THE NEED FOR ISLAMIC ACCOUNTING; PERCEPTIONS

OF ITS OBJECTIVES AND CHARACTERISTICS BY

MALAYSIAN MUSLIM ACCOUNTANTS AND
ACCOUNTING ACADEMICS

Shahul Hameed Bin Mohamed Ibrahim

THESIS PRESENTED IN FULFILMENT OF THE REQUIREMENTS FOR THE

AWARD OF THE DOCTOR OF PHILOSOPHY DEGREE IN ACCOUNTING

DEPARTMENT OF ACCOUNTANCY AND BUSINESS FINANCE

UNIVERSITY OF DUNDEE

APRIL 2000
DEDICATED TO ALLAH (EXALTED BE HIS MAJESTY) WHO

GAVE US LIFE AND HIS GUIDANCE, HIS CHOSEN LAST

MESSENGER MUHAMMAD (PEACE BE UPON HIM) WHO

STRIVED FOR THE SALVATION OF MANKIND FROM THE

DARKNESS OF IGNORANCE TO THE LIGHT OF ISLAM, MY

BELOVED LATE FATHER, HJ. MOHAMMED IBRAHIM

MOHD. ISMAIL (MAY ALLAH SWT HAVE MERCY ON HIM)

WHO GAVE ME A GOOD EDUCATION BY HIS OWN GOOD

EXAMPLE AND WHO INSPIRED THE LOVE OF ISLAM,

MUSLIMS AND JUSTICE FOR HUMANITY IN ME, AND MY

DEAR MOTHER WHOM I LOVE VERY MUCH (MAY ALLAH

GIVE HER A LONG AND HEALTHY LIFE AND A SECURED

PLACE IN PARADISE) AND WHOSE PRAYERS I CANNOT DO

WITHOUT.
 i

TABLE OF CONTENTS

Table of Figures........................................................................................................ vii

List of Tables .............................................................................................................. ix
Acknowledgements .................................................................................................... xi
Declaration................................................................................................................ xiii
Certificate ................................................................................................................. xiii
Abstract ..................................................................................................................... xiv

CHAPTER 1: INTRODUCTION AND OUTLINE OF THE STUDY 1

1.0 Introduction 1
1.1 The Context: Conventional Accounting and Its Relationship to Society 1
1.2 The Problem: the Globalisation of Anglo-American Accounting in Diverse Cultures
and Environments 2
1.3 The Imperative for the Research: Resurgence of Islam and Islamisation of Knowledge 3
1.4 The Aim and Objectives of the Research 7
1.5 Research Methodology and Methods 10
1.6 Original Contributions to Knowledge and Limitations of the Study. 12
1.7 Outline of the Thesis 15

CHAPTER 2: WORLD-VIEWS, VALUES AND ACCOUNTING;

DIFFERENT “ACCOUNTINGS” FOR DIFFERENT WORLDVIEWS. 19

2.0 Outline of chapter 19

2.1 Worldviews,Values and Their Impact on Economic Objectives,Norms and Accounting 19
2.1.1 The Western Worldview and Values 21
2.1.2 Western Worldview 21
2.1.3 Democracy and Popular Sovereignty 22
2.1.4 Individualism, Liberalism and Utilitarianism 23
2.1.5 Empiricism 26
2.1.6 Secularism 27
2.2 Capitalism, Economic Norms and Accounting 28
2.3 Marxism: A Reaction Against Capitalism. 33
2.4 The Accounting Implications of Western Worldviews, Values and Economic Norms. 34
2.5 Islamic Worldview and Values 39
2.6 The Implication of Islamic Worldview and Values for Economic Norms and
Codes: the Shari’ah and Economic Objectives 45
2.6.1 Circulation of Wealth 48
2.6.2 Security 49
2.6.3 Authenticity 50
2.6.4 Equity: 50
2.6.5 Dignity of Labour 51
2.6.6 Morally Filtered Consumption: 51
2.6.7 Prohibition of Immoral and Unsocial Contracts 54
2.7 Accounting Implications of Islamic Economic Values and Norms 54
2.8 A Comparative Analysis of Western and Islamic Values and Their
Implications for Socioeconomic Norms and Accounting 55
2.9 Worldview and Values: A Comparison 57
2.10 Conclusion 63
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CHAPTER 3: THE PROBLEMS WITH CONVENTIONAL ACCOUNTIN G AND

