2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

The Importance of Islamic Accounting in Modern Era

by:
Chusnul Asfadillah
Student of Airlangga University, Surabaya, Indonesia
+62899 372 1772
Ines Nur Latifah
Student of Airlangga University, Surabaya, Indonesia
+62878 8432 3738
DR. Raditya Sukmana
Lecturer of Airlangga University, Surabaya, Indonesia
+ 62 878 5421 6776
ABSTRACT
Purpose This paper aims to determine the importance of the Islamic
Accounting in modern era. In particular, the paper analyzes the values of
the Islamic principles in the accounting process that prevent the
unexpected activity such as fraud, dishonest etc to appear in reality.
Arthur Anderson case was a result of the fraudulent activities that lead to
its termination. Certainly this kind of case is expecting not to be happened
in the future.
Design/methodology/approach The paper adopts the descriptive
analysis and elaboration of the important element of the Islamic principles
used in the accounting process. Furthermore, this paper attempt to make
clear distinction between values underlying the Islamic accounting and
that of the conventional accounting.
Findings the comparison of those two systems leads to the conclusion
that the value in Islam such as honest, fair, truth (which is important in
the Islamic accounting process) has more meaning than the similar value
June 27-28, 2012
Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

of in the conventional accounting. Hold firmly the Islamic value obviously

leads to the decrease fraudulent practices and other unexpected
activities. Moreover, it increases the social welfare of the stakeholders as
Islam requests people to bring as much as benefit to other community.
Practical implication The implication is that the current conventional
modern accounting value must be redefined to bring the stakeholders in
getting more benefit and creating less damage to the society. The
reporting value should provide information to the stakeholders on the
current state of the real condition and provide solution which leads to the
increase of the stakeholders welfare.
Keywords

Islamic

accounting,

conventional

accounting,

Islamic

principle
Paper type Analysis paper

INTRODUCTION
Accounting is the most important part in business and economy that
processes information of business and economy activities into financial
statement and financial reporting to be presented to the decision-makers.
In addition, accounting is accountability tool of the agent (stewardship of
the

management)

towards

the

principal

(shareholders

and

other

stakeholders). Based on the definition above, we can say that accounting

is the universal language of business and economic. So that, accounting
process must be done in good manner to produce good financial
statement and financial reporting to make precise decision to manage
financial aspect of business and to present proper accountability.
June 27-28, 2012
Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

Unfortunately, there are so many unexpected activities pertaining to

accounting processes such as the fraudulent or dishonesty practices in
business and economy activities appeared in many occasions in this
modern era. The most famous case of fraudulent practice pertaining to
accounting process is the Enron and Arthur Anderson scandal that lead to
the bankruptcy of those big company in 2000s. After the Enron and Arthur
Anderson scandal happened in 2000s, there are so many changes that
have been made in accounting and auditing system, especially about
ethics in accounting and auditing in order to improve the relevance,
faithfulness, reliability, and usefulness of financial statement and financial
reporting.
In the other side, Islamic accounting that has existed since 1500s
has its own principle that not only can decrease the degree of unexpected
activities pertaining to accounting process but also increase the welfare of
both internal and external parties of the business because the Islamic
accounting has an aspect that has more meaning value than the similar
aspect of in the conventional accounting comprising all values required to
bring accounting process more preferable.
Therefore, this paper attempts to elaborate some reasons why
Islamic accounting is important in Modern Era. The paper is divided into 4
sections. Section 1 introduces the overview of accounting and accountant
in Islam. Section 2 elaborates the accountability concept in Islamic
Accounting and Conventional Accounting. Section 3 explains the benefits
of applying Islamic Accounting in modern era. Section 4 is the paper
conclusion.
June 27-28, 2012
Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

