The failure of
Enron Corporation in 2001, which followed the failure of Arthur Andersen in
2002, is one of example the failure of accounting regulation and accounting
ethic. The financial scandals in the USA and some other
countries, suchas Australia, dramatically demonstrated how the efficiency of
financial markets is based on assumptions of trust and ethical behaviour of
corporate managers. The collapse of companies such as Enron, WorldCom and Global Crossing in the USA, HIH Insurance and
OneTel in Australia, and Parmalat in Italy has led to a loss of
confidence by the investing public in the system of
financial reporting and accountability.[1] These prove that the lack of ethic in accountant and
still have egoism in getting money or profit oriented. It also describes that
education system that produces the accountants failed for educating them.
Therefore, the education system should be added by the concept of religion (din) for developing the accounting
ethics.
One of effort to establish a
code of Islamic ethical conduct for accountants was developed by the Accounting
and Auditing Organizations of Islamic Financial Institutions (AAOIFI) in
1998. The code presents an ethical
framework for accountants derived from Islamic Shari’a rules and principles.[2]
It consists of three sections; namely, the shari’ah
foundations of accounting ethics, the principles of ethics for accountants,
and the rules of ethical conduct for accountants. This ethical framework can be
guidance for accountants in doing their accountability. The sha’riah
foundations of accountant ethics stipulate on the Islamic foundation; namely,
Integrity, Vicegerency of humanity on earth, sincerity, piety, righteousness,
accountability before Allah.
Although there is a guidance
from Accounting and Auditing Organizations of Islamic Financial Institutions
(AAOIFI), many Accountants still have the problems of accountability especially
ethics in terms of doing in accounting practical. Many Accountants placed their
concept of accountability and their integrity in the profit oriented. They only
just focus on getting profit or money. Thus, it also can appear the egoism of
getting success in their life.
Accountants must realize that
their responsibility to God, Allah SWT. Therefore, the principle integrity in
Islam requires accountant to be competent and adequately qualified. In the
Qur’an Allah requires that “Truly the best of men to employ is the man who is
strong and trustworthy”.[3]
It is also described in the principle of vicegerency that supreme authority is
that Allah (Al-Qur’an, Al-Baqarah verse 30). Man’s ownership of property is not
an end in itself, but a means to provide a decent life for him and his family,
and society. Man should observe the commandments and Prohibitions of Allah, as
Allah is the real owner of the property. Mankind is only a vicegerent of Allah and
will be held accountable for the way he has acquired the wealth and how he/she
used it.
The AAOIFI’s code of ethical
conduct cannot be realized if it just becomes guidance for Accountants. The
codes may be a way of putting added pressure on people to do things that are in
the best of that particular company or profession.[4]
It also can be realization if it becomes incorporated into the accounting
curriculum both at the tertiary level as well as in the professional education.
The model for integrating ethics into the accounting curriculum: devote half a
semester of the introduction to Business course to general business ethics,
integrate ethics into each and every accounting course throughout the
curriculum, develop a capstone course at the senior level that deals with the
complex issues of business responsibility and professional responsibility. [5]
The approach to ethics
integration provides the student with both broad and specific exposure to
business and accounting ethics. Society will get benefit from educated
individuals with high ethical reasoning ability who are aware to ethical issues
and who have developed the habit of careful reflection. This combination of
ethical reasoning, sensitization and reflective thought are the seeds for
building integrity, the central organization principle of ethical behavior.
Islamic accounting course should have the
objective to make students aware of emerging issues facing the accounting
profession and accountants. The AAOIFI’s code of professional conduct can be
used as a material to explain and expose students to the attributes of ethical awareness
and principles from an Islamic perspective.[6]
Thus, trough Islamic ethics in education can shape the generation with a good
moral and reduce the manipulation of accounting practical.
Besides accounting
curriculum, accountant must understand and apply about the legal principle of
maslahah as the basis of setting proper priorities for the work. There are
three areas which constitute the primary objectives of sharia’ah (maqasid al-shar’ah);
namely, to educate the individual, to establish justice, and to realize benefit
(maslahah) to the people. The
majority of Islamic jurists are in agreement that there is no law in the whole
of Shari’ah that does not seek to
secure maslahah.
