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The need of accounting standards for Islamic financial institutions: evidence from
AAOIFI
Adel Mohammed Sarea Mustafa Mohd Hanefah
Article information:
To cite this document:
Adel Mohammed Sarea Mustafa Mohd Hanefah, (2013),"The need of accounting standards for Islamic
financial institutions: evidence from AAOIFI", Journal of Islamic Accounting and Business Research, Vol. 4
Iss 1 pp. 64 - 76
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JIABR
4,1 The need of accounting standards
for Islamic financial institutions:
evidence from AAOIFI
64
Adel Mohammed Sarea
College of Business and Finance, Ahlia University, Kingdom of Bahrain, and
Mustafa Mohd Hanefah
Faculty of Economics and Muamalat,
Downloaded by Universitas Islam Negeri Sunan Kalijaga At 21:52 10 March 2016 (PT)
Abstract
Purpose – The purpose of this paper is to determine the need of Islamic Accounting Standards –
a review of the literature – for Islamic financial institutions (IFIs).
Design/methodology/approach – The basis of the paper was stakeholder theory to analyse the need of
accounting standards and to design the conceptual framework as evidenced from Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI). The evidence reviewed suggests the need for
Islamic accounting standards to fill the gap in accounting practice among Islamic financial institutions.
Findings – The AAOIFI accounting standards serve as a guideline that may reflect the unique
characteristics of IFIs and become a useful tool to meet the various needs of IFIs. Currently, one of the
major challenges facing IFIs lies in the preparation of the financial statements under different
accounting standards and which may lead to problems of comparability, reliability and compliance
level measurement. This has resulted in a heated debate among scholars which has hitherto translated
to the evolving existing literature surrounding the interpretation of the level of compliance with the
Islamic accounting standards. The paper concludes with various recommendations for future research,
the most important of which is the need for future studies on how AAOIFI accounting standards can
be made mandatory in all Muslim countries.
Originality/value – This paper contributes towards a better understanding and acceptability of the
need of Islamic Accounting Standards.
Keywords Islamic accounting, Islamic financial institutions, AAOIFI Standards, Accounting, Islam
Paper type Literature review
1. Introduction
At present, Islamic banks represent the majority of Islamic financial institutions (IFIs),
which are spread locally and internationally across both Muslim and non-Muslim
countries. The emergence of Islamic banking is due to the increasing demand from
Muslims communities worldwide for Shari’ah complied Islamic financial products,
services and the variety of modes of Islamic finance. However, Islamic banking is
evolving and growing at a rapid rate with an impressive record of more than 200 IFIs
operating in 63 Islamic and non-Islamic countries (Maali and Napier, 2010). The past
ten years saw high growth in the number of IFIs around the world that has attracted
Journal of Islamic Accounting and major Western institutions such as Citibank, HSBC, and Deutsche Bank, which operate
Business Research Islamic windows within conventional banks (Maali and Napier, 2010). Furthermore,
Vol. 4 No. 1, 2013
pp. 64-76 given the rate of growth of the IFIs, the continuous sustainability of the development
q Emerald Group Publishing Limited by IFIs in both Islamic and non-Islamic countries needs Islamic accounting standards
1759-0817
DOI 10.1108/17590811311314294 otherwise called accounting and auditing organization for Islamic financial institutions
(AAOIFI) accounting standards due to the unique characteristics coupled with the Accounting
growing demand of IFIs’ products and services so as to facilitate and enhance the
credibility and reliability of the financial statements and reports.
standards for IFIs
It is argued that the current standards which are based on conventional framework
seem insufficient to guide the IFIs. Currently, the various IFIs apply different
accounting standards in their preparation of their accounts due to the absence of
Islamic accounting standards (Zaini, 2007). The trend towards the AAOIFI standards 65
has become a pressing issue that has generated heated debate among Organization of
Islamic Cooperation countries.
of EU countries as the location of choice for the multinational companies. On the other
hand, Joshi and Ramadhan (2002) found that, size, auditors’ reputation, the percentage
of foreign sales and profitability were the main determinants of the level of compliance
with IASs to be implemented by listed companies in Bahrain. However, lack of
standardization and institutional legitimization of accounting standards may cause
some challenges to adopt accounting standards and to ensuring the need of authority
to be implemented globally. Related to that, Mir and Rahaman (2005) found that,
institutional legitimization is a major factor that drives the decision to adopt the IFRS
as a result of the pressure exerted by key international donors on the Bangladeshi
Government and professional accounting bodies. Furthermore, Al-Shammari et al.
