Journal of Islamic Accounting and Business Research

The two Ws of Islamic accounting research

Roszaini Haniffa Mohammad Hudaib
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EDITORIAL Islamic
accounting
The two Ws of Islamic accounting research
research
5
Roszaini Haniffa
Bradford University School of Management, Bradford, UK, and
Mohammad Hudaib
Nottingham University Business School, Nottingham, UK
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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 the
two “W” questions – what is Islamic accounting and why Islamic accounting research is important. In
doing 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 and
finance. One of the reasons is due to lack of exposure of research conducted in the area at international
level, ending up with only a few issues getting attention. Similarly, the lack of a platform where
researchers interested in the area could showcase the diverse range of research as well as network and
get support on their research hindered the progress of research in this area. Hence, JIABR could be the
leading journal in the area of Islamic accounting and business research if all papers related to it are
channeled in this specialist journal. In this way, researchers in the areas of accounting and business
would 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 are
interested but have limited knowledge in the area, and also those who wish to submit to the journal, in
that it highlights some potential areas for research.
Keywords Islam, Accounting, Accounting research, Auditing, Corporate governance
Paper type Research paper

Introduction
Welcome 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 and
to see the first issue in print. As an international journal committed to encouraging and
publishing quality work from researchers and practitioners around the world in the
area of Islamic accounting and business, we believe JIABR will make an important
contribution 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 to
provide researchers and practitioners a platform to discuss pertinent issues that has
wider implications on various stakeholders. In this first editorial, we attempt to
introduce the journal by answering the two “W” questions: what is Islamic accounting Journal of Islamic Accounting and
and why Islamic accounting research is an important field. In this way, we hope both Business Research
Vol. 1 No. 1, 2010
readers and potential contributors would be able to appreciate the difference in the aim pp. 5-9
and scope of the journal compared to other journals in similar fields. We will also q Emerald Group Publishing Limited
1759-0817
introduce the contents of this first issue. DOI 10.1108/17590811011033370
 JIABR What is Islamic accounting?
1,1 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 “Islamic
accounting” can also have a temporal and spatial implication.

6 In a religious sense, Islamic accounting refers to a coherent body of ideas and practices
based on the Islamic religion. Hayashi (1989, p. 42) defines Islamic accounting as “[. . .]
theory which thinks how it could allocate the resources justly [. . .]” and Haniffa
and Hudaib (2002, p. 8) define it as “an assurance function that seeks to establish
socio-economic justice through its formalised procedures, routines, objective
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measurement, control and reporting in accordance with shari’ah islami’iah principles.”

From the two definitions, it can be discerned that Islamic accounting plays two important
roles to:
(1) provide assurance to users of accounting information through proper
recordings and disclosure that transactions do not contravene shari’a
principles; and
(2) ensure that resources are allocated fairly through proper measurements and
recognition of assets, liabilities, revenues, and expenses.

The word shari’a comes from an Arabic word that literally means “the way” or “the
path to the water source.” In the context of Islam, shari’a refers to the clear and straight
path that would lead humans to al-falah – happiness in this world and in the hereafter.
Shari’a principles are derived from two main sources: the Qur’an, which is considered
by Muslims to be the exact words of revelation from God to Prophet Muhammad, and
the Sunnah (the acts and sayings of the Prophet as transmitted through traditions
known as Hadith).
Shari’a places great emphasis on the issue of measurement because they are related
to distribution of wealth. It is stated in the Qur’an:
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 than
due (Al-Mutaffifin 83:1-3).
As an assurance mechanism, keeping proper records is deemed important as part of
the fair determination of rights and obligations:
“O ye who believe! when ye deal with each other, in transactions involving future obligations
in a fixed period of time, reduce them to writing” and “Let a scribe write down faithfully as
between the parties” (Al-Baqarah 2:282).
Closely related to the assurance function is the concept of accountability (mas’uliyyah),
which is broader than that present in Western societies (Baydoun and Willett, 1997). In
Islam, primary accountability is to God as all of one’s actions (good and bad deeds) in
life 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, and
empowering the rightful owner to know, demand and receive his rights as well as deter
 those entrusted with power from abusing their position in overseeing socio-economic Islamic
justice: accounting
O ye who believe! Fear Allah, and (always) say a word directed to the right (Al-Ahzab 33:70). research
In short:
Islamic accounting from a religious sense will have implications on the practice of accounting
and the conduct of accountants as well as other related parties such as the Shari’ah 7
supervisory board, audit committees, investment analysts, regulators, trustees, etc. in various
Islamic financial institutions.
On the other hand, as suggested by Napier (2009, p. 124), the temporal and spatial
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meaning of Islamic accounting may imply “accounting in parts of the world where
Islam is the majority religion during periods when Islam has been dominant” and it
could 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 by
Muslim societies in different parts of the world at different time.”
Therefore, given the various possible interpretations of Islamic accounting, JIABR
welcomes papers not only on accounting, auditing, and corporate governance but also
capital market-based research that uses accounting numbers. It also welcomes papers
on historical research into Islamic accounting and economic activities during the
“Golden Age” of Islam and current accounting and business practices in Islamic
countries.

Why Islamic accounting research is important?

