounting numbers
e.g. profit, sales etc. 2.49 3.00 2.00 3.00 .79 N=65
SQ1.12 Extraneous circumstances, e.g. economic
circumstances beyond the control of
employees are taken into account when 2.57 3.00 2.00 3.00 .69 N=63
performance assessment is made.

SQ1.13 Performance review includes

social/community/Islamic work 2.06 2.00 1.00 3.00 .89 N=64
done by employees.
Summary
Performance
Mean Median Percentile 25 Percentile 75 Std Deviation Valid N
Evaluation

SPEREVAC 2.22 2.00 2.00 3.00 .61 N=60

A summary variable SPEREVAC was computed using the formula

mean.4(q1.2,q1.3,rq1.12,rq1.13) where the last two questions were re-coded as they were in

the opposite direction. A higher score would indicate more unIslamic behaviour. The above

table 10-20 (lower portion) shows the results for this variable. The mean score of 2.22 and

median of 2.00 shows that the performance evaluation use of conventional accounting tends

to lead to unIslamic behaviour (as a score of more than 2 would indicate agree and strongly

agree in some areas). Further the interquartile range lies between 2 and 3 makes the case

stronger. This shows that conventional accounting does lead to unIslamic behaviour in the

area of performance evaluation.

Chapter 10 Page 468

10.4.3 Profit Focus

One of the undesirable effects of conventional accounting is the isomorphic nature of its

performance measure through the bottom line. The problem of focusing on short-term profit

focus has already been debated in the management accounting literature (see for example,

Kaplan & Atkinson, 1998) but only in terms of business strategy and efficiency. From an

Islamic perspective, excessive profit focus leads to materialism and the forgetfulness of the

importance of accountability to God, society and the forgetfulness of the hereafter which is

considered everlasting by Muslims.

The researcher hypothesises that if Islamic business organisations and Muslim users rely on

the conventional accounts, their behaviour will also shift to a financial profit focus instead of

the holistic view of life which Islam demands in all human affairs including business. As such

the following questions set out in Table 10-21 were asked to ascertain whether conventional

accounting does affect behaviour in this area.

TABLE 10-21:SUMMARISED RESPONSE FREQUENCY

NON-FINANCE QUESTIONNAIRE: PROFIT FOCUS
1= Strongly Disagree & disagree, 2= Neither Disagree nor Agree, 3= Agree and Strongly Agree
1.00 2.00 3.00
Quest No. Statement
Count % Count % Count %
Staff welfare , training and
SQ1.11 benefits are first to go, when 19 30.2% 9 14.3% 35 55.6%
there are budget cuts.
In my organisation, safety and
SQ1.16 working conditions are 5 8.5% 11 18.6% 43 72.9%
sacrificed to increase profits.
My company encourages its
SQ1.17 employees to offer their time
16 25.8% 18 29.0% 28 45.2%
and money to charitable and
community projects.
My company takes
SQ1.18 employee-working conditions 6 9.8% 12 19.7% 43 70.5%
seriously.
I feel that I am compromising
some of my Islamic ideals to
SQ1.20 portray a good reflection by 14 25.0% 24 42.9% 18 32.1%
the company’s accounting
system.
Chapter 10 Page 469

The responses to Question 1.11 indicate that 55.6% of the respondents agreed that

employee welfare and benefits are the first casualty in times of budget cuts. As budget

cuts are made to ensure adequate profits to shareholders, this also evidences a profit focus.

The response to question SQ1.16 indicates that 72.9% agree that safety and working

conditions are sacrificed to increase profits. Only 8.5% disagreed. The response to both

these questions is strongly suggestive of a profit focus effect of conventional accounting.

Further only 45.5% agreed that their company encourages the employees to offer their time

and money to charitable projects. This is also suggestive of more effort towards making

profits rather than being socially concerned or at best the company is neutral (29.0%) in this

area

Although only 32.1% agreed to negative inductance effect of the accounting system, only

25% totally disagreed. The proportion of 42.9% who neither agreed nor disagreed at least

evidences that conventional accounting does not reflect Islamic behaviour in its reports and

at worst induce unIslamic behaviour.

