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Journal of Islamic Accounting and Business ResearchEmerald Article: The two Ws of Islamic accounting research

Roszaini Haniffa, Mohammad Hudaib

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To cite this document: Roszaini Haniffa, Mohammad Hudaib, (2010),"The two Ws of Islamic accounting research", Journal of Islamic

Accounting and Business Research, Vol. 1 Iss: 1 pp. 5 - 9

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EDITORIAL

The two Ws of Islamic accountingresearchRoszaini Haniffa

Bradford University School of Management, Bradford, UK, and

Mohammad HudaibNottingham University Business School, Nottingham, UK

Abstract

Purpose The purpose of this paper is to introduce the new journal and articles in the first issue.

Design/methodology/approach The paper attempts to introduce the journal by answering thetwo W questions what is Islamic accounting and why Islamic accounting research is important. Indoing so, it indirectly highlights the need for a specialist journal like Journal of Islamic Accounting and

Business Research (JIABR) and the potential research areas.

Findings Islamic accounting research is still at the infancy stage compared to Islamic banking andfinance. One of the reasons is due to lack of exposure of research conducted in the area at internationallevel, ending up with only a few issues getting attention. Similarly, the lack of a platform whereresearchers interested in the area could showcase the diverse range of research as well as network andget support on their research hindered the progress of research in this area. Hence, JIABRcould be the

leading journal in the area of Islamic accounting and business research if all papers related to it arechanneled in this specialist journal. In this way, researchers in the areas of accounting and businesswould be more aware of the development and contemporary issues to take the research forward.

Originality/value This paper is useful to new readers of the journal around the world who areinterested but have limited knowledge in the area, and also those who wish to submit to the journal, inthat it highlights some potential areas for research.

Keywords Islam, Accounting, Accounting research, Auditing, Corporate governance

Paper type Research paper

IntroductionWelcome to the inaugural issue of the Journal of Islamic Accounting and Business

Research (JIABR). We are both pleased to be involved in the launch of this journal andto see the first issue in print. As an international journal committed to encouraging andpublishing quality work from researchers and practitioners around the world in the

area of Islamic accounting and business, we believe JIABR will make an importantcontribution to the fields of accounting, finance and management. We hope for the

journal to not only showcase the diverse range of research in this field but also toprovide researchers and practitioners a platform to discuss pertinent issues that haswider implications on various stakeholders. In this first editorial, we attempt tointroduce the journal by answering the two W questions: what is Islamic accountingand why Islamic accounting research is an important field. In this way, we hope bothreaders and potential contributors would be able to appreciate the difference in the aimand scope of the journal compared to other journals in similar fields. We will alsointroduce the contents of this first issue.

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/1759-0817.htm

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Journal of Islamic Accounting andBusiness ResearchVol. 1 No. 1, 2010

pp. 5-9q Emerald Group Publishing Limited

1759-0817

DOI 10.1108/17590811011033370


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What is Islamic accounting?The term Islamic accounting may be interpreted in many ways. Indeed, Napier (2009,pp. 123-4) highlights various meanings that can be attached to it:

First, Islamic accounting could be understood in a religious sense [ . . .]. The term Islamicaccounting can also have a temporal and spatial implication.

In a religious sense, Islamic accounting refers to a coherent body of ideas and practicesbased on the Islamic religion. Hayashi (1989, p. 42) defines Islamic accounting as [. . .]theory which thinks how it could allocate the resources justly [. . .] and Haniffaand Hudaib (2002, p. 8) define it as an assurance function that seeks to establish

socio-economic justice through its formalised procedures, routines, objectivemeasurement, control and reporting in accordance with shariah islamiiah principles.From the two definitions, it can be discerned that Islamic accounting plays two importantroles to:

(1) provide assurance to users of accounting information through properrecordings and disclosure that transactions do not contravene shariaprinciples; and

(2) ensure that resources are allocated fairly through proper measurements andrecognition of assets, liabilities, revenues, and expenses.

The word sharia comes from an Arabic word that literally means the way or thepath to the water source. In the context of Islam, sharia refers to the clear and straightpath that would lead humans to al-falah happiness in this world and in the hereafter.

Sharia principles are derived from two main sources: the Quran, which is consideredby Muslims to be the exact words of revelation from God to Prophet Muhammad, andthe Sunnah (the acts and sayings of the Prophet as transmitted through traditionsknown as Hadith).