IMPLICATIONS FOR ISLAMIC ACCOUNTING 66

3.0 Introduction and Chapter Outline 66

3.1 An Outline of Various Accounting Critiques. 68
3.2 The Objectives and Assumptions of Conventional Accounting: Some Problems
With the Decision Usefulness Paradigm. 73
3.2.1 The Economic Environment of Decision Usefulness 75
3.2.2 The “Ceteris Paribus” of Decision Usefulness. 76
3.2.3 The Question of Social Welfare: 79
3.2.4 The Societal Assumptions of Decision-usefulness 81
3.2.5 The Dysfunctional Effects of Decision Usefulness: 84
3.2.6 Conclusions on the Decision-Usefulness Objectives of Conventional Accounting. 85
3.3 The Characteristics of Conventional Accounting; the Problem With ‘Accounting
Principles’ 86
3.4 The Macro Consequences of Conventional Accounting 90
3.4.1 Multinational Exploitation 92
3.4.2 Privatisation , Loss of Work and Public Property 93
3.4.3 Environmental Problems 96
3.5 The Micro Consequences of Conventional Accounting - Behavioural Problems. 100
3.5.1 Behavioural Research: Human Problems of Budgets 101
3.5.2 Management Control and Performance Measurement 103
3.6 Conventional Accounting Critique: An Islamic Perspective. 105
3.6.1 The Inappropriateness of Conventional Accounting Objectives and Fundamental Assumptions
From An Islamic Perspective 105
3.6.1.1 Environment and Fundamental Assumptions of Muslim Society and Islamic
Economic System. 108
3.6.2. Characteristics of Conventional Accounting 109
3.6.2.1 The Unsuitability of the Historical Cost and the Prudence Concept. 109
3.6.2.2 The Calculation of Income From An Islamic Perspective 110
3.6.3 Unislamic Consequences of Conventional Accounting 112
3.6.3.1 Privatisation 112
3.6.3.2 Environmental Problems: Islamic Perspectives 113
3.6.3.3 Micro Behavioural Consequences 115
3.7 Conclusion 115

CHAPTER 4: THE NEED FOR ISLAMIC ACCOUNTING: PULL FACTOR 1– THE

ISLAMISATION OF KNOWLEDGE 118

4.0 Chapter Outline: the Pull Factors 118

4.1 The Islamisation of Knowledge 120
4.1.1 Islamisation of Knowledge and Islamisation. 120
4.1.2 The Need for Islamisation of Knowledge- the Malaise of the Muslim Ummah. 122
4.1.3 Reactions to the Malaise 126
4.1.4 The Movement towards Islamisation of Knowledge 128
4.2 The Methodology of Islamisation of Knowledge 129
4.2.1 The Three-Step Approach 130
4.2.2 A Work Plan for the Islamisation of Knowledge 133
4.2.3 Islamisation of Knowledge through discourses 135
4.2.3.1 Articulating the Islamic paradigm of knowledge 136
4.2.3.2 Developing Qur’anic (or Islamic) methodology 136
4.2.3.3 Methodology for dealing with the Qur’an 136
4.2.3.4 Methodology for dealing with the Sunnah 137
4.2.3.5 Re-examining the Islamic intellectual Heritage 137
4.2.3.6 Dealing with the Western Intellectual paradigm 137
4.2.4 The Two Processes Approach 138
4.3 Islamisation of Knowledge, A Paradigm Shift In Epistemology? 142
4.3.1 Epistemology: the Development and Schools of Western Epistemology. 142
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4.3.2 Scientific revolutions and Sociological Paradigms 145

4.3.3 The Implications and critique of the paradigms. 152
4.3.4 Theoretical assumptions of this research 156
4.3.5 Locating this research 157
4.4 An Intial Attempt At Islamisation of Accounting. 163
4.5 Conclusion 164