AN OVERVIEW OF ACCOUNTING AND ACCOUNTANT IN ISLAM

In Islam, humans are considered to be vicegerents of God because
Allah has proclaimed that I will create a vicegerent on earth (Al-Quran,
Al-Baqarah: 30). Therefore everything a Muslim does is to be accordance
with Gods wishes that must comply Shariah or Islamic law. Islamic law
has two main sources. They are Al-Quran as the revealed words of God
and the Sunnah containing Gods inspired acts: sayings of the Prophet
Muhammad (s.a.w) and descriptions of his conducts. These sources are
augmented also by the Ijma (the pronouncements representing the
consensus of Islamic scholars), the Qiyas (the similarity with certain
happening), and Uruf (custom) that is not in contradiction with Al-Quran
and the Sunnah on matters not addressed explicitly by the Al-Quran and
the Sunnah
Allah, the Cherisher and the Sustainer of the world has already sent
Al-Quran to explain everything in this world (Al-Quran, An-Nahl: 89) so
that human (Muslims) have no excuse not to comply Al-Quran. Pertaining
to the role of economic activities in Islam, the philosophy of all human
activity should be directed towards the achievement of comprehensive
human welfare in this life and also in the hereafter (falah). To achieve
comprehensive human welfare in this life and also in the hereafter, the
economic activities must be morally directed and not only maximize the
wealth or profit nor the size of individual business enterprise and quantity
of output.

June 27-28, 2012

Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

We have known that business and economic activities cannot be

separated with accounting process regarding decision-making in economic
and business transaction. Even Allah does have His own accountant (Rakib
and Atid) to record everything that human do in this world to be
accountable at the Hereafter. Knowing the importance of accounting in
this life, accounting is treated especially by stating in Q.S Al-Baqarah: 282
which is the longest verse in Al-Quran:
O ye who believe! When ye deal with each other, in transactions
involving future obligations in a fixed period time, reduce them to writing
Let a scribe write down faithfully as between the parties: let not the scribe
refuse to write: as Allah has taught him, so let him write. Let him who
incurs the liability dictate, but let him fear Allah his Lord , and not
diminish aught of what he owes. If the party liable is mentally deficient, or
weak, or unable himself to dictate, Let his guardian dictate faithfully, and
get two witnesses, out of your own men, and if there are not two men, the
a man and two women, such as ye choose, for witnesses, so that if one of
them errs, the other can remind her. The witnesses should not refuse
when they are called on (For evidence). Disdain not to reduce to writing
(your contract) for a future period, whether it be small or big; it is more
just in the sight of Allah. More suitable as evidence, and more convenient
to prevent doubts among yourselves but if it be a transaction which ye
carry out on the spot among yourselves, there is no blame on you if ye
reduce it not to writing. But take witness whenever ye make a commercial
contract; and let neither scribe nor witness suffer harm. If ye do (such
harm), it would be wickedness in you. So fear Allah; for it is Allah that
teaches you. And Allah is well acquainted with all things.
The explicit understanding about the verse above is about Islamic
accounting principles policy1:
1. Proper,
financial

complete,
and

and

business

transparent
transactions

recording
by

of both

responsible

accountants.
2. Written contract must be made as the evidence especially for
a debt contract.
3. The written contracts

must

have

at

least

truthful

witnesses to provide check and balance mechanism, ensure

June 27-28, 2012
Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

proper accountability, and ensure parties of the contract properly

honor their financial obligations.
4. Materiality is important to ensure correct recognition of the
amount of financial and business transactions, both rights and
5.

obligations of the contractual parties.

Fear God (Allah) for all the transaction parties to ensure
fairness and justice in accounting for financial and business
transactions.

