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Sarea. 2013. Adoption of AAOIFI Accounting Standards by Islamic Banks of Bahrain
Sarea. 2013. Adoption of AAOIFI Accounting Standards by Islamic Banks of Bahrain
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AAOIFI
Adoption of AAOIFI accounting accounting
standards by Islamic banks standards
of Bahrain
131
Adel Mohammed Sarea
College of Business and Finance, Ahlia University, Manama,
Kingdom of Bahrain, and
Mustafa Mohd Hanefah
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Abstract
Purpose – The objective of this paper is to determine the level of compliance with Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI) accounting standards by Islamic
banks of Bahrain.
Design/methodology/approach – The paper is based on diffusion of innovation theory whereby
the perceived relative advantage, compatibility, complexity, trialability and observability factors are
expected to influence the level of compliance with AAOIFI accounting standards.
Findings – The findings indicate that Islamic banks of Bahrain are in full convergence with AAOIFI
accounting standards.
Research limitations/implications – This research, just like many other studies, faces data
limitations. Sample size employed for this study contains only the accountants in Islamic banks of Bahrain.
Originality/value – The results of this paper are expected to serve as a guide to the regulatory
bodies and the setter of accounting standards for Islamic financial institutions (IFIs).
Keywords Accounting, AAOIFI accounting standards, Islamic accounting, Islamic financial institutions
Paper type Research paper
1. Research overview
Financial statements for Islamic financial institutions (IFIs) are now considered more
important to Shari’ah scholars, researchers and users of financial statements. However,
the first study conducted by Abdel-Magid (1981) on the need of accounting for IFIs found
that there is an increasing demand among researchers to ensuring the accounting
practice is based on Shari’ah principles. The study has proposed a framework to prepare
financial statements based on a unique model of accounting standards for IFIs that
makes financial statements more comparable, transparent and reliable for users.
According to Hameed (2001) conventional accounting is inappropriate for Muslim users
and Islamic organizations. In another related study conducted by Karim and Tomkins
(1987) he indicates that, it is inappropriate to impose unmodified Western accounting
practices on developing countries. In addition, International Accounting Standards
(IASs) based on such techniques would create difficulties for Muslims around the world
(Shadia, 2007). Therefore, it is vital for Muslim accountants to develop accounting Journal of Financial Reporting and
standards which are specially adapted to Islamic needs and for Muslim countries Accounting
Vol. 11 No. 2, 2013
(Shadia, 2007). Thus, this paper highlights and focuses on the level of compliance with pp. 131-142
the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) q Emerald Group Publishing Limited
1985-2517
accounting standards by Islamic banks of Bahrain. DOI 10.1108/JFRA-07-2012-0031
JFRA 2. Developments of Islamic banking in Bahrain
11,2 Cooperation Council for the Arab States of the Gulf region (Gulf Cooperation Countries
(GCC)) has a rich history of banking sector, going back to 1918 when the British first
opened a bank in Bahrain (Olson and Zoubi, 2008). Islamic banking began in Bahrain
in 1979 with the establishment of the Bahrain Islamic bank (Hussein, 2004).
The Islamic banks operating in the Kingdom of Bahrain are diversified globally in
132 which the GCC, EU, and North America constitute their main markets over the last ten
years.
According to Central Bank of Bahrain (CBB, 2012):
The growth of Islamic banking in particular has been remarkable, with total assets in this
segment jumping from US$1.9 billion in 2000 to US$26.3 billion by June 2009, an increase of
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over 12 times. The market share of Islamic banks correspondingly increased from 1.8% of
total banking assets in 2000 to 11.1% in June 2009.
examined that, the original contract used in premium savings certificate (PSC) violates
the conditions of deposit account (Wadi’ah contract), as in Wadi’ah, the bank is not
allowed to spend the money for investment, but in practice, the National Savings Bank
of Malaysia (Bank Simpanan Nasional (BSN)) Malaysia uses the money for investment,
hence the scholars had unanimously declared that giving any kind of benefit like prizes
to the creditor is riba (usury). In another study related to Shari’ah auditing, Wahyuni
(2008) indicates that, lack of a supervisory board and low demand for audited financial
statements provide little incentive for managers of Islamic microfinance institutions in
Indonesia (Baitul Maal wat Tamweel (BMT)) to get their financial statements audited
by independent auditors.
5. Research framework
The conceptual framework for financial reporting contains objectives that are aimed at
providing meaningful information:
.
for creditors and investors to aid in making an informed decisions;
.
for the assessment of future cash flows; and
.
regarding the enterprises resources (assets) and changes in them, i.e. the users of
financial statements (Lovett, 2002).