CHAPTER 5: THE NEED FOR ISLAMIC ACCOUNTING: PULL FACTORS 2- THE

ESTABLISHMENT OF ISLAMIC ORGANISATIONS 166

5.0 Introduction 166

5.1 The Islamic economic and financial system and the problem of riba. 168
5.1.1 The objectives and characteristics of the Islamic Economic System 169
5.1.2 Definition and classification of Riba 172
5.1.3 Reasons for the prohibition of Riba 173
5.1.4 Controversies on the prohibition of Riba 173
5.2 Islamic Organisations 178
5.2.1 Islamic businesses 181
5.2.1.1 forms of Business Organisation 181
5.2.1.2 Objectives and Operations of Islamic Organisations. 181
5.2.1.3 Accounting implications 183
5.2.2 Zakat collection and distribution 184
5.2.3 Insurance companies 190
5.3 Islamic banks and Financial Institutions: history, nature and operations 192
5.3.1 Classification of Islamic banks 193
5.3.2 Development of Islamic banks and financial institutions 194
5.3.3 Modus operandi of Islamic Banks 198
5.4 The Asset side of islamic banks: Islamic Financial Instruments: 201
5.4.1 Murabaha and Bai al-Mu’ajjal 201
5.4.2 Mudharaba 202
5.4.3 Musharaka 203
5.4.4 Ijara 204
5.4.5 Salaam 204
5.4.6 Istisna 204
5.5 Accounting problems of Islamic banks 205
5.5.1 Profit sharing 205
5.5.2 Capital Adequacy Ratio 211
5.5.3 Confounding International Accounting Standards 215
5.5.4 Non-Financial Disclosure 217
5.6 Conclusion 219

CHAPTER 6:THE OBJECTIVES & CHARACTERISTICS OF ISLAMIC ACCOUNTING 221

6.0 Introduction 221

6.1 The Construction of Accounting Theories: Methodologies, Approaches and Methods. 223
6.1.1 The Empirical Inductive Approach: 223
6.1.2 The Deductive Approach 225
6.1.3 The Methodology of this research. 230
6.2 Ethics, Business and Accounting 232
6.2.1 Ethics and Business Ethics: 234
6.2.2 The Islamic Economic Paradigm and its objectives 238
6.3 Accountability and Islamic Accountability : the objective and premise of Islamic accounting. 242
6.3.1 Stewardship 243
6.3.2 Accountability 245
6.3.3 Extensions of Accountability Framework & Islamic Accountability 249
6.3.4 Islamic Accountability; the Basis of Islamic Accounting 252
6.4 Subsidiary objectives of Islamic Accounting 260
6.4.1 Shari’ah Compliance. 260
6.4.2 Assessment and Distribution of Zakat 261
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6.4.3 Equitable distribution of wealth among stakeholders 263

6.4.4 The creation of an co-operative environment and solidarity 264
6.5 Users of Islamic Accounting Information 265
6.6 Characteristics of Islamic Accounting 268
6.6.1 Conventional and Islamic Accounting Information: Similarities and Differences. 268
6.6.2 Information on the Shari’ah Compliance of the Entity. 271
6.6.3 Wealth distribution 273
6.6.4 Employee-Manager relationships 274
6.6.5 The Social and Environmental Impact of the Organisations Activities. 275
6.6.6 Some other considerations of Islamic Accounting 276
6.6.6.1 Monetary Measurement Concept 276
6.6.6.2 Islamic Auditing 277
6.6.7 Income Measurement and Valuation in the Islamic Accounting system. 278
6.7 Conclusion 284

CHAPTER 7: RESEARCH DESIGN AND DATA COLLECTION 287

7.0 Introduction 287

7.1 Data Gathering Techniques: Matching Methodology and Methods. 288
7.1.1 Questionnaires and the survey method 289
7.1.2 Postal Questionnaires 290
7.1.3 Personally Administered Questionnaires 292
7.1.4 Interviews 293
7.1.4.1 Definition: 293
7.1.4.2 Classification of Interviews 293
7.1.4.3 Advantages and Disadvantages of interviews versus Postal Questionnaires 294
7.1.5 Telephone Surveys 295
7.2 Methods and the Rationale for the Methods 296
7.2.1 The Data Collection Methods: From The Ideal to Reality 296
7.2.2 The Choice of Malaysia as the Research Environment 297
7.2.2.1 Some background information on Malaysia 297
7.2.2.2 Islamic revivalism in Malaysia 298
7.2.2.3 Islamisation of business life 300
7.2.2.4 Malaysia as the Country of Choice for this Project. 300
7.2.3 Questionnaires and Interviews from an Islamic perspective. 301
7.3 The Islamic Accounting Perception Questionnaire (IAQ) 303
7.3.1 The Objective of the Questionnaire 303
7.3.2 The Construction of the Questionnaire 305
7.3.3 The Structure of the Islamic Accounting Questionnaire. 306
7.3.3.1 Section 1: The ethical/ moral context of Islamic and Muslim Business organisations. 306
7.3.3.2 Section 2: Suitability (or otherwise) of Conventional Anglo-American Accounting for
Islamic organisations and Muslim users. 311
7.3.3.3 Section 3: The Objectives, Users, Nature and Characteristics of Islamic Accounting. 314
7.3.3.4 Section 4:Personal & Organisational Details. 319
7.3.4 The Population and Sample Statistics of Participants Surveyed. 320
7.3.4.1 The Accounting Academics 321
7.3.4.2 The Accounting Professionals 323
7.3.5 Method of Delivery and Difficulties Encountered 325
7.4 The Finance Questionnaire on the Behavioural Effects of Conventional Accounting. 327
7.4.1 The Objective of the Finance Questionnaire. 327
7.4.2 The Structure and Construction of the Finance Questionnaire 328
7.4.3 Method of Delivery and Difficulties Encountered 329
7.4.4 Sample Statistics and Response Rate for the Finance Questionnaire 330
7.5 Non-Finance Questionnaire on the Behavioural Effects of Conventional Accounting. 331
7.5.1 The Structure of the Non-Finance Questionnaire 332
7.5.2 Sample Statistics for the Non-Finance Questionnaire, Delivery and Difficulties Encountered 332
7.6 Conclusion 333
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CHAPTER 8: DATA ANALYSIS OF THE ISLAMIC ACCOUNTING QUESTIONNAIRE 335