All accounting activities will have an impact on the welfare of society in one way or
another, i.e. having social-economic consequences. The emergence of Islamic banks as a
significant force in several countries in the late-1970s has prompted researchers to
consider the accounting implications. “Islamic accounting” is almost unheard of until
Abdel-Magid (1981) in his seminal paper highlighted the need for accounting practices
based on shari’a principles to cater for Islamic banks that began to emerge at that
time. The growth of Islamic banking in the early 1990s resulted in more scholarly
research into Islamic accounting but they are either not written in English, and the
English-language literature tends to be published in non-mainstream accounting
journals (Napier and Haniffa, 2010)[1] or the internet. The early researchers raise many
important issues, e.g. the need of a framework for Islamic accounting, accounting policy
choice, corporate reporting, need for Islamic accounting regulations, etc. but did not get
the 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 the
attention of researchers interested in knowing this alternative model of business
without interest. As a global player, IFIs need to compete and offer products that the
market would be interested in. Various Islamic juridical concepts were applied to give
them an Islamic appearance (Tripp, 2006), hence the use of the term “shari’a-compliant”
rather than “shari’a-based.” The products offered start replicating their conventional
counterparts which used complex schemes of financial engineering often by getting
around accounting standards, loading hard to understand numbers in the financial
 JIABR statements and unloading risks off balance sheet. The sophisticated structures of the
1,1 contracts may well serve the shari’a compliance aspect but not much thought nor
attention given to the accounting aspects. It is difficult to accept that all is well with
financial modeling when the conventional model has proven its weakness in the
financial crisis. Hence, Islamic accounting research is important and needs to develop in
tandem with the development of new Islamic financial structures.
8 Accounting systems are embedded in a country’s economic and legal framework,
much of which is shaped by political processes (Leuz et al., 2005). The politics of
accounting suggest that all parties that can impact or be impacted by accounting
activities will lobby to protect their own interest. Hence, it is not surprising to find
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI),
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the standard setting body for IFIs, being caught up in the political process. There are
many economic and political questions that need answers: for instance, how can
Islamic accounting standards be enforced; what is the role of auditing for IFIs; how
does lobbying affect the political process of standard setting for IFIs, etc.
From the brief discussion above, there is no doubt that Islamic accounting research
is 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 providing
alternative measures and solutions through shari’a principles to overcome some of the
weaknesses of the conventional model in the recent financial crisis.

Contributions in this inaugural issue

We 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 JIABR
wishes to publish to raise awareness and to encourage debates among researchers on
issues that have significant implications on various stakeholders.
The first two papers address AAOIFI’s accounting standards – FAS 6 and FAS 17.
In the first paper, Simon Archer, Rifaat Karim and Vasudevan Sundararajan tackled a
vital issue on how to measure and manage the risk characteristics of one of the major
sources of funding of IIFS, profit sharing investment accounts (PSIA). They provide a
methodology to estimate “alpha,” which is the fraction of the assets funded by PSIA
included in the denominator of the capital adequacy ratio. The value of alpha has
significant implications for asset-liability management, product pricing, and optimal
capital structure for Islamic banks. The next stage is to test it using data from IIFS but
this could only be done if such data are disclosed.
The second paper by Bill Maurer addressed an important point on the politics of
accounting. Bill highlights how lobbying affects the political process of accounting
standard setting bodies, specifically the position of AAOIFI, using recent sukuk
issuances as examples. Bill raises interesting questions in the paper related to one
particular AAOIFI’s accounting standard – FAS 17. The challenge for other potential
contributors is to scrutinize the impact of other accounting standards on the financial
statements of IFIs.
The next two papers are related to investments. The paper by Mervyn Lewis
described the status quo of Islamic investment funds. Mervyn highlights the differences
in the screening and purification process adopted by different Islamic indices and
how the over-emphasis on the “prohibitions” and neglecting the other positive aspects
limits the opportunities to reach other ethical investors. Mervyn proposed a number of
 recommendations on how Islamic funds can raise their profile and enhance their global Islamic
reach. Given the increasing attention on climate change and sustainability, Islamic
funds have much to offer to investors and more research is needed in this area.
accounting
The fourth paper by Ruzita Abdul Rahim and Othman Yong is an empirical study research
comparing initial return patterns of shari’a and non-shari’a compliant status of
Malaysian IPOs and conclude that the returns are driven by the size and type of offers
in the case of the former, and by risk, for the latter. 9
We trust there is much in this inaugural issue to inspire future researchers and
potential contributors and we look forward to receiving your contributions. We hope
you enjoy reading this issue!
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Note
1. This book is a collection of some of the most significant English-language contributions to
the literature of Islamic accounting classified under six themes: conceptual framework of
Islamic accounting, accounting ethics and social responsibility, corporate reporting,
accounting practice and zakah, and auditing and Islamic history of accounting. Also see
Napier (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 of
financial 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 Islamic
perspective of accounting”, Accounting, Commerce and Finance: The Islamic Perspective
Journal, Vol. 6 Nos 1/2, pp. 1-71.
Hayashi, T. (1989), On Islamic Accounting: Its Future Impact on Western Accounting, The
Institute 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 University
Press, 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 author
Roszaini Haniffa can be contacted at: r.haniffa@bradford.ac.uk

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