From the verses above, simply accounting in Islamic overview has

the main objective to ensure fair and just financial transactions
between parties to fulfill accountability to principal, management, and
social at large and the most ultimate accountability to Allah swt. In the
other side, accounting in Conventional overview has objective to
provide financial information about the reporting entity for the users
in making decisions to allocate limited resources to get maximum profit.
Based on the objective of conventional accounting, it could be
possible for the accountant to do the fraudulent practice because the
objective of conventional accounting is how to make decision to get the
maximum profit by using the minimum cost and when the success of the
company is measured through profit that the company can gets, not
through the welfare of the shareholders and society that the company can
give.
As we know that in accounting process, an accountant has
important role. Accountant has a responsibility to the users to clearly
communicate information for decision-making purpose. In addition,
accountant is functioned as gatekeepers of financial markets because
June 27-28, 2012
Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

without accountant that ensures quality and integrity of financial

information, the market capital would be by far less efficient, the cost of
capital would be higher, and the standard of living would be lower 2. So, an
accountant must present the most useful financial statement and financial
reporting

that

lie

on

the

truth,

justice,

fair,

goodwill,

honesty,

benevolence, and reliability in order to be used for precise decision

making.
Unfortunately, on many occasions accountants fail to do their jobs
ethically or even do fraudulent and the reason is the apparently low moral
standard of some accountants and they do not understand the meaning of
their accountability. So, in Islam Allah has settled up about the
characteristics of human based on Shariah foundations which an
accountant must have to reduce the possibilities of fraudulent such as
follows3:
1. Integrity, in which an accountant must be competent and
adequately qualified. Allah states:
Truly the best of men to employ is the man who is strong and
trustworthy.
(Al-Quran, Al-Qasas: 26)
2. Vicegerency of humanity on earth, in which the ultimate
authority belongs to Allah and human are only vicegerent of Allah
whose ownership of property is not an end in itself, but a means to
provide a proper life for his, his family, and society. Consequently,
human will be held accountable for the way he has acquired the
wealth and how she/he used it.
I will create a vicegerent on earth
(Al-Quran, Al-Baqarah: 30)

June 27-28, 2012

Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

3. Sincerity, in which an accountant must obey Allah in performing his

/her duty and not influenced by anything, so his /her work, can
become a form of worship of Allah.
making your devotion sincere such as He created you in the
beginning, so shall ye return.
(Al-Quran, Al-Araf: 29)
4. Piety, in which an accountant must fear Allah in secret and public
by doing Allahs commandments and avoiding Allahs prohibitions so
an accountant performs righteous deeds not evil deeds.
Fear Allah, and let every soul look to what (provision) he has sent
to forth for the morrow. Yea, fear Allah: for Allah is well acquainted
with (all) that ye do
(Al-Quran, Al-Hasyr: 18)
5. Righteousness, in which an accountant should strive to accomplish
the high degree of righteousness and perfection in his/her duty in
the possible manner inasmuch as Allah has given us intelligence to
perform our duties in this world.
He instructs you, that ye may receive admonition.
(Al-Quran, An-Nahl: 90)
6. Accountability before Allah, accountant must first, primary, and
foremost

fear

Allah

as

the

supreme

authority

before

the

shareholders and the stakeholders because in Islam, an accountant

personally will be accountable to all his/her deeds in this world at
the Judgement Day.
Not one of the beings in the heaven and the earth but must come
to the Most Gracious as a servant. He does take an account of them
(all), and hath numbered them (all) exactly. And every one of them
will come to Him singly on the Day of Judgment.
(Al-Quran, Maryam: 93-95)

June 27-28, 2012

Cambridge, UK

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

Then from the explanation above, we can conclude that Islamic

Accounting is the accounting processes that have to comply with Shariah
or Islamic Law to ensure fair and just financial transaction between parties
to fulfill accountability purpose. And the question now is what aspect that
makes Islamic Accounting has more meaning values than Conventional
Accounting; the answer is the accountability concept. So, the next section
will elaborate values of accountability concept in Islamic Accounting.