Sharia places great emphasis on the issue of measurement because they are relatedto distribution of wealth. It is stated in the Quran:

Woe to those that deal in fraud - those who, when they have to receive by measure from men,exact full measure, but when they have to give by measure or weight to men, give less thandue (Al-Mutaffifin 83:1-3).

As an assurance mechanism, keeping proper records is deemed important as part ofthe fair determination of rights and obligations:

O ye who believe! when ye deal with each other, in transactions involving future obligationsin a fixed period of time, reduce them to writing and Let a scribe write down faithfully asbetween the parties (Al-Baqarah 2:282).

Closely related to the assurance function is the concept of accountability (masuliyyah),which is broader than that present in Western societies (Baydoun and Willett, 1997). InIslam, primary accountability is to God as all of ones actions (good and bad deeds) inlife will be accounted for on the Day of Judgement:

Allah takes careful account of all things (An-Nisa 4:86).

The fear of God in private and in public should help in establishing justice, andempowering the rightful owner to know, demand and receive his rights as well as deter

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those entrusted with power from abusing their position in overseeing socio-economicjustice:

O ye who believe! Fear Allah, and (always) say a word directed to the right (Al-Ahzab 33:70).

In short:

Islamic accounting from a religious sense will have implications on the practice of accountingand the conduct of accountants as well as other related parties such as the Shariahsupervisory board, audit committees, investment analysts, regulators, trustees, etc. in variousIslamic financial institutions.

On the other hand, as suggested by Napier (2009, p. 124), the temporal and spatialmeaning of Islamic accounting may imply accounting in parts of the world whereIslam is the majority religion during periods when Islam has been dominant and itcould also mean the current practice of accounting in Islamic countries. In this sense,Islamic accounting refers to issues related to how accounting is being practiced byMuslim societies in different parts of the world at different time.

Therefore, given the various possible interpretations of Islamic accounting, JIABRwelcomes papers not only on accounting, auditing, and corporate governance but alsocapital market-based research that uses accounting numbers. It also welcomes paperson historical research into Islamic accounting and economic activities during theGolden Age of Islam and current accounting and business practices in Islamiccountries.

Why Islamic accounting research is important?All accounting activities will have an impact on the welfare of society in one way oranother, i.e. having social-economic consequences. The emergence of Islamic banks as asignificant force in several countries in the late-1970s has prompted researchers toconsider the accounting implications. Islamic accounting is almost unheard of untilAbdel-Magid (1981) in his seminal paper highlighted the need for accounting practicesbased on sharia principles to cater for Islamic banks that began to emerge at thattime. The growth of Islamic banking in the early 1990s resulted in more scholarlyresearch into Islamic accounting but they are either not written in English, and theEnglish-language literature tends to be published in non-mainstream accounting

journals (Napier and Haniffa, 2010)[1] or the internet. The early researchers raise manyimportant issues, e.g. the need of a framework for Islamic accounting, accounting policychoice, corporate reporting, need for Islamic accounting regulations, etc. but did not getthe attention they deserve as they got buried among the huge accounting literature

and also hidden within their local domain and not getting international exposure.When Islamic financial institutions (IFIs) entered the period of going global and

offering more innovative financial products in the last five to six years, it attracted theattention of researchers interested in knowing this alternative model of businesswithout interest. As a global player, IFIs need to compete and offer products that themarket would be interested in. Various Islamic juridical concepts were applied to givethem an Islamic appearance (Tripp, 2006), hence the use of the term sharia-compliantrather than sharia-based. The products offered start replicating their conventionalcounterparts which used complex schemes of financial engineering often by gettingaround accounting standards, loading hard to understand numbers in the financial

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statements and unloading risks off balance sheet. The sophisticated structures of thecontracts may well serve the sharia compliance aspect but not much thought norattention given to the accounting aspects. It is difficult to accept that all is well withfinancial modeling when the conventional model has proven its weakness in thefinancial crisis. Hence, Islamic accounting research is important and needs to develop intandem with the development of new Islamic financial structures.

Accounting systems are embedded in a countrys economic and legal framework,much of which is shaped by political processes (Leuz et al., 2005). The politics ofaccounting suggest that all parties that can impact or be impacted by accountingactivities will lobby to protect their own interest. Hence, it is not surprising to find

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI),the standard setting body for IFIs, being caught up in the political process. There aremany economic and political questions that need answers: for instance, how canIslamic accounting standards be enforced; what is the role of auditing for IFIs; howdoes lobbying affect the political process of standard setting for IFIs, etc.

