The background to the present study together with the research objectives and issues, the methodology and methods used and an outline of the thesis are presented in this chapter. In the next three sections (1.1,1.2 and 1.3) the context of the study, the problem giving rise to the study and imperatives which drive the study are presented respectively. This is followed in section 1.4 by a discussion of the specific research aims and objectives of the study, which is to inquire into the need for an alternative “Islamic accounting” given the problems that conventional Anglo-American Accounting poses for Islamic organisations and users. Section 1.5 outlines the research methodology and methods followed in this study while the contribution the study makes to the Islamic accounting literature are stated in section 1.6. This chapter ends with section 1.7 where a flowchart and a brief outline of each chapter of the thesis are presented. 1.1 THE CONTEXT: CONVENTIONAL ACCOUNTING AND ITS RELATIONSHIP TO SOCIETY Behind the facade of accounting as a purely technical subject, lies a reality in which accounting and society are intertwined in a complex relationship (Burchell et al., 1980). Accounting creates social reality (Hines, 1988) and in itself is influenced and moulded by society (or the dominating forces within it). This is not readily apparent to users, even accountants, who unfailingly advocate its technical neutrality. Until recently, this was echoed even in academic circles which tends to be dominated by a positivist epistemology in mainstream accounting research especially in the USA (Baker & Beltner, 1997). Within this approach, accounting is studied for its causal relationships; what is instead of what ought to be and for the purposes of predicting and projecting profitability and cash flows (Watts & Zimmerman, 1986). This has given rise to a whole discipline of finance and financial markets and fund management, which has become basically a speculative activity- a popular post-modern game in hyper-reality (McGoun, 1997). This positivist tendency of accounting to be used for justifying speculative financial activity (for example, in the case of the mergers, acquisitions and privatisations (Briloff, 1990; Arnold & Cooper, 1999) has serious consequences for any society, Islamic or otherwise. Academic circles in the West have realised this tendency and its dire consequences for society. Hence, a discourse on the critique of conventional Anglo-American accounting has developed which takes a more comprehensive view of accounting in relation to its role in society. Various accounting journals sprang up in the late 1970’s and 1980’s such as Accounting, Organizations and Society, Advances in Public Interest Accounting, Critical Perspectives on Accounting and the Accounting, Auditing and Accountability Journal which provided a broader gateway for alternative types of accounting research. 1.2 THE PROBLEM: THE GLOBALISATION OF ANGLO-AMERICAN ACCOUNTING IN DIVERSE CULTURES AND ENVIRONMENTS There is also debate in academia about whether “Western” Anglo-American accounting (from here on referred to as conventional accounting) is the appropriate system to be accepted without question by all other cultures and people of the world (Wallace 1990a). Initial research (e.g. Hove, 1986) has indicated that it is not, although the extent to which western accounting is relevant or otherwise is a matter of debate (Baydoun & Willet, 1995). A whole journal dedicated to this area of research (Research in Third World Accounting) has sprung up and the debate is alive and well. Research so far has indicated that there is a relationship between accounting and culture (Gray, 1988; AlHashim & Arpan, 1992; Perera, 1989) and one system cannot be transplanted into another cultural environment to take root without causing dysfunctional effects on the host culture and society. Despite this however, in recent years, there have been pressures on developing countries with different cultures, religions, social, business and political

environments to adopt the conventional accounting principles and standards. Consequently, their underlying philosophy is adopted without any or negligible modification in the name of globalisation. These ‘pressures’ have been in the guise of; (i) Harmonisation of international accounting standards by the IASC (Taylor, 1987;Wallace, 1990b), (ii) the operations of multinational audit firms and their clients the multinational corporations, and (iii) the professional education imparted through the examination and qualification exporting accounting bodies of the UK e.g. CIMA (Briston & Kedslie, 1997). However, the spread of “Western” consumerism (Ahmed, 1992) and capitalism over the globe is not without its opponents. The resurgence of religion especially Islam in the Muslim countries, questions the socio-economic values of Western capitalism and attempts to introduce its own socio-economic system in line with its own worldview. The researcher considers that the Islamic economic system may need an alternative “Islamic accounting” System that would provide appropriate information which hopefully would induce user behaviour consistent with the Islamic worldview. This research project hopes to make an initial contribution in this area. The Islamic reaction against the attack on its values in the name of globalisation is the imperative to this research project and is outlined in the following section. 