8.0 Introduction 335

8.1 Research Design, Variables, Scales and Statistical Techniques 335
8.1.1 Research Design 335
8.1.2 Variables 337
8.1.3 Scales or levels of measurement 339
8.1.4 Measurement scales 342
8.1.5 Statistical Techniques 343
8.2 Validity and Reliability 345
8.2.1 Validity 346
8.2.2 Tests for Reliability 350
8.2.3 Sampling Error 351
8.3 Dependent Variables: Findings 353
8.3.1 Analysis & Findings of Section 1 of Islamic Accounting Questionnaire (IAQ). 354
8.3.1.1 Aggregate Scores for Section 1 of IAQ 359
8.3.1.2 Interpretations of aggregate scores 362
8.3.1.3 Aggregate scores for Section 1 of the IAQ. 362
8.3.2 Analysis & Findings of Section 2 of the Questionnaire 364
8.3.2.1 Aggregate scores for Section 2 of the IAQ. 368
8.3.3 Analysis & Findings of Section 3 of the Questionnaire 370
8.3.3.1 Objectives of Islamic Accounting 370
8.3.3.2 Importance of other stakeholders 372
8.3.3.3 The type of Information which Islamic accounting should provide 373
8.3.3.4 The characteristics and nature of Islamic accounting 374
8.3.3.5 Aggregate scores for Section 3 of the IAQ. 375
8.4 Interpretation of the Findings As A Whole 376
8.5 Independent Variables: Findings 376
8.5.1 Working Sector 377
8.5.2 Accountancy Related Experience: 377
8.5.3 Education. 378
8.5.4 Islamic Education 380
8.5.5 Social and Environmental Accounting Education 382
8.6 Significance Tests of Association Between Independent and Dependent Variables 383
8.7 Conclusion 386

CHAPTER 9: HYPOTHESES TESTING OF THE ISLAMIC ACCOUNTING

QUESTIONNAIRE 387

9.0 Introduction 387

9.1 Socio-Economic Principles of Islamic Business Organisations 388
9.2 The Adequacy of Islamic Sources (Qur’an, Sunnah) As A Base for Developing An
Islamic Accounting and Economic System for Contemporary Organisations. 397
9.3 The Appropriateness of Conventional Accounting for Islamic Business Organisations
and Muslim Users 399
9.3.1 Conventional accounting results in UnIslamic behaviour 400
9.3.2 Conventional accounting provides inappropriate information 403
9.3.3 Conventional accounting concepts (principles) are not suitable for Islamic organisations. 405
9.4 The Objectives and Characteristics of Islamic Accounting 407
9.4.1 The Objectives of Islamic Accounting. 408
9.4.2 The Subsidiary Objectives of Islamic Accounting 411
9.4.3 The Users of Islamic Accounting 413
9.4.4 The characteristics of Islamic accounting 416
9.5 Interpretation of Results 420
9.6 Conclusion 426

APPENDIX 9-1: RESULTS OF IAQ HYPOTHESIS TESTING BY SECTORS 429

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CHAPTER 10: ANALYSIS OF BEHAVIOURAL ACCOUNTING QUESTIONNAIRES 431

10.0 Introduction 431

10.1 The Finance Questionnaire: Areas of Enquiry 432
10.2 Finance Questionnaire: Analysis of Findings 435
10.2.1 Short Term Investments 436
10.2.2 Long-term Investments 437
10.2.3 Social and Environmental Investment Policy 439
10.2.4 Islamic Investment Policy 442
10.2.5 Summary Results for Investment Activities 443
10.2.6 Financing Activities 444
10.2.7 Islamic Financing Instruments 444
10.2.8 Non-Islamic Financing Instruments 446
10.2.9 Summary Financing Behaviour 447
10.2.10 Operational Activities 448
10.2.11 Suitability of conventional accounting 449
10.2.12 Islamic commitment 450
10.3 Interpretation of Findings of Finance Questionnaire 454
10.4 Non-Finance Questionnaire: Areas of Enquiry and Results 461
10.4.1 Budget Pressures 462
10.4.2 Performance Evaluation 466
10.4.3 Profit Focus 468
10.5 Interpretation of the Results of Non-Finance Questionnaire 471
10.6 Conclusion 473