In past literature, a number of interesting studies based on diffusion and innovation
theory have discussed the adoption of IASs by companies and banks as mandatory or as
guidelines (Lovett, 2002; Hussein, 1981). Accordingly, this research can be considered as
a first attempt to analyze the adoption of AAOIFI accounting standards in terms of
diffusion and innovation theory. Thus, this paper aims to examine to what extent Islamic
banks of Bahrain are complying with the AAOIFI accounting standards? This study
chose the diffusion and innovation theory as its main underlying theory because it is able
to explain the research problem and the extent of compliance with accounting standards
by Islamic Banks of Bahrain. Furthermore, diffusion and innovation theory may be used
to investigate the process of adopting accounting standards and the need for further
research before the theory can either be accepted or dismissed as inappropriate for
inquiry into the nature of the accounting standards setting process (Hussein, 1981). This
is because it has been found in prior research that, the acceptance of accounting
standards appears to follow the pattern of the diffusion of innovation process (Hussein,
1981). The purpose of this paper is also to determine if the attributes of the variables, as
specified by Rogers (2003) influence the adoption of AAOIFI standards by Islamic banks
of Bahrain.
JFRA Rogers’s theory states that the perceived attributes of an innovation, relative
11,2 advantage, compatibility, complexity, trialability, and observability influence the rate
of adoption of accounting standards. It is shown in Figure 1.
According to Rogers (2003), the innovation diffusion theory interprets the process
through which an individual passes from initial knowledge of an innovation to forming
an attitude toward the innovation, to a decision to adopt or reject, to implementation
134 and use of the new idea and the confirmation of this decision and how a new invention
will be successfully spread among members of a social system within the context of the
diffusion elements.
The identification of a theory is needed to serve as a basis of interpretation of the
variables influencing the adoption of the AAOIFI accounting standards. Quite a
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number of researchers in the field of accounting have adopted the diffusion theory in
their studies. For instance, Hussein (1981) applied diffusion theory to the adoption of
domestic accounting standards, and measured the attitude towards the adoption of
accounting standards based on research statements pertaining to specific US generally
accepted accounting principles (GAAP), this therefore resulted in empirical evidence
that diffusion can be applied in measuring adoption of accounting standards.
Rogers’s theory suggests that innovation diffusion can be applied in adopting or
rejecting any idea, which involves relative advantage, compatibility, complexity,
trialability, and observability influencing the rate of adoption of accounting standards.
Thus, Rogers model consist of five stages namely: knowledge, persuasion, decision,
implementation and confirmation. Among these five stages, the second stage which
perceives characteristics of innovation had been studied more frequently and is
generally considered the most significant in explaining the rate of adoption
(Kendall et al., 2001). Rogers (2003) identified that the rate of adoption of an innovation
is influenced by five variables namely; the perceived attributes of the innovation, the
type of innovation-decision, the communication channels, the nature of the social
system, and the extent of influence of the change agent (Figure 2).
In this research, relative advantage is described as the benefits perceived by Islamic
banks in adopting the AAOIFI accounting standards. Compatibility deals with
Awareness
Interest
Evaluation
Trial
Figure 1. Adoption
Stages of
adoption/compliance
Source: Rogers (2003)
Knowledge
AAOIFI
accounting
standards
Persuasion
Decision 135
Implementation
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Figure 2.
Confirmation
A paradigm of variables
determining the rate of
adoption of innovations
Source: Rogers (2003)
how well AAOIFI accounting standards will suit the current business process.
Complexity is how Islamic banks perceive AAOIFI accounting standards to be. If they
are too complex then the standards may not be adopted, and vice versa. Trialability as
applied in the current research explains the ability to engage in the AAOIFI accounting
standards without incurring cost (cost of compliance). Observability is the degree to
which the results of AAOIFI are visible to others such as users of the financial
statements (Figure 3).
Roger’s model has been applied to study the adoption of innovations in many
disciplines. It has been applied in marketing to determine the acceptance of new products,
in education to determine the acceptance of new teaching techniques, in medicine to
determine the acceptance of new procedures, and in agriculture to determine the
acceptance of hybrid crops (Lovett, 2002).
The use of Roger’s model in studying compliance with the AAOIFI accounting
standards by Islamic banks is rather new, especially in the case of Islamic banks of
Bahrain and more so in the field of accounting. Lovett (2002), for instance indicates that,
Relative Advantage
Compatibility
Complexity
Trialability
Figure 3.