1.3 THE IMPERATIVE FOR THE RESEARCH: RESURGENCE OF ISLAM AND ISLAMISATION OF KNOWLEDGE Islam is the second largest and fastest growing religion in the world. It is not only a ritualistic religion confined to the individual but an integrated way of life combining politics, economics, culture, religion and every aspect of human life. From its very beginnings, it was an integrated way of life combining the secular and the sacred, mosque and the state, political and social life. Thus, Noreng (1997), for example, terms it as both a “political and social project “ since its inception. This is unlike the understanding of religion in the modern secular West where religion is separated from the state. In this study, Islam is used in the sense of a civilisation driven by Islam- the religion and code of life, law, ethics, government, economics and society. The word “Islamic” is used to denote Muslim society, which lives according to Islamic principles in all areas of life. The word ‘Muslim’ on the other hand is used to describe the actual situation of Muslim countries where Muslims have political power but have not implemented Islam in their political, social or economic life although they may be at various stages of this process. This civilisational view of Islam is not entirely novel or an entirely ‘Islamic’ perspective but is recognised by writers in the West, for example, Hunttington (1996) who portrays Islam in this context. Further, the Economist (1998) included ‘Islam’ as a potential candidate for ‘super power’ status in the 21st Century although arguing that it is very improbable given the disunity amongst its ranks and its lack of long-range military power. Further, Talbott (1998), in commenting on the ambiguous response of the EC on Turkey’s admission to the European Union, admitted that European opposition to its joining was because of its ‘Islamic’ credentials and that this should not be the case: “The debate within the EU over Turkey resonates with references to “culture” and “civilisation”. These words are often euphemisms for religion [emphasis mine]. The theory is currently in vogue that the cold war rivalry between communism and capitalism has given way to a global “clash of civilizations” including one between the Judeo-Christian West and the Islamic world. That idea is pernicious. If the “Europeanness” of a village depends on whether its landmarks are church spires or minarets, then the peace of the Continent will be in recurring jeopardy of the kind we have seen in Bosnia over the past several years and in Kosovo over the past several months”. (Talbott, 1998) Although the Muslim countries are not united politically and Muslim countries for

the most part are secular according to their constitutions this is due to a number of historical factors including colonialism’s divide and rule policy. There is a global resurgence of Islamic fervour at both local and international levels and the aspect which most concerns this study is the aspiration of the Muslims to order their political, social and economic life in accordance with Islamic teachings. Towards this end, in the socio-economic sphere, there has been a paradigm shift from conventional utilitarian economics to Islamic Economics (Presley & Sessions, 1994). In Islamic economics, the rational economic man’s utility maximising behaviour is replaced by the ‘homo-economicus-Islamicus’ (Al-Zarqa, 1980) whose consumer behaviour is limited by a ‘moral filter’ and a redefined self interest extending to the hereafter (Chapra, 1992). To attain this “Islamic Economic System”, Islamic political and economic organisations have been set up at the international, regional and local levels. International politico-economic organisations include the Organisation of the Islamic Conference (OIC) grouping 52 Muslim countries, Economic Co-operation Organisation (ECO) grouping Iran, Pakistan, Turkey and the Central Asian States, the newly formed D8 (group of developing eight Muslim countries) and the Gulf Cooperation Council (GCC) which groups six Muslim gulf countries. These organisations have economic, scientific, trade and cultural sub-committees. More important from an accounting point of view is the setting up of local and regional Islamic banks, insurance companies, investment companies, Muslim treasuries (baitul mal) and endowments (al-awqaf) established to operate under Islamic Shari’ah (Islamic law) and to achieve Islamic objectives. These organisations are for the most part using conventional accounting principles, which may not be appropriate to the achievement of their mission. In addition there is a movement towards Islamisation of knowledge and disciplines (Abu Sulayman, 1989) which basically is an attempt to critically re-examine secular ‘western’ knowledge and to recast them with the values, norms and assumptions of Islam. This movement asserts that there is a ‘crisis in the Muslim mind’ which has caused the stagnation of knowledge and progress in the Muslim world. They assert that the way to correct the problem is to reinterpret conventional western secular knowledge into the Islamic mould and to reintegrate human knowledge derived from the senses and reason with revelation, the knowledge given by God through scriptures and the Prophets; in other words, a whole new epistemology. The apparent problem with Islamic law is that it is based on eternal principles in the Qur’an (which is the Word of God according to