CHAPTER 11: SUMMARY, CONCLUSIONS AND SUGGESTIONS FOR FURTHER

RESEARCH 475

11.0 Introduction 475

11.1 Aims and Objectives of the Study 475
11.2 The Case for An Islamic Accounting 476
11.2.1 Development of values underlying conventional accounting. 476
11.2.2 The Push factors: Why conventional accounting is inappropriate for Islamic organisations
and users 478
11.2.3 Pull Factors 1: The theoretical imperative 479
11.2.4 Pull Factors 2: The practical imperative 480
11.3 Islamic Accountability, the Objectives and Characteristics of Islamic Accounting 481
11.4 Research Design and Empirical Results 483
11.5 Limitations and Suggestions for Further Research 490
11.6 Original Contributions of the Research 491

BIBLIOGRAPHY 494
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TABLE OF FIGURES

Figure 1-1:Structure of Thesis 16

Figure 2-1:The Society / Accounting Interface 36
Figure 2-2: Comparative World-View and Values of Islam and Western Civilisation 59
Figure 2-3: Comparison of Western (Capitalist) Economic Norms vs. Islamic Economic
Norms 60
Figure 2-4: Accounting Implications of Different Economic/Value Systems 61
Figure 2-5: Result of Incongruency between Economic System and Accounting System 64
Figure 3-1: Accounting Route to Social Welfare 77
Figure 3-2:The Need for Islamic Accounting: Push Factors 117
Figure 4-1:The Need for Islamic Accounting: Push and Pull Factors 119
Figure 4-2:The Four Paradigms of Burrell & Morgan (1979) 146
Figure 4-3: The Subjective- Objective Dimension of Meta-theoretical Assumptions 147
Figure 4-4:Locating This Research: Islamic Paradigm as a Third Dimension 158
Figure 6-1:The Accountability Model & Framework 246
Figure 6-2: An Alternate Definition of Accountability 247
Figure 6-3:The Islamic Accountability Model 259
Figure 7-1: Research Questions Underlying the Islamic Accounting Questionnaire. 304
Figure 7-2: Section 1 of the Islamic Accounting Questionnaire 309
Figure 7-3: Section 2 of the IAQ 313
Figure 7-4: IAQ: Section 3 (Part 1) 315
Figure 7-5: IAQ: Section 3 (Part 2) 315
Figure 7-6: IAQ Section 3, Part 3 316
Figure 7-7: IAQ, Section 3, Part 4. 317
Figure 7-8: IAQ, Section 3, Part 5 318
Figure 7-9: IAQ, Part 4: Personal and Organisational Details 320
Figure 8-1:Moderating and Intervening Variables 339
Figure 8-2 :Dendrogram Using Ward Method for Section 1 of the IAQ 348
Figure 8-3: Dendrogram Using Ward Method for Section 2 of the IAQ 348
Figure 8-4: Dendrogram Using Ward Method for Section 3 of the IAQ 349
Figure 9-1: Hypothesis 1: IBO’s Concentrate on Social Welfare 389
Figure 9-2: Questions on Ethical Nature of Islamic Business 390
Figure 9-3: Hypothesis 2: IBO’s Do Not Participate In unIslamic Activities 393
Figure 9-4:Questions on Investment Activities of IBOs. 395
Figure 9-5:Hypothesis on the Inherent Development Capacity of the Islamic Sources of Law 398
Figure 9-6: Hypothesis on Consequences of Conventional Accounting Information 400
Figure 9-7:Questions on the Behavioural Implications of Conventional Accounting 401
Figure 9-8:Hypothesis on Appropriateness of Conventional Accounting Information 403
Figure 9-9: Questions on Appropriateness of Conventional Accounting Information 404
Figure 9-10: Hypothesis on Suitability of Conventional Accounting Concepts 405
Figure 9-11:Qustions on Appropriateness of Conventional Accounting Concepts 406
Figure 9-12:Hypothesis on the Main Objective of Islamic Accounting 409
Figure 9-13: Hypothesis on the Subsidiary Objectives of Islamic Accounting 411
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Figure 9-14:Questions on the Subsidiary Objectives of Islamic Accounting 412