However, the responses to SQ1.18 with 70.5% of the respondents agreeing indicate that

employee-working conditions are taken seriously. This does not seem to support the case

for unIslamic effect of conventional accounting. The response to this question seems to be

inconsistent with question SQ1.16.

The descriptive statistics for this area of enquiry are given in table 10-22. The mean of 2.64

and median of 3.00 for question SQ1.16 1.shows that unIslamic behaviour of sacrificing

safety and working conditions is very strong. Similarly, the mean of 2.25 and median of 3 for

question sq1.11 indicates that the profit focussing nature of conventional accounting leads to

sacrifices in staff welfare. The mean of 2.19 and the median of 2.00 for question SQ1.17

suggests the companies neither encourages nor discourages staff to offer their time for

community and charitable projects. Similary, the mean of 2.07 and the median of 2 for

question SQ1.20 indicates that conventional accounting does not seem to induce individuals

to sacrifice their Islamic ideals in order for themselves to be reflected well by the accounting
 Chapter 10 Page 470

system. Although the response to question SQ 1.18 with a mean of 2.61 and a median of

3.00 seem to indicate that working conditions are taken seriously, the response to this this

question is inconsistent with question SQ1.16 where the respondents note that working

conditions are sacrificed for profits. Perhaps, the company treats the employees well in good

times but not when profits are at stake. Even if this were true, this itself would be an

indication of the profit focus nature of conventional accounting.

TABLE 10-22:NON-FINANCE QUESTIONNAIRE

DESCRIPTIVE STATISTICS (SUMMARISED RESPONSES)
1= Strongly Disagree & disagree, 2= Neither Disagree nor Agree, 3= Agree and Strongly Agree
Statement Percentile Std
Mean Median Percentile 25 Valid N
75 Deviation
SQ1.11 Staff welfare , training and
benefits are first to go, when 2.25 3.00 1.00 3.00 .90 N=63
there are budget cuts.
SQ1.16 In my organisation, safety and
working conditions are 2.64 3.00 2.00 3.00 .64 N=59
sacrificed to increase profits.
SQ1.17 My company encourages its
employees to offer their time
and money to charitable and 2.19 2.00 1.00 3.00 .83 N=62
community projects.
SQ1.18 My company takes employee
working conditions seriously. 2.61 3.00 2.00 3.00 .67 N=61
SQ1.20 I feel that I am compromising
some of my Islamic ideals to
portray a good reflection by the 2.07 2.00 1.25 3.00 .76 N=56
company’s accounting system.

Mean Median Percentile 25 Percentile 75 Std Deviation Valid N

SPROFOCU 2.04 2.00 1.8 2.20 .48 N=50

Overall there is slight evidence of profit focus and negative inductance effect of accounting

on behaviour of employees. However, the median score of 2.00 for the summary variable

SPROFOCU, which is computed as the mean of all the above questions, seems to indicate

neutrality at best. The mean of 2.04 indicates some unIslamic behaviour. Again, the

evidence is not strong either way. Research methods other than self-reporting such as case

studies need to be conducted to gain further insight in this area.

Chapter 10 Page 471

10.5 INTERPRETATION OF THE RESULTS OF NON-FINANCE

QUESTIONNAIRE

Overall, there seem to be some evidence on the unIslamic behaviour effects of conventional

accounting in the area of performance evaluation (as evidenced by a mean of 2.11 and

median of 2.23 for the summary variable SPEREVAC). There is strong evidence of the use

of financial numbers to evaluate personnel performance although circumstances beyond the

control of employees are taken into account in assessing performance.

The other areas of the questionnaire i.e. budget pressure and profit focus with means of 1.91

and 1.94 and medians of 1.88 and 2.0 indicate neutrality. This implies that there is no

evidence to indicate that conventional accounting leads to or does not lead to unIslamic

behaviour by causing tensions and profit focus. However, answers to some of the questions

are inconsistent raising some doubts on the reliability of the answers which border on

neutrality or especially considering the sensitive nature of the particular questions which may

lead to a reluctance of the respondents in answering the questions frankly.