Maslahah means a cause, a
means, an occasion or a goal which is good. It also means an affair or a piece
of business which is conducive to good or that is for good.[7] The principle of maslahah can contribute to
establishing guidelines for moral judgement. Maslahah also means benefit or interest.[8]
The codes of professional conduct should outline how to achieve public interest
and in the case of conflict, how to solve that conflict. There are three level
of judgment to be used by accountants when resolving ethical conflicts.[9]
In the first level, whatever
financial decision and accounting disclosures of business activities the public
requires for living especially in terms of their life (self and family),
property and intellect must be protected.[10]
Rahman (2003) explained that any of business activities, which can influence
these basic attributes must be disclosed and debated, not only in terms of
their financial implications but also in terms of their essential social
implications. He gives examples, business activities, which can endanger the
lives of the people such as air and water pollution, which can damage property,
and people lives.
In the second level, the
protection of complementary public interests that presumes that any negligence
or action, which may lead to difficulties but not total disruption to the
public, must also be accounted Rahman (2003). For instance, the protection
include involvement in, trading with or manufacture or sale of tobacco and
alcohol which affect the health of public; involvement in fur trade, animal
experimentation and exploitation which damage the lives of the animals; and
trading or manufacture or sale of violent magazines and videos which instill
bad moral behavior to the public. He urged that the public must be protected
from these activities, and therefore accountants need to disclose the effect of
the company’s activities of this nature, both in terms of their social and
financial implications.
In the third level, Rahman (2003) explained
that the need to achieve embellishments refer to the interests whom, upon
realization, lead to improvements and attainment of that which is desirable to
the public. Therefore, accountants’ reports need to reflect such attributes as
relevance, comprehensible, reliability, completeness, objectivity, timeliness,
and comparability. He concluded that in the case where accountants face
conflicts between protecting the essential public interests and the
complementary public interest, the former should be given priority.
Corporate Social Responsibility is one of
example to elaborate the first level because accountants must disclosure about
their financial implications in terms of their responsibility to the society. Accountant
or Muhtasib in Islam is the one
responsible for making sure that business is not harming the community. It was Muhtasib’s task, among other things, to
ensure that business activities such as baking and tanning were situated in
areas where they did not have a negative impact on the community through the
emissions and smells they produced.[11]
Furthermore, Kamla et al. (2006) explained that the Muhtasib was charged with checking that business were not disposing
their waste in a way that was harmful to the community surrounding them.
Corporate must disclosure
their financial reporting in terms of accounting for corporate Social Responsibility.
It is one of action from ethics example, which describe the financial reporting
in social perspective must be disclosure to avoid environmental drawback such
as pollution. There are seven categories analyzed that disclosure namely; commitment to performance, quantified measures of
performance (e.g. tons
of CO2 emitted), identification of specified
targets, performance against targets, future performance targets, acknowledgement of measures
used within a management system, identification of social and
environmental performance factors impacting on decision making or change processes.[12]
Corporate must identify and show good performance in
terms of determining their objective, strategic planning, and decision policy.
In this context accountant has a important role to disclosure the social and
environmental factors that they give impact to decision making and process.
Therefore, accountants must have a good accountability in terms of
accountability to Allah and society. The
accounting for Corporate Social Responsibility (CSR) must be combined with the
Islamic perspectives so that the performance of corporate can be clear in their
financial or management decision in terms of accountant role.
Beside Corporate
Social Responsibility, some areas need to be addressed by application of
Islamic ethics, namely: stakeholder perspectives, the agency theory, earning
management, and off balance sheet items.[13]
The first area is stakeholder perspectives. According to Beekun and Badawi (2005),
there are several criteria of relevance when examining Islamic ethical system
from stakeholders’ perspective: justice and balance, trust and benevolence.
Accountants must give transparent accounting information and provide full
disclosures in reporting business transaction in permissible (halal) business
ventures; fair wages to employees; provision of good and quality products to
customer.
The
second area of Islamic ethics application is the agency theory. The
current accounting practiced
was adopted from western accounting
systems entails is diametrically
opposed
to the value systems of the whole
society. Some of the assumptions
that
underlie theories of the purpose of
accounting
information in western society are
at variance of Islamic teaching.
Baydoun and Willet (1997) explained that
a current
example is an agency theory, the
core
of which is self-interest.
The Islamic view is that profit must be accompanied with the risk of loss
and that relationship between capital
provider and entrepreneur should be based on the principle of partnership.