Figure 9-15:Questions on the Relative Importance of Various Stakeholders Compared to
Shareholders 414

Figure 9-16:Hypothesis on the Relative Importance of Islamic Accounting Users 414

Figure 9-17: Hypothesis on the Information Characteristics of Islamic Accounting 417
Figure 9-18:Questions on the Characteristics on Islamic Accounting Information 418
Figure 10-1: Islamic Commitment of Various Groups: Finance Questionnaire 453
Figure 10-2: Mean Response for Summary Variables 455
Figure 10-3: Scatterplot of Islamic Behaviour Vs Company Type 459
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LIST OF TABLES

Table 4-1:Classfication and Evolution of Islamisation of Knowledge Methodologies 141

Table 5-1:Profit Distribution Method in the Faisal Islamic Bank of Sudan 208
Table 7-1: Population and Sample Statistics of Accounting Academics In Malaysian
Universities Surveyed. 323

Table 7-2: Malaysian Professional Accountants Sample Surveyed. 325

Table 7-3: Finance Questionnaires Sample 331
Table 7-4:Non Finance Questionnaire Sample and Responses 333
Table 8-1: Reliability Analysis for Islamic Accounting Questionnaire 351
Table 8-2:Distribution and Receipt of Islamic Accounting Questionnaires 352
Table 8-3: χ2-Test for Sample Representation of Population Sectoral Characteristics 353
Table 8-4: Response Frequencies for Dependent Variables (Likert Scale) - IAQ 356
Table 8-5: Response Frequencies for Independent Variables (1-5 Ranking Scale) - IAQ 357
Table 8-6:Response Frequencies of Dependent Variables (Categorical Scale)-IAQ 358
Table 8-7: IAQ Aggregate Scores – Descriptives 365
Table 8-8: IAQ Aggregate Scores – Response Frequencies 366
Table 8-9:IAQ Aggregate Scores – Frequencies (Continued) 367
Table 8-10: Participants by Working Sector 377
Table 8-11:Grouped Experience Frequency Table 378
Table 8-12: Qualifications/Place of Education of Participants 380
Table 8-13: Highest Islamic Qualifications 381
Table 8-14: Formally Studied Social & Environmental Accounting 382
Table 8-15: Firm Receives Technical Assistance 382
Table 8-16: Significance Levels: Kruskal-Wallis Tests of Differences of Ranked Means between
Populations Grouped By Independent Variables –IAQ 384
Table 9-1: Statistical Results for Hypothesis Testing of ETH1 393
Table 9-2: Statistical Results for Hypothesis Testing of ETH2 396
Table 9-3: Statistical Results of Hypothesis Testing for QSREL 399
Table 9-4: Statistical Results for Hypothesis Testing of UNISL 402
Table 9-5: Statistical Results for Hypothesis Testing of Appropriateness of Conventional
Accounting Information for Muslim Users (CAINF). 404
Table 9-6: Statistical Results for Hypothesis Testing of CAPRIN 406
Table 9-7: Results of Testing the Decision-Usefulness Hypothesis 410
Table 9-8: Results of Hypothesis Testing of Social vs. Economic Objectives of Islamic Accounting413
Table 9-9: Results of Hypothesis Testing of STIMP 415
Table 9-10:Results of Hypothesis Testing of SEI 419
Table 9-11results of Tests of IAQ Hypothesis At Mean/Median=4.0 422
Table 9-12: Proportion Test of Variables for Academic and Professional Accountants 425
Table A9-1: Means Test of Hypotheses by Sector 429
Table A9-2: Median Tests of Hypotheses by Sector 430
Table 10-1:Finance Questionnaire: Respondents by Company Type 435
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Table 10-2: Finance Questionnaire: Responses to Questions on Short-term Investment Activities437

Table 10-3: Finance Questionnaire: Responses to Questions on Investment Strategy 439
Table 10-4: Responses to Questions on Social and Environmental Consequences of Investment441
Table 10-5:Responses to Questions on Islamic Investment Policy 443
Table 10-6: Descriptives for Summary Investment Activity 444
Table 10-7: Responses to Questions on Islamically Allowable Financing Methods 445
Table 10-8: Response to Questions on Non-Islamic Financing Instruments 446
Table 10-9: Summary of Financing Behaviour 447
Table 10-10 Responses to Question on Operational Activities 448
Table 10-11:Summary Behaviour in Operational Activities 449
Table 10-12: Responses to Suitability of Conventional Accounting 450
Table 10-13: Islamic Commitment 452
Table 10-14: Descriptive Statistics for Islamic Commitment 454
Table 10-15: Correlation Test for Co Type and Islamic Behaviour 460
Table 10-16: Respondents Type: Non-Finance Questionnaire 462
Table 10-17: Summarised Response Frequency Non-Finance Questionnaire: Effect of
Budget Pressures 463