THE ACCOUNTABILITY CONCEPT IN ISLAMIC ACCOUNTING AND

CONVENTIONAL ACCOUNTING
In Islam, human in this life require to maintain good relationship
with God (Hablun MinAllah), with fellow being (Hablun MinAn-Nas) and
with the nature (Hablun MinAlam). It means the accountants in Islam are
required to be accountable either to the principal (shareholders and other
stakeholders) and management as in Coventional Accounting concept or
to society, environment, and the most principal to God.
The explanation below will elaborate the differences between
accountability

concept

in

Islamic

Accounting

and

Conventional

Accounting.
1. Accountability to God.
Islamic Accounting and Conventional Accounting have different
concept about accountability to God. The table below elaborates some
reasons (thoughts) why accountability concept to God in Islamic
Accounting and Conventional Accounting are different.
No Islamic Accounting
June 27-28, 2012
Cambridge, UK

Conventional Accounting

2012 Cambridge Business & Economics Conference

1.

ISBN : 9780974211428

Unity of God and Power is hold Economic

rationalism

and

by God, in which human treats Power hold by human (ratio),

reason as the basis of belief in in
God
2.

which

human

treating

reason as the basis of belief

and knowledge of economic.

Concerning in religious aspect Concerning in the only worldly
and

believe

Judgment

that

Day

there
in

is matters

or

not

religious

which matters and believe that there

mankind must responsible and is no Judgment Day, world is

accountable

to

God

at

the the end of the life and there is

Judgment Day and there is hell no hell and no heaven.

3.

and heaven.
Influenced by Shariah (Islamic Influenced
Law), in which it is not allowed Ideology
riba

(usury

or

interest

by
based

on commercial

Capitalist
on

law

modern

permissive

credit), doing unlawful (haram) and accounting law, in which it

business,

speculative is

transaction,
uncertainty,
interference,
hoarding, etc.

allowed

gambling, interest
free

market unlawful

on

market

(usury

credit),

(haram)

exploitation, speculative
gambling,

riba

or

doing

business,
transaction,

uncertainty,

free

interference,

exploitation, hoarding, etc.

The reasons (thoughts) in Islamic Accounting about why accountant must
be accountable to God will lead to the accounting process that lie on the
truth, justice, fair, goodwill, honesty, benevolence, and reliability. For
example:

the relevance and faithful representation of financial statement and

financial reporting to provide the most useful information for

decision making;
the full transparency of disclosure in financial statement and
financial reporting to satisfy any reasonable demand for information

June 27-28, 2012

Cambridge, UK

10

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

in accordance with the Shariah and there is no excuse for an

accountant to make limited disclosure subjecting to some interests;

in operational it is forbidden to permit everything that can hurt
justice such as hoarding, free market interference, exploitation, etc
to reach highest profit but it is a must to do everything in
boundaries of Shariah to get the reasonable profit.

2. Accountability to The Principal and Management

In this case, accountability to principal and management, both in
Islamic Accounting and Conventional Accounting has the same concept in
which becomes one of the objectives of the accounting process, but in
Conventional Accounting, accountability to the principal and management
is the first and foremost accountability that have to be fulfilled, whereas in
Islamic Accounting accountability to the principal and management is in
the second position after accountability to God which become the main
and the foremost accountability because Islam hold firmly that verily
Allah is well acquainted with all that you do(Al-Qur;an, An-Nisaa: 135).

3. Accountability to Society and Environment

Accountability to society and environment in Islamic Accounting has
different concept with the concept in Conventional Accounting. In this
case accountability concept to the society and environment can be in form
of concerning in Corporate Social Responsibility (CSR). CSR will give
benefits to the corporation such as increased profits, customers loyalty,
trust, positive brand attitude, combating negative publicity, and having a
rightful place in the business world by contributing to the betterment of

June 27-28, 2012

Cambridge, UK

11

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

society, caring for employees, being ethical in trading, protecting the

environment, and getting involved in the local community.
According to Sutan Emir Hidayat and Suliman Abdulrahman Alhur in
their article about Corporate Social Responsibility for Islamic Banks
(2012), general concept of CSR has three aspects namely sustainability,
accountability, and transparency, whereas Islamic concept of CSR based
on AAOIFIs Governance Standard No. 7 has five aspect of responsibilities
namely religious, economic, legal, ethical, and discretionary.
a. Aspects in general concept of CSR
Sustainability which is not permitted to do natural resources

exploitation unless it can be regenerated.