Observability
Roger’s variables
to determining the
rate of adoption
Source: Rogers (2003)
JFRA the acceptance of accounting standards appears to follow the pattern of the diffusion of
11,2 innovation process. As a result, he found that, there is a positive relationship between the
relative advantage, compatibility, trialability and observability and adoption of general
accepted accounting standards by American companies in the state of Florida. On the
other hand, the complexity indicated negative influence on the adoption of IASs, which
means that the more complex the IASs the less likely they will be adopted.
136
6. Research methodology
6.1 Sample selection
The population of the study consists of accountants working in Islamic banks of
Bahrain. The rule-of-thumb sample size in social science according to Sekaran (2000) is
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between 30 and 500 for effective analysis based on the research questions investigated.
Therefore, a study sample rather than the entire population is more likely to produce
reliable results, which could reduce cost and time (Cooper and Schindler, 2006). A total
of 312 questionnaires were distributed to the accountants of Islamic banks of Bahrain.
Only 129 copies were returned to the researchers, approximately 41 percent which is
sufficient for statistics reliability. The sample was drawn from the total population of
accountants in Islamic banks of Bahrain (Table I).
Trialability TRIAL Trialability involves the ability to engage in AAOIFI standards without
gaining cost (cost of compliance)
This was measured through a number of items (three questions)
Observability OBSER The more disclose of information to adopt AAOIFI the more likely the
organizations will adopt that
This variable was measured through some items (four questions)
Dependent variable Table II.
Adoption of AAOIFI Adoption of AAOIFI accounting standards by Islamic banks of Bahrain The labels
AAOIFI This variable was measured through AAOIFI accounting standards and measurement
(17 standards) of the study variables
7. Findings
7.1 Descriptive statistics
Table III shows the descriptive statistics of the independent variables. The variables
reflect the level of compliance with AAOIFI accounting standards. The variables also
refer to the level of understanding and acceptability of AAOIFI accounting standards
JFRA to be adopted by Islamic banks of Bahrain. Overall, the mean of the variables is
11,2 positive and that reflects the high level of compliance with the AAOIFI accounting
standards. This result is in line with prior studies to reflect higher level of compliance
with the AAOIFI accounting standards.
Independent variables
ADVANT 1.000 5.000 3.72
COMPAT 1.000 5.000 3.60
OBSERV 1.000 5.000 3.40
Table III. TRIAL 1.000 5.000 3.14
Descriptive statistics COMPLEX 1.000 5.000 3.06
for independent and Dependent variable
dependent variables AAOIFI 4.01
Notes: Significant at: *10 percent level; at-critical: at df 128 2 1 ¼ 127 and confidence level of Table VI.
95 percent is 1.658; dependent variable – adoption of the AAOIFI accounting standards Predictors coefficients
These results indicate that the accountant’s perceptions on the level of compliance with
the AAOIFI accounting standards influence their decision to comply with the AAOIFI
accounting standards.
The results reveal that, the level of compliance with the AAOIFI accounting
standards are affected by factors identified by Rogers. The results support the research
hypotheses that, the more relative advantage, compatibility and observability of the
AAOIFI accounting standards, the more likely the AAOIFI accounting standards will be
adopted. On the other hand, complexity variable is negatively related to the level of
compliance with the AAOIFI accounting standards, which means, the less complex the
AAOIFI accounting standards, the more likely AAOIFI accounting standards will be
adopted. Meanwhile, the trialability variable is negatively significant, which means that
Shari’ah principles are not for trial but must be fully adopted by all parties. Furthermore,
the AAOIFI accounting standards need to be mandated by the government in order to be
fully adopted by Islamic banks and other institutions. Bahrain has mandated that AAOIFI
accounting standards must be fully complied by all banks and financial institutions.
Based on the above discussion, this research may be considered as a first attempt to
contribute to the accounting literature in terms of the impact of the relative advantage,
compatibility, complexity, trialability, and observability on the efforts of adoption
or compliance with the AAOIFI accounting standards. The findings should also be
beneficial to the regulators and researchers to adopt and undertake further studies on
AAOIFI accounting standards.
141
References
AAOIFI (2008), Financial Accounting Standards, Accounting and Auditing Organization for
Islamic Financial Institutions, Manama.
AAOIFI (2010), Financial Accounting Standards, Accounting and Auditing Organization for
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Corresponding author
Adel Mohammed Sarea can be contacted at: Adelsarea@yahoo.com
1. Nassr Saleh Mohamad Ahmad, Abdu Samia Daw Ben Daw. 2015. Compliance with AAOIFI guidelines
in general presentation and disclosure by Libyan Islamic banks. World Journal of Entrepreneurship,
Management and Sustainable Development 11:2, 90-99. [Abstract] [Full Text] [PDF]
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