Table 10-18:Non-Finance Questionnaire Descriptive Statistics (Summarised Responses):

Budget Pressures 465

Table 10-19:Summarised Response Frequency Non-Finance Questionnaire: Performance

Evaluation 466
Table 10-20: Non-Finance Questionnaire Descriptive Statistics (Summarised Responses) 467
Table 10-21:Summarised Response Frequency 468
Table 10-22:Non-Finance Questionnaire Descriptive Statistics (Summarised Responses) 470
Table 10-23: Correlation Tests By Respondent Type 472
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Acknowledgments

I wish to express my sincere thanks to the following persons who made this thesis
possible:

I would first thank Dr. Kouhy and Professor John Innes who together supervised the
thesis. Dr. Kouhy took a deep interest in the project from the beginning and was very
insightful and thorough in the review of the chapters of this thesis. He continued to be
interested in the project and the researcher despite his illness towards the end of the
project. Prof. J. Innes always reviewed my work speedily and was very constructive
and friendly in his criticism of my work. Thank you for toning down my thesis and
getting rid of my silly grammatical mistakes! I am sorry that I could not keep up with
him, as I should have! I also thank Prof. Grinyer who was involved in the early stages
of the project.

Special thanks goes to Prof. Rob Gray whose lectures on social and environmental
accounting inspired me to change my topic from Islamic banking problems to a
theoretical enquiry into Islamic accounting. Prof. Gray’s criticisms of conventional
accounting was the basis of my own critique and although we don’t agree on what is
meant by ‘social’ and the basis of ethics and morality, the issues in his studies of
social accounting have relevance to many of the Islamic concerns of my project.

Mr. Donald Sinclair also deserves special mention in this thesis as well as all theses
undertaken in this department for helping all accounting students including myself
with the statistical techniques used in the research. He is a patient and helpful guide
who has made the dread of statistics a bit more bearable.

Prof. David Power is also thanked for his trenchant criticisms and “rubbishing” my
earlier drafts of the thesis. He is responsible for saving the readers of this thesis from
the burden of reading what “Plato had for breakfast”! I am especially thankful to him
(along with Prof. Innes) for correcting my grammar and editorial mistakes and making
my writing more readable and academic.

I also like to thank Prof. Jan Bebbington, Dr. Christos Tzovas, Dr. Khalid al-khater,
Dr. Jassim al-Rumaihi, Dr. Mustapha Mahmud, Br. Jalaal al-Attar, Dr. Collin Dey, Dr.
Bruce Burton, Allan Murray, Niklas Kreander, Dr. Rishma Vedd, Emily, Dr. Claire,
Margarita Basabikova and Br. Khalid Abdul Qader who all contributed their thoughts,
help and food (especailly Khalid al-khater, Jalaal al-Attar and Margarita who
supplied caviar) at various times.
 xii

Special thanks also goes to Br. Kamaruddin Taha, CEO of Abrar Discounts Bhd., the
managers and employees of the Abrar Group, Tabung Haji and Bank Islam Malaysia
Bhd., the executive MBA students of UIA and Dr. Obiyathulla, Dr. Omar Azmi, Br.
Yusuf Ismail, my niece Firdaus binti Mohd. Farouk and the secretaries at both UIA
and Dept. of Accounting and Business Finance at the University of Dundee.

I am totally in debt to the Malaysian accountants and accounting academics and the
employees and managers of Islamic organisations in Malaysia who took their time
and trouble to answer my questionnaires and pray that Allah swt. reward them
generously for their contribution to Islamic accounting.

Lastly I must thank my own family members especially my aged mother who has
forgone four years of service from me. I pray Allah swt. rewards her with good health,
long life and an assured place in paradise with my late father (Allah yarham). My
brother Dr. Rafiq who took care of her in my absence is especially thanked. I also
thank my wife who put up with my hours and emotions during the past 19 years and
especially the past 3.5 years in Dundee. Also my children who were deprived of a
higher level of care during my research period.

I would also like to thank Mr. Farouk bin Abdul Majeed and Mrs. Hajoor Farouk, my
co-brother and sister in law, who managed my finances and property voluntarily in
Malaysia while I was studying and for their hospitality during my empiricial
investigation. May Allah reward them for their kindness.