Muslims) and the Sunnah (the sayings and traditions of the Prophet Muhammad pbuh ) and the interpretation of religious scholars over the past 1420 years. The Qur’an and the Sunnah cannot be changed. They can only be reinterpreted within strict limits in line with the requirements of time and space. Unfortunately for the Muslim world, the process of development of Islamic law stagnated around 700 years ago and the colonisation of the Muslim world leading to the separation of politics from Islam further confounded this problem. Since the law of the land was separated from Islam, Muslim scholars became completely out of touch with the realities of modern society and state and many of the derived laws for a bygone age became obsolete. After independence, not only was there an absence of law to meet the requirements of modern society, the colonial masters had moulded their successors in the developing world with their own philosophies and left them with a legacy of knowledge, institutions and civilisation, divorced from the Islamic past. The Muslim not only had problems of reinterpreting laws to meet their current needs, there were left with an alien epistemology that alienated their thinking from their religion and forced them to lead a double life in their personal and societal roles. With the Islamisation of knowledge, Muslim scholars hope to go back to their divine sources to extract principles which together with the aid of reason and empirical positive facts of current circumstances and place, develop new and

relevant knowledge and laws in order for Islamic society to achieve its objectives. As part of this process, the various “modern” disciplines need to be reconstructed on the edifice of Islam. This research attempts to make a beginning in the Islamisation of Accounting. 1.4 THE AIM AND OBJECTIVES OF THE RESEARCH This research is an initial exploratory attempt towards establishing the need for an alternative ‘Islamic accounting’ from a critical re-examination of the principles, norms, objectives and normative values which underlie conventional Anglo-American accounting and the unIslamic consequences it engenders among Islamic and Muslim organisations and Muslim users. The underlying philosophical values of secular “Western” Anglo-American society are reflected in its accounting practices and principles. It is created by a capitalistic social reality with extreme concentration of power, inequalities in income and wealth, social and economic instability, and environmental destruction. These are not the objectives of any civilised society let alone an Islamic one. Changes to conventional accounting have been suggested from various perspectives: e.g. social and environmental (Gray et al., 1996), feminist (Reiter, 1997), deep green (Cooper, 1992) and Marxist (Cooper & Hopper, 1990). However, they do not take the spiritual element seriously as does Islam and therefore cannot be used as a tool to achieve the objectives of an Islamic society. Further, there are currently 192 Islamic banks and financial institutions in the Muslim world and other countries (Timewell, 1998). These institutions are springing up even in Western countries where Multinationals such as Chase Manhattan and Australian New Zealand (ANZ) banks establish special Islamic counters or branches to serve the niche market (or capture the significant Muslim funds). Islamic insurance companies (known as takaful) are also operating together with relief organisations (e.g. Islamic Relief, Muslim Aid and Human Relief Foundation in the UK). Zakat agencies have been set up to collect and distribute Zakat, a religious wealth/income tax. There are Islamic universities, pilgrim fund management boards, Islamic hospitals, and Islamic foundations. In addition business corporations are being set up following the Islamic model in Muslim countries such as Egypt (El-Ashker, 1987). Most of them use conventional accounting, which may not be suitable to the development of an Islamic economic/social environment and the achievement of their Islamic mission for which they have been set up. This is despite the fact that a regulatory agency, the Accounting and Auditing Organisation for Islamic Financial Institutions has been created which has issued certain Accounting Standards for Islamic banks (Pomeranz, 1997; Karim, 1999). Besides arguing for the need for an Islamic accounting, this research attempts to explore and develop the objectives and characteristics, from an Islamic perspective, of an accounting, which will serve the purposes, and objectives of Islamic society. The researcher suggests that the worldview, principles, objectives and values of Islam are different from secular Western society. As such, the particular obligations and prohibitions in the economic and social arena under the Islamic Shari’ah (Islamic Law) require a different accounting framework and different accounting concepts, rules, principles and guidelines to achieve the objectives of an Islamic society. The researcher suggests therefore that conventional accounting may be inappropriate tool for the task. Further the establishment of Islamic organisations within Muslim societies requires an immediate practical as opposed to only a theoretical need for an alternative Islamic accounting. There is a danger that the continued use of conventional accounting without at least a major modification may result in a deviation if not a frustration of the objectives and mission for which the organisations were established. This alternative accounting which would be in line with the mission of Islamic organisations and the world-view of Muslim users is termed “Islamic accounting” by the researcher. Further, since one cannot find the objectives and rules of Islamic accounting in