Islam recognizes the fact that the
owners/ financiers of
a firm have the right to make a
profit, but not at the expense of the
claims
of various other stakeholders (Beekun
and Badawi, 2005). These applications
provide
an indication of treating others
with virtuous dealings. This kind
of action will spread a strong tie of
trust,
brotherhood and cooperation that
can
level out the problem of greedy and
injustice
which are prevailing in principal
and
agent relationship.[14]
Earning
management is third area
of Islamic ethics application. Earning decision takes place when the accountant chooses
the reporting methods and the estimates
that do not accurately reflect their
actual performance. Immoral accountants
can use a variety of techniques to
manage earnings for many different
reasons. For instance,
the business that approaching debt
covenant violations are more likely
to
manage earnings. This practices start
from
the abuse of wealth by the wealthy
people
to exercise improper pressure over
the needy, so as to retain the benefit
of
their wealth, they simply transact the
receipt
and payment of interest on loans
provided
to needy . This unfair dealing is absolutely forbidden in Islam
which simply does not accept the concept
of the ‘time value for money”. [15]
The fourth area
of Islamic application is off balance sheet. Off balance sheet financing
arrangements often involve the creation of an off-balance-sheet entity (OBSE)
in the form of a joint venture, limited-liability corporation, partnership, or
other unconsolidated entity.[16]
It is often used to
make a business look like it has far
less
liabilities or debts than it actually
does. One of example case that related to the manipulation
of OBSE is Enron through its Special Purpose Entities (SPEs).
SPEs are one of types
in
off-balance-sheet accounting that move debt to a newly created company without having to report it in balance sheet. This
practice violate the concept of Islamic
ethics. Specifically, the two general
objectives underlying
the preparation of Islamic corporate
reports are; social accountability
and
full disclosure. Therefore,
the
establishment of
the justice to community required
an accounting system to inform and disclose to the society that is
explicitly orientated
to the public interest ( Istislah).
In short, to
answer in what extent Islamic ethics can contribute towards a more ethical
accounting practice is depend on individual accountants. If accountants
understand about the rules, committed and belief to their God, they will have a
more ethical accounting practice. The important thing that accountants or Muhtasib must have responsibility is not only for themselves but
also for God, Allah, as their responsibility for “hereafter”.
REFERENCES
[1] Jackling,
et al. “Professional accounting bodies’ perceptions of ethical issues, causes
of ethical failure and ethics education, Managerial auditing journal 22 (9),
Deakin University, p:2
[2] AAOIFI.
Code of Ethics for Accountants and Auditors of Islamic Financial Institutions,
Bahrain, 1998, p:4
[10] Hooker,
B., “Self-interest, ethics, and the profit motive”, Business Ethics, Cowton and
Crisp, Oxford University Press, 2001, p: 38
[4] Carrol,
R. “A Model for Ethical Education in Accounting” in Gowthorpe, C and Blake, J,
Ethical Issues in Accounting (Ed.), Routledge London, 1998, p:166
[5] Abdul
Rahim Abdul Rahman, Ethics in Accounting Education: Contribution of the Islamic
Principle of Mashlahah, IIUM Journal of Economics Journal of Economics and
Management, (2003), p: 44
[6] Abdul
Rahim Abdul Rahman, An Introduction to Islamic Accounting Theory and Practice,
CERT, 2010, p: 49
[8] Abdul Rahim
Abdul Rahman, Ethics in Accounting Education: Contribution of the Islamic
Principle of Mashlahah, IIUM Journal of Economics Journal of Economics and
Management, (2003), p: 41
[9] Abdul
Rahim Abdul Rahman, Ethics in Accounting Education: Contribution of the Islamic
Principle of Mashlahah, IIUM Journal of Economics Journal of Economics and
Management, (2003), p: 41
[10] Kamla et
al., Islam, nature and accounting: Islamic principles and the notion of
accounting for the environment, (2006), p:257
[11] Adams and Frost, “Accounting for ethical, social, environmental and economic issues:
towards an integrated approach”, Research Executive Summaries Series 2 (12), CIMA Australia, 2006, p: 3a
[12]
Yunanda, R.A and Abd. Majid, N., “The Contribution of Islamic Ethics
towards Ethical Accounting Practices”, Issues in Social and Environmental
Accounting, 5 (1/2), (2011), p: 133
[13] Yunanda,
R.A and Abd. Majid, N., “The Contribution of Islamic Ethics towards Ethical
Accounting Practices”, Issues in Social and Environmental Accounting , 5 (1/2),
(2011), p: 134
[14] Gambling,
T and Abdel Karem, R.A. “Business and Accounting Ethics in Islam, Mansell,
London, (1991), p:34
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