From the brief discussion above, there is no doubt that Islamic accounting researchis important not only due to development of IFIs that gave rise to many accounting,auditing, and governance questions that beg answers but also its potential in providingalternative measures and solutions through sharia principles to overcome some of theweaknesses of the conventional model in the recent financial crisis.

Contributions in this inaugural issueWe now turn to the articles in this inaugural issue. We are delighted that the four

articles in this issue demonstrate the diverse range of research papers that JIABRwishes to publish to raise awareness and to encourage debates among researchers onissues that have significant implications on various stakeholders.

The first two papers address AAOIFIs accounting standards FAS 6 and FAS 17.In the first paper, Simon Archer, Rifaat Karim and Vasudevan Sundararajan tackled avital issue on how to measure and manage the risk characteristics of one of the majorsources of funding of IIFS, profit sharing investment accounts (PSIA). They provide amethodology to estimate alpha, which is the fraction of the assets funded by PSIAincluded in the denominator of the capital adequacy ratio. The value of alpha hassignificant implications for asset-liability management, product pricing, and optimalcapital structure for Islamic banks. The next stage is to test it using data from IIFS butthis could only be done if such data are disclosed.

The second paper by Bill Maurer addressed an important point on the politics ofaccounting. Bill highlights how lobbying affects the political process of accounting

standard setting bodies, specifically the position of AAOIFI, using recent sukukissuances as examples. Bill raises interesting questions in the paper related to oneparticular AAOIFIs accounting standard FAS 17. The challenge for other potentialcontributors is to scrutinize the impact of other accounting standards on the financialstatements of IFIs.

The next two papers are related to investments. The paper by Mervyn Lewisdescribed the status quo of Islamic investment funds. Mervyn highlights the differencesin the screening and purification process adopted by different Islamic indices andhow the over-emphasis on the prohibitions and neglecting the other positive aspectslimits the opportunities to reach other ethical investors. Mervyn proposed a number of

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recommendations on how Islamic funds can raise their profile and enhance their globalreach. Given the increasing attention on climate change and sustainability, Islamicfunds have much to offer to investors and more research is needed in this area.

The fourth paper by Ruzita Abdul Rahim and Othman Yong is an empirical studycomparing initial return patterns of sharia and non-sharia compliant status ofMalaysian IPOs and conclude that the returns are driven by the size and type of offersin the case of the former, and by risk, for the latter.

We trust there is much in this inaugural issue to inspire future researchers andpotential contributors and we look forward to receiving your contributions. We hopeyou enjoy reading this issue!

Note

1. This book is a collection of some of the most significant English-language contributions tothe literature of Islamic accounting classified under six themes: conceptual framework ofIslamic accounting, accounting ethics and social responsibility, corporate reporting,accounting practice and zakah, and auditing and Islamic history of accounting. Also seeNapier (2009) for review of early research in Islamic accounting.

References

Abdel-Magid, M.F. (1981), The theory of Islamic banking: accounting implications,International Journal of Accounting, Vol. 17 No. 1, pp. 79-102.

Baydoun, N. and Willett, R. (1997), Islam and accounting: ethical issues in the presentation offinancial information, Accounting, Commerce & Finance: The Islamic Perspective Journal,Vol. 1 No. 1, pp. 1-25.

Haniffa, R. and Hudaib, M. (2002), A theoretical framework for the development of the Islamicperspective of accounting, Accounting, Commerce and Finance: The Islamic PerspectiveJournal, Vol. 6 Nos 1/2, pp. 1-71.

Hayashi, T. (1989), On Islamic Accounting: Its Future Impact on Western Accounting, TheInstitute of Middle Eastern Studies, International University of Japan, Minami Uonuma.

Leuz, C., Pfaff, D. and Hopwood, A. (2005), The Economics and Politics of Accounting:International Perspectives on Research Trends, Policy, and Practice, Oxford UniversityPress, Oxford.

Napier, C. (2009), Defining Islamic accounting: current issues, past root, Accounting History,Vol. 14 Nos 1/2, pp. 121-44.

Napier, C. and Haniffa, R. (Eds) (2010), Islamic Accounting, Edward Elgar, Cheltenham.

Tripp, C. (2006), Islam and the Moral Economy, Cambridge University Press, Cambridge.

Corresponding authorRoszaini Haniffa can be contacted at: [email protected]

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