detail in the Qur’an, the researcher aims to follow the methodology of Islamic jurisprudence of ‘Ijma (consensus) of scholars and experts in the area. The second part of the study will therefore seek to find the consensus of Muslim Accountants and Accounting academics in Malaysia by surveying their perceptions on conventional accounting and on the objectives and characteristics of Islamic accounting which have been derived in the earlier part of the study. One of the assumptions of the researcher in this project is that the need for Islamic accounting is partly based on the assumption that conventional accounting is not suitable for Muslim organisations and users. The researcher believes that conventional accounting leads to unIslamic Financing, Investment and Operating behaviour among Muslim users. Further, certain aspects of accounting lead to behavioural problems from an Islamic moral/ethical perspective. The third part of this research aims to elicit information on the validity of this assumption. In short the objectives of this research can be divided into three main parts: • To argue the need for and to enquire into the objectives and characteristics of an “Islamic accounting” derived from Islamic values and an Islamic worldview which is more appropriate to an Islamic society; • To explore the consensus or otherwise of Muslim accountants and academics on the objectives and characteristics of Islamic accounting; and • To ascertain the extent to which conventional accounting is unsuitable for Muslims and Islamic organisations by obtaining information regarding its behavioural effects. 1.5 RESEARCH METHODOLOGY AND METHODS According to perceived wisdom (see for example, Burrell & Morgan, 1979), an exploratory study of this nature should use either a grounded theory (code analysis) or case study (critical analysis) or a historical structural analysis approach to explain, diagnose and understand the issues under study. Gioia & Pitre (1990), however, argue for a multi-paradigm approach to theory building, which has been adopted due to the nature of the study and the limitations of practicality. Hence interpretive, critical, structural (in terms of probing historical evidence) and functionalist approaches (in terms of testing hypothesis) have been employed in this study. A normative/deductive methodology is used in this research to argue the case against the adoption of conventional accounting by Islamic organisations and societies and to deduce the outlines of an “Islamic accounting theory”. Specifically, disclosure of the distortions caused by the social construction of an UnIslamic reality by conventional accounting is critically analysed to describe and critique in the hope of change through revising consciousness of users. In contrast to the proposed emancipatory accounting (e.g. Tinker, 1985) which stops short of prescribing changes, an initial attempt is made to propose an alternative Islamic accounting system in terms of its objectives and characteristics in line with Islamic values. Here, the researcher will attempt to deduce the characteristics of Islamic accounting from general principles and values from the Islamic worldview. Finally a nomothetic method (which is usually reflective of a positivist methodology) is followed using survey techniques and basic statistical analysis to test certain hypotheses to study the consensus on objectives and characteristics of Islamic accounting. Although this may seen to be inconsistent with a normativedeductive and ‘critical’ methodology employed in the first part of the research, the researcher justifies this in terms of the objective of the second part of the research. This is to elicit evidence on consensus of the respondents on Islamic accounting, as well as to gauge the extent of unIslamic behaviour of users caused by conventional accounting, both of which are positive (what is?) issues. The methods used in the various stages of this research are: (a) Review the literature on criticisms of conventional accounting and examine and extend them from an Islamic perspective. Also the literature on Islamic worldview, Islamisation of knowledge and the Islamic economic system will be

reviewed and contrasted with the values inherent in the capitalist economic system of the West, to argue the need for an alternative Islamic accounting. (b) Deduce the objectives and characteristics of an alternative “Islamic accounting” from the worldview, objectives, values and economic norms of the Islam and the Islamic economic system. (c) Test the perception and consensus or otherwise of Malaysian Muslim accounting academics and professional accountants on the characteristics of Islamic accounting using postal questionnaires. (d) Undertake two further surveys of finance managers and organisational employees in other functions in various organisations to find out the extent to which, if any, conventional accounting practices within organisations result in unIslamic behaviour. 