Testing a Model of Islamic Corporate Financial Report

Topics: Financial statements, Income statement, Islam Pages: 12 (3179 words) Published: June 24, 2013
Testing A Model of Islamic Corporate Financial Reports : Some Experimental Evidence

1. Introduction
Religion can exert a profound influence on individuals and societies. There has been a growing religious commitment during the past two decades which has led to more Muslim countries seeking to manage their economies in line with the precepts of Islam (Hassan, 1998). Central issue in Islamic accounting is weather the external financial reporting system currently adopted by Muslim countries serves the needs of Muslims. Baydoun and Willett (1994 and 2000) who argued that the influence of Islam on accounting was more likely to be in the disclosure aspect of accounting proposed a model of Islamic Corporate Financial Reports. Their model, based on what Muslims ought to desire, need to investigate if such model is aligned with what Muslims actually regard as useful information. Maliah Sulaiman (1998) tested the model & found that the results from the survey were all non-significant, indicating no support for Baydoun and Willett’s conceptual model. Further study by (Brownell, 1995) states that non-significant results is weak due to leniency, acquiescence, halo and partitioning errors.

2. Islamic Corporate Reporting: The Model
The stance of Baydoun & Willett’s (1994 & 2000) model is Western accounting system capitalist is different with teachings of Islam. Capitalistic system gives pre-eminence to the profit and loss. An Islamic economy focus for growth should lead to social justice and a more equitable distribution of power and wealth. Concepts of ownership and private property in Islam have different connotations from those prevalent in the West because for Muslims, ownership of wealth is not absolute, individuals are only trustees. Ultimate ownerships belong to Allah (SWT). The Islamic social order is based on the principles of equality, justice and brotherhood and the concept of freedom and responsibility (al-Buraey, 1990). Two principles underlie the concept of accountability in Islam are full disclosure and social accountability. Baydoun and willett (1994 & 2000) suggested that the current value balance sheet be included as part of the reporting requirement of firms operating in an Islamic economy. An Islamic company is expected to disclose at least any prohibited transactions they made, zakat obligation they have to pay and have already paid, and social responsibility. Social responsibilities would include charities, wages to employees, and environmental protection. This means that financial reporting in an Islamic society is likely to be more detailed than what is currently prevalent in Western societies. Its purpose should be able to direct the firm not only to provide a true picture of their firm but also encourage them to be benevolent (Ihsan) and discourage them to be unjust. Social accountability would mean that financial report should enable Muslims to determine zakat liability. For example amount payable by Muslims whose wealth exceeds a certain minimum threshold. Individuals are expected to feel socially responsible for others in community. Aim for this is to allow people to earn their living in a fair and profitable way without exploitation of others, so that the whole society will get benefits.

2.1 The current value balance sheet (CVBS)
Three main theoretical arguments for this model first is Use of current values relates to the ‘justice and equity’ with regards to the payment of zakat. Second is support for the use of current values follows from practices pursued during the Prophet’s time. It may be derived from implicit common monetary used in Prophet’s time to establish nisab. Nisab is a minimum threshold of wealth above which zakat is payable. Third is Current value information allows the inclusion in the financial statements of market value based on information obtained from outside the firm’s database. Historical cost information excludes the potential relationship which accounting...
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