As mentioned earlier, the results are not generalisable to the population executives and

other employees in Malaysia because of the non-randomness of the sample drawn and the

small size of the sample. The only exception to this is the case of executives who were

MBA students of the International Islamic University (where all students were given the

questionnaire).

Lastly, correlation tests on the results between MBA and non-MBA respondents indicate that

there is no significant correlation except in the area of performance evaluation where the

correlation is significant at the 5% level. See Table 10-23 below.

Chapter 10 Page 472

TABLE 10-23: CORRELATION TESTS BY RESPONDENT TYPE

RSPEREVA * MBA

Crosstab
Count
MBA Total
MBA NonMBA
RSPEREVA 1 11 8 19
2 6 5 11
3 28 6 34
Total 45 19 64

Chi-Square Tests
Value df Asymp. Sig. (2-sided)
Pearson Chi-Square 5.075(a) 2 0.079
Likelihood Ratio 5.139 2 0.077
Linear-by-Linear 3.969 1 0.046
Association
N of Valid Cases 64
a 1 cells (16.7%) have expected count less than 5. The minimum expected count is
3.27.

Symmetric Measures
Value Asymp. Std. Error(a) Approx.
T(b)
Interval by Interval Pearson's R -0.251 0.121 -2.042
Ordinal by Ordinal Spearman -0.261 0.121 -2.127
Correlation
N of Valid Cases 64

Test Statistics(a,b)
SBUDPRES SPROFOCU SPEREVAC
Chi-Square 1.646 1.424 9.291
df 2 2 2
Asymp. Sig. .439 .491 .010
a Kruskal Wallis Test
b Grouping Variable: Company Type

Further, a Kruskall-Wallis test of the summary variables shows that only the differences in

performance evaluation measure is significant at the 1% level among different types of

companies.
Chapter 10 Page 473

The implication of both these tests is that in the area of performance evaluation,

non-financial factors such as community work is taken into account to some extent in Islamic

companies more than others. This is true as most non-MBA respondents were from Islamic

companies as well. This is consistent with the findings of the finance questionnaire in

section 10.4 where Islamic companies seem to able to moderate the negative effects of

conventional accounting better.

Despite the limitation of the sample, the researcher feels the purpose of the survey (i.e. to

gain an initial insight into the unIslamic behavioural consequences of conventional

accounting) is served. The results are mixed. Possibly there are unIslamic effects but the

notion that conventional accounting is neutral cannot be asserted with certainty. There is a

need to carry out a more extensive survey and case studies to determine the extent of

unIslamic behaviour among employees in various types of organisations.

The overall result is that there seems to be a lack of strong evidence on either side i.e.

whether conventional accounting tool of budgeting leads to or does not lead to unIslamic

behaviour although the results border on a negative answer. Bearing in mind the sensitive

nature of the questions, there is a need for indepth case studies to gain deeper insights into

this issue.

10.6 CONCLUSION

The results of the finance and non-finance questionnaires have been discussed in this

chapter. Both questionnaires were designed to elicit information as to whether conventional

accounting leads to unIslamic behaviour in Islamic, Muslim and Non-Muslim organisations.

Results from the finance questionnaires given to managers in the finance functions of

various organisations indicate that conventional accounting does have some negative

behavioural effects on the financing, investing and operating activities of the organisations.

However the evidence is not strong. Further the negative effects seem to be moderated by
Chapter 10 Page 474

the type of organisational culture. Islamic organisations seem to be most resistant to the

negative effects although not exempt form them. Muslim and Non-Muslim organisations

seem to be more affected by conventional accounting and thus display more unIslamic

behaviour. Due to the small size and the non-randomness of the sample, the results are not

generalisable to all organisations. However there is certainly a case for further indepth study

to determine the extent (or lack of) unIslamic financing, investing and operating behaviour.

The results of the second questionnaire on the direct effect of conventional on personnel of

various organisations are mixed. Roughly equal proportions of respondents view take all

three positions, agree, disagree and neutral. The evidence in some areas for example,

performance evaluation are more clear cut than others. Since there is no indication that

conventional accounting does not make people behave in an UnIslamic manner there is a

need for more in-depth research specially over a time period to study the effects over

time.