1.6 ORIGINAL CONTRIBUTIONS TO KNOWLEDGE AND LIMITATIONS OF THE STUDY. To the knowledge of the researcher, this is the first study of “Islamic accounting" of its kind both in terms of theoretical enquiry and empirical investigation. The word “Islamic accounting” has been in the literature since the late 1980’s (e.g. Hayashi, 1989; Choi & Mueller, 1992). There has been great expectations regarding its development. Hayashi (1989) for example, studied the implication of Islamic accounting for Western Accounting while Choi & Mueller (1992) gave “glad tidings” of Islamic accounting in the following words: “There is every reason to believe that in due course something labelled “Islamic accounting” will be identified and propagated (p57)......An Islamic perspective is beginning to assert itself upon the international accounting scene. Its beginnings are modest, but its fervour adamant. We believe that the Middle-East region will continue to make accounting news as the twenty-first century breaks”. (Choi & Mueller, 1992, p57 and 65) There have been some recent attempts to develop Shari’ate Accounting (Triyuwon & Gaffikin, 1996) and Islamic corporate reports (Baydoun & Willet, 1998). The paper by Triyuwon & Gaffikin (1996) argues from a critical perspective using the language of philosophy. Baydoun & Willet (1998) argue for an Islamic Value Added corporate report, cash flow statement and current value Balance Sheets. However, in the researcher’s opinion, Baydoun & Willet’s (1998) theoretical arguments are rather brief. Despite these important contributions, however, instead of exploring the theory first, most research has jumped into the practice bandwagon by exploring the accounting implication of Islamic banking (e.g. Karim, 1995 and 1998a). Perhaps this is to be expected as conventional accounting represents itself as objective and neutral and “misleads” its acquaintances into thinking that it can be modified for new areas such as Islamic banking without recourse to a fundamental reexamination of its principles. This research initiates a contribution to basic theory or conceptual framework to this area with its enquiry into to the objectives and characteristics of Islamic accounting (Chapter 6). There is also no study attempting to compare conventional accounting to the proposed Islamic one. In particular, there is no exposition of the fundamental philosophical tenets of conventional accounting in the mould undertaken, for example, by Gray et al. (1996) in their call for social accounting or that undertaken by Tinker (1985) in his bid for an “emancipatory accounting”. There is also no examination of these expositions from the Islamic perspective. This research (see Chapter 3) tries to fill this gap at least partially and contributes to the critical and social accounting literature by adding the “confounding” element of Islam (Hamid et al., 1993) to the debate. Further, not many seem to have answered the call of the proponents of the Islamisation of Knowledge (see Chapter 4) in the discipline of accounting compared to the discipline of Islamic Economics (see for example, Haneef, 1995). The analysis of the Islamisation methodologies (Chapter 4) and its partial adoption in this project contributes to academic support for Islamisation of disciplines as a

whole and for accounting in particular. It is hoped that this thesis will make Islamisation of knowledge a more concrete and practical idea. To the author’s knowledge, this research is also the first to contribute empirical survey results on the objectives and characteristics of Islamic accounting (Chapters 8 and 9). The results show strong support among Malaysian Muslim Accountants and Accounting Academics for the replacement of the decisionusefulness framework of conventional accounting with an “Islamic Accountability” framework of Islamic accounting. Further, stakeholders other than shareholders and creditors (who are the focus of conventional accounting) are considered at least as important as users of Islamic accounting information. The respondents also view the integrated disclosure of Islamic, social and environmental information as the hallmark of Islamic accounting. There is also a lack of research on whether conventional accounting causes unIslamic behaviour by Islamic organisations and Muslim users. This research argues that negative behavioural consequences for internal users may make conventional accounting unsuitable to a Muslim society, to Muslim users and to Muslim organisations. The current research contributes to the literature through a survey to gain insight into this area (Chapter 10). Although the results do not conclusively substantiate the validity of the researcher’s arguments in practice, the evidence presented has raised some doubts. This at least calls for further research in the area. The nature of the research project (time and cost constraints) restricted the scope of the study from including a more extensive survey. Future research could extend the survey to other employees in various organisations in Malaysia, accountants and accounting academics in other Muslim countries and a Delphi method of brainstorming Islamic scholars on the subject could be undertaken to make the subject credible under Islamic law. To gain further insight into the behavioural consequences of conventional accounting in Islamic organisations and among Muslim employees, case study research extending over a period of time is necessary. This research has been limited by the lack of access to Islamic and Muslim organisations for in depth case studies. Future research could overcome these problems and gain a deeper insight into the behavioural implications of conventional accounting on Muslims. The next section presents the outline of the thesis through which these contributions came about. 