(2008) investigated the extent of compliance with IASs by companies in the Gulf
Co-Operation Council (GCC). In general, the levels of compliance with IAS increased
from 1996 to 2002 for all standards, indicating that the GCC states were collectively
progressing towards achieving greater harmonization with IASs. A possible
explanation of increased level of compliance with IASs is that, they are less costly
and less difficult to be implemented.
(Lovett, 2002).
Moreover, diversity in IFIs practices means that, there are practices that have not
been covered by Islamic accounting standards (AAOIFI) or any accounting standards
that are in line with Shari’ah principles. Therefore, developing unique accounting and
auditing standards for the dissemination of such information about IFIs becomes
a necessity (Tag El-Din, 2004). Islamic banks worldwide prepare their financial
statements using variety of accounting standards either IASs or local accounting
standards, the problem may exist in the practices and the level of understanding among
accountants and the level of compliance of Islamic banks global (KPMG and ACCA,
2010, Report). Thus, the need for Islamic accounting standards may possibly be the
right way to resolve these issues. In this regard, there have been arguments in previous
studies that, because of the unique transactions of Islamic banks, conventional
accounting rules such as the IFRSs are not compatible to Islamic banks (Maali and
Napier, 2010). This is because, in the IFIs, depositors’ funds are not guaranteed, and
customer deposits cannot be reported as liabilities in the balance sheets of Islamic banks.
Recently, however many Islamic banks have been adopting the accounting standards
set by AAOIFI (Maali and Napier, 2010). Therefore, understanding factors affecting the
levels of compliance with the Islamic accounting standards (AAOIFI) need to be
investigated in the future studies.
Furthermore, the acceptability and understanding of the role of the Islamic accounting
standards (AAOIFI) can be of high significance for policy implications, regulators,
and standard setters. Currently, the evolving literatures surrounding the interpretation of
the levels of compliance with the accounting standards for IFIs generated a heated debate
among the researchers. Thus, this paper aims to provide answers to the current debate.
A clear understanding and acceptability have the potential to lead to more compliance
with Islamic accounting standards such as AAOIFI. Therefore, it is uncertain to determine
whether the Islamic banks would switch to the AAOIFI standards or adopt a combination
of both of the AAOIFI and local standards. It is therefore necessary to ask the
following question: do we need Islamic accounting standards?
According to AAOIFI (2008) the objective of financial accounting for Islamic banks
and IFIs are as follows:
.
To determine the rights and obligations of all interested parties, including those
rights and obligations resulting from incomplete transactions and other events,
in accordance with the principles of Islamic Shari’ah and its concepts of fairness,
charity, and compliance with Islamic business values.
.
To contribute to the safeguarding of the Islamic bank’s assets, its rights and the
rights of others in an adequate manner.
.
To contribute to the enhancement of the managerial and productive capabilities
of the Islamic bank and encourage compliance with its established goals and
policies and, above all, compliance with Islamic Shari’ah in all transactions and
events.
. To provide, through financial reports, useful information to the users of these
reports, to enable them to make legitimate decisions in their dealings with
Islamic banks.
In reference to the above objectives, this research attempts to contribute to the current
framework and serve as a guide for IFIs regarding interest free transactions through
determining the levels of compliance with the AAOIFI accounting standards by
Islamic banks.
accountants and auditors of IFIs and Code of ethics for employees of IFIs are discussed
by AAOIFI Ethics standards. AAOIFI also has issued 45 Shari’ah standards to be
implemented by IFIs globally.
7. Conclusion
The adoption or compliance with the AAOIFI accounting standards and IFRS has
become the focus among IFIs. The objectives of the AAOIFI accounting standards are
to prepare and develop accounting, auditing, governance, ethical, and Shari’ah
standards relating to the activities of IFIs.
Based on the stakeholder theory, this paper discussed the importance of the AAOIFI
accounting standards for IFIs globally.
The AAOIFI accounting standards for IFIs that are in accordance with the Shari’ah
requirements are the best choice for increasing foreign investments and investor’s
confidence among Muslim societies and economies.
AAOIFI through its global network has also persuaded regulatory authorities to
adopt its standards, but until now AAOIFI has not been fully successful. It does not
have the power to enforce its standards on IFIs globally. It is strongly recommended
that Muslim countries should give full support to AAOIFI standards by adopting and
making them mandatory for all IFIs.
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76 Corresponding author
Adel Mohammed Sarea can be contacted at: Adelsarea@yahoo.com
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