Accountability which is the corporation has responsibility for the

effects of its activities on the external environment.

Transparency which is the corporation should communicate

truthful information to the public about its operations.

b. Aspects in Islamic concept of CSR
Religious Responsibility refers to the obligation to obey Shariah

in all dealings and operations.

Economic Responsibility refers to be financially viable, profitable,

and efficient.
Legal Responsibility refers to the obligation to obey the laws and

regulations of the country of operation.

Ethical Responsibility refers to the obligation to respect mass of
societal, religious, and customary norms which are not codified in

law.
Discretionary Responsibility refers to the expectation from
stakeholders to perform a social role in implementing Islamic
deals over and above the religious, economic, legal, and ethical
responsibility.

June 27-28, 2012

Cambridge, UK

12

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

So, in Islamic Accounting, when performing their jobs, accountants

must consider the aspect in Islamic concept of CSR which is more complex
than general concept of CSR to seriously fulfill their accountability to
society and environment that require the transparency, accurateness,
justice, and goodwill to mainly share happiness to the others as Allah
command us and not mainly subjected to establish good reputation of the
corporation (worldly gain).
But seek, with the (wealth) which Allah has bestowed on thee, the
Home of the Hereafter, nor forget thy portion in this world: but do thou
good, as Allah has been good to thee, and seek not (occasion for) mischief
in the land: for Allah loves not those who do mischief. (Al-Quran, AlQasas: 77).
For examples:
a. Zakat Accounting on Business Wealth and Financial Assets that
aims to distribute wealth to reduce gap between the poor and
rich, to achieve the economic and spiritual well-being of zakat
payer and zakat recipients, and to act of submission to God. In
this case calculation zakat must be objectively determined by
Shariah. Thus to enable zakat assessment to be true and fair,
the zakat payer needs to truthfully disclose all of his/her financial
facts.
but that which you give for charity, seeking the Countenance
of Allah, (will increase): it is these who will get a recompense
multiplied.
(Al-Quran, Ar-Ruum: 39)
b. Maintaining the welfare of employees and their family such as
health and education facilities.
Pay wages to your employees before their sweat has been
dry, and tell their salary provision forwhat they do (HR. Baihaki)
June 27-28, 2012
Cambridge, UK

13

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

c. Using the Green Accounting concept in which in accounting

practice the accountant should include indirect costs and benefits
of a product/activity needed to minimize its environmental
impact such as waste cost although it will reduce the profit at
first because of increasing cost.
d. Reduction of adverse impact on the environment by using
renewable resources and minimizing the usage of non-renewable
sources, making the best use of natural resources, using energy
more efficient, etc.
And withhold not things justly due to men, nor do evil in the
land, working mischief.
(Al-Quran, Asy-Syuaraa:183)

THE BENEFITS OF APPLYING ISLAMIC ACCOUNTING PRINCIPLE IN

MODERN ERA
Based on some analysis above, applying Islamic Accounting
Principle in Modern Era will give some benefits directly and indirectly to
the internal and external parties of the business.
1. When the accountants hold firmly to Shariah by believing that
human must responsible and accountable his/her action in this
world to God at the Judgment Day, so automatically accountant will
present financial statement and financial reporting that lie on the
truth, justice, fair, goodwill, honesty, transparency, accurateness,
and benevolent because although the fraudulent can be unknown
by their supervisor in this world, but actually in the Hereafter he/she

June 27-28, 2012

Cambridge, UK

14

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

must be accountable for what he/she had done, Allah knows all
thing well. Therefore, It will give some benefits to the business
There will be fewer possibilities that accountants do unexpected

activities such as fraudulent in business and society.