1.7 OUTLINE OF THE THESIS Figure 1-1 on the next page, shows the structure of the thesis. A synopsis of the study follows: This chapter has provided the background to the problem, outlined the research aims and objectives, described the research methodology and methods used and highlighted the original contribution this study has made to the Islamic accounting literature. In chapter 2, the relationship of conventional Anglo-American accounting and the worldview and values of “Western” society are reviewed. It is argued that Accounting being a social institution (Roslender, 1992) is not value free and objective. Conventional accounting in particular has imbedded values of the capitalist economic system, which in turn reflect the values developed from the historical experience of Europe including its enlightenment and modernist phases of development. The Western values of democracy, secularism, individualism, utilitarianism and consumerism are analysed as the underlying assumptions and rationale under which accounting works. The implications of this for the economic objectives, norms and behaviour are traced out and its implication for accounting as an information provision system delineated. The worldview and values of Islam is then presented and shown to lead to an ethical Islamic economic system. These are then contrasted with the Western worldview and values and the capitalist economic system and are shown to be different from the Islamic worldview, values and economic system. Thus, the requirement for an alternative Islamic accounting

system is posited. FIGURE 1 1:STRUCTURE OF THESIS In chapter 3, a critique of conventional accounting is undertaken in terms of its objectives, characteristics and consequences. Taking the cue from social, environmental and critical accounting literature, it is argued that the objectives, characteristics, consequences and the environment under which conventional accounting operates (the push factors) are totally unsuited to accounting for transactions in an Islamic society. In particular, the existing social and critical literature on accounting is examined from an Islamic perspective to argue the need for an Islamic accounting system. In chapter 4, the first category of “pull factors” which make Islamic accounting necessary - the Islamisation of knowledge, is defined, discussed and categorised. The debate on the Islamisation of knowledge is extended by its discussion in the context of the general epistemology and methodology of research in general, and the Burrell & Morgan (1979) framework in particular. The implications of the various methodologies of Islamisation for the Islamisation of accounting and for this research project are explored and the methodology for this study adopted. In chapter 5, the second category of “pull factors”, the establishment of various Islamic organisations with their own Islamic objectives and legal framework, is outlined. In particular, the operations and financing techniques of Islamic banks and financial institutions are used to show the relevance and importance of an alternate “Islamic accounting” systems for these institutions. In chapter 6, the objectives and characteristics of Islamic accounting are developed from the Islamic worldview and a perusal of the literature in Islamic accounting. An “Islamic accountability model” is posited as the framework and objective of Islamic accounting in contrast to the decision-usefulness of conventional accounting. Some problems of recognition, measurement, valuation and disclosure principles of conventional accounting are discussed and Islamic alternatives proposed. In chapter 7, the research design, data collection methods in general and a justification for the survey method adopted in this research are presented. The design and structure of the research instruments (questionnaires) are discussed. This is followed by a discussion on the population and sample characteristics. The procedure followed for data collection, including problems encountered during the empirical part of the research, is outlined. In chapter 8, the responses to an “Islamic accounting questionnaire” sent to professional accountants and academics in Malaysia are analysed and the findings presented. The results indicate strong support for Islamic accounting. In chapter 9, several hypotheses regarding Islamic accounting are tested on the data from the Islamic accounting questionnaire. The results of the statistical analyses conducted on the data support the hypotheses of the researcher except those regarding certain conventional accounting principles. In chapter 10, the results of the questionnaires on behavioural consequences of conventional accounting are presented. The results are mixed although there is some evidence to suggest that conventional accounting does cause some unIslamic behaviour although its undesirable effects seem to be less prominent in Islamic business organisations. The research is summarised in chapter 11 where conclusions are drawn as to the implications of the findings and the direction of future research is suggested. The researcher concludes with the original contributions to knowledge of this research.

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