I also would like to express my sincere gratitude to the Hill Town Islamic centre and
the Muslim community of Dundee especially the Imams of the Hilltown mosque and
Dr. Hafiz Ayub Patel who is the 1st emergency service to all the Muslims of Dundee
and a true friend in need. May Allah swt. bless them and reward them amply. Also a
special thanks to Dr. Ridah al-Gazzar for being a good friend and Muslim counsel for
the whole period of my stay in Dundee.

Last but not least, I would like to thank the Malaysian Government and my fellow
Malaysians for funding my research and the International Islamic University Malaysia
for granting me study leave to enable me undertake this study.
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Declaration

I hereby declare that I am the author of this thesis; that the work of which this

thesis is a record has been done by myself, and that it has not previously

been accepted for a higher degree.

Signed: ............................................

Shahul Hameed Mohamed Ibrahim

Date: ......................................

Certificate

I certify that Shahul Hameed Mohamed Ibrahim has worked the equivalent of

nine terms on this research and that the conditions of Ordinance 39 and

related regulations have been fulfilled.

Signed: ............................................

Dr. R. Kouhy

Date: ......................................
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Abstract

This study investigates the need for an alternative “Islamic accounting” which
is consistent with the worldview, values and socioeconomic norms of Islamic
society. It proposes an outline of an Islamic accounting theory together with
empirical investigations of (i) the perception of Malaysian Muslim accountants
and accounting academics on Islamic accounting and (ii) the unIslamic
behavioural consequences of conventional accounting on users.

The researcher starts from a premise that the worldviews and values of a
society affect its economic objectives and norms, which in turn affect the
accounting system, and vice versa. An examination of the worldviews, values
and economic objectives of Western society and the capitalist economic
system which underlie conventional (Anglo-American) accounting shows them
to be different from those of an Islamic society. This presents a prima facie
case for Islamic accounting.

The need for an Islamic accounting is classified into “push” and “pull” factors
and then examined in detail. It is argued that conventional accounting with its:

• Decision-usefulness framework of providing information to increase the

wealth of shareholders and creditors in an advanced capital market
framework,
• Measurement and valuation characteristics, and
• Socioeconomic and behavioural consequences,

may be inappropriate for an Islamic society trying to implement an Islamic

economic system. Further, recent attempts at the “Islamisation of knowledge”
are examined and shown to provide the theoretical imperative for the
development of an Islamic accounting system. The study also examines the
objectives, nature and operations of Islamic economic institutions such as
Islamic banks together with their accounting implications. It is shown that the
accounting requirements of these institutions vary from conventional
capitalistic economic institutions. Thus, a practical imperative for the
development of an Islamic accounting system is thereby demonstrated.

From the worldview, socioeconomic objectives and values of Islam, an outline

of an Islamic accounting theory is developed based on a proposed “Islamic
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Accountability” model. The model envisages dual accountability for Islamic

organisations to take cognisance of the Islamic concept of Khilafa
(vicegerancy) which embodies trusteeship of economic resources and
accountability not only to finance providers but to God as well by ensuring the
compliance of the organisation’s operations to Islamic Law and morality
(Shari’ah). Hence, Islamic accounting focuses on various stakeholders in
addition to shareholders and creditors, measures and reports on Shari’ah
compliance in addition to economic activities, and may use non-financial
quantitative and qualitative measures in its reporting.

The theoretical concerns are then investigated using three sets of

questionnaires. The first set of questionnaires was posted to Malaysian
Muslim Accountants and Accounting Academics. Although the respondents
supported retaining the conventional accounting principles of historical cost,
prudence and monetary measurement, they generally agreed to the
unsuitability of conventional accounting information. They also showed strong
support for an Islamic accountability framework and a more holistic, integrated
reporting regime to varied stakeholders, instead of focusing on shareholders.

The behavioural questionnaires were addressed to executives and employees

in the finance and non-finance functions of various companies in Malaysia to
elicit evidence on the unIslamic behavioural consequences of conventional
accounting. Although, there is no strong evidence from this research to
indicate that conventional accounting lead to unIslamic behaviour or
otherwise, the findings indicate that Islamic organisations are better able to
withstand the negative consequences of conventional accounting.
Organisations owned or run by Muslims (not specifically Islamic) and Non-
Muslim organisations, however, tend to use accounting to focus on profits
irrespective of unIslamic consequences.

This study has made some initial contributions to the Islamisation of

accounting and can be the basis of future research, which seeks to make
Islamic accounting a reality in practice.