The shareholders/investor and creditor will feel more secure to
put their funds in the business thus indirectly it will interest the

other investors and their funds.

The users of the financial statement and financial reporting will
get the most useful of them to minimize the possibilities doing

mistakes in decision making.

2. By concerning in accountability to the employees and their family
when performing their jobs in which accountability is the purpose of
Islamic Accounting, indirectly it can give benefits:
Reducing the exploitation of labors because

in

Islamic

Accounting, it is not permitted to do everything to reach the

maximum profit by exploiting the labors as the decision to

compress the operational cost.

Increasing the welfare of the employees and their family
When the welfare of the employees and their family is
maintained well, the employees will be loyal to the business so

that it can reduce recruitment cost for the new employee.

3. By appreciating Islamic concept for CSR activities such as Zakat and
reduction of adverse impact on the environment, it can give
benefits:
Reducing the destruction of environment,
Reducing poverty and increasing the welfare of the society
around the business then indirectly it will increase the purchasing
power of the poor that will give positive contribution to the

June 27-28, 2012

Cambridge, UK

15

2012 Cambridge Business & Economics Conference

economic

growth

through

ISBN : 9780974211428

the

increasing

of

consumption

expenditures and aggregate demand.

Then, the company itself will also get some benefits such as
increased profits, customers loyalty, trust, positive brand attitude,
combating negative publicity, and having a rightful place in the
business world by contributing to the betterment of society, being
ethical in trading, protecting the environment, and getting involved
in the local community and the most important is the sustainability
of the company for the long time as long as the company has
intention for sharing happiness not for good reputation.

CONCLUSION
Islamic Accounting is the accounting process that have to comply
with Shariah (Islamic Law) to ensure fair and just financial transaction
between parties to fulfill accountability purpose to the most ultimate
accountability to Allah swt.
If Islamic Accounting values that have existed since 1500s are hold
firmly, it will lead to the accounting process that lie on the truth, justice,
fair, goodwill, honesty, benevolence, and reliability. Consequently, it can
give more benefits to principal, management, employee, society, and
environment which is so important in this modern era where there are so
many fraudulent and poverty because if we try to figure out accounting
more deeply, actually accounting will not only influence economic and
business aspect but also influence other aspects in this life.

June 27-28, 2012

Cambridge, UK

16

2012 Cambridge Business & Economics Conference

ISBN : 9780974211428

Endnotes
1

Abdul Rahman Abdul Rahim, An Introduction to Islamic Accounting

Theory and Practice, CERT, Kuala Lumpur, Malaysia, 2010, page 14.

Ibid. page 39.

Ibid. page 41-42.

References
Al-Quran and Hadist
Erik, Johnson. (2009). Green Accounting: Environmental Accounting,
accessed February 19, 2012, [available at
http://www.articlesbase.com/education-articles/green-accountingenvironmental-accounting-755857.html]
Harahap, Sofyan S. (2011). The Difference of Conventional and Islamic
Accounting, accessed January 1, 2012, [available at www.bus.osakacu.ac.jp/ja/research/events/ seminar 040205/sofyan.ppt]
Hidayat, Sutan E. and Suliman A. Alhur. Corporate Social Responsibility for
Islamic Banks. Islamic Finance News (February 15, 2012), 21-23.
Kieso, Donald S., Jerry J. Weygandt., & Terry D. Warfield. (2011).
Intermediate Accounting IFRS Edition Vol. 1. New Jersey:
Quad/Graphics, Inc.
Muhammad. (2005). Pengantar Akuntansi Syariah. Jakarta: Salemba
Empat.
Rahman, A. R. A. (2010). An Introduction to Islamic Accounting Theory and
Practice. Kuala Lumpur: CERT.

June 27-28, 2012

Cambridge, UK

17