adewirman accounting-materi 1

8/9/2019 Adewirman Accounting-materi 1

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Decision Usefulness and Criticstowards the Conventional Accounting

Ade Wirman Syafei


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Decision Usefulness

It is believed thatthe determination of a goal

will lead on the promulgation of a certain ruleor principles.

After a long controversial debates, the

conventional accounting had achieved its

objectives


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Decision Usefulness

AAA (1966) mentions clearly that the users

can be such as: Shareholders

Creditors

Others e.g. employee, government body,

public and etc.


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Decision Usefulness

The goal of conventional accounting has

affected the determination ofthe objectivesof conventional financial reporting.

FASB (SFAC No. 1) states thatthe financialreporting should provide information that isuseful to present and potential investors andcreditors and other users in making rationalinvestment, credit and similar decision (Para34)


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Decision Usefulness

FR Should provide information to help

present and potential investors and creditorsand other users in assessing amounts, timing

and uncertainty of prospective cash and

dividends or interest proceeds from the sale,

redemption, maturity of securities or loan(para 37)


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FR should provide information aboutthe

economic enterprise, the claims to thoseresources (obligations ofthe enterprise to

transfer resources to other entities and

owners equity) and the effects oftransaction,

events and circumstances that changeresources and claim to those resources

(para.40)


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Decision Usefulness

FASB mentions clearly the two first group of

users such as investors and creditors whilethe other group of users are simplified in thename of others.

Shahul (2001) believes thatthe reason forFASB to mention the firsttwo groups of usersclearly is because they are the group whichhave dominant powertowards the companyin terms of money.


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Decision Usefulness

Shahul (2000) claims that the owners of a

business separated from the day-to-daymanagement of the business. Professional

managers started controlling and managing

large-scale business corporations. The

interest of shareholders became restricted todividend.


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Decision Usefulness

As a resultthe long-term business objectives

are to stay in business as long as possibleand be able to generate high profit for

company. It is in this economic contextthat

decision usefulness paradigm was arrived.

Thus, the forms of reporting provided by anenterprise would only be intended to meet

the interest ofthose first two groups.


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Decision Usefulness

Majority of the forms of financial repor ting

shows information needed by those first twogroup.

Here, it is seen that the interest of other

group of users has been disregarded by the

conventional accounting


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Critics towards the ConventionalAccounting

Even worse, conventional accounting has

been believed to have contribution on thedestructive of the ecological environment

(Maunders & Burrit, 1991, Argyis, 1990,

Tinker 1985).

Briloff (1990) argues that coventionalaccoounting has produced financial

scandals and fraudulent investment.


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Alternative accountings have been slowly

forth

coming sinceth

e Corporate Repor

t

(ASSC, 1975) addressed the issue of publicaccountability of corporations.

This repor t suggested that corporationswhich are of a significant size use significantcommunity resources and as such, arepublicly accountable to a wide suite ofstakeholders as opposed to the traditionalshareholder and creditor groups.


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The Corporate Repor t suggested that in

addition

to

the

tradi

tional profi

tand lossaccount and balance sheet, several other

statements be included in a companysannual report including a value addedstatement, a statement of energy usage, an

employee report and a statement oftransactions with the government, amongstothers.


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Recently, new methods of measuring ecological inputs

and outpu

ts

have been sugges

ted as

the basis onwhich full blown environmental accounting reports can

be made, instead of merely providing qualitative non-

financial information (Gray et al., 1993).

Some accounting professional bodies such as the

Association of Chartered Certified Accountants haveeven instituted annual environmental awards for

companies for producing the best environmental

information in their annual reports besides funding

research studies on the issue.


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Corporation and Society

Corporation have emerged as the

dominant governance institution on the

planet, with the largest among them

reaching into vir tually every country in theworld an exceeding most government in size

and power, increasingly.


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Contd

its implication have gone largely unnoticed

and unaddressed (Korten, 1995). Accounting Western Model contributes to this

situation


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Critics on ConventionalAccounting

Externalities is not included in financial report

(Lee Parker, environmental accounting) Intangible asset cannot be measured

adequately(Lev Baruch)

Human resources and employee reporting

interest are not included.


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Contd

Social Interest is overlooked

Promote the exploitation of

capitalist over labor and society.Promote the concentration of

wealth and power o the hand of

the rich.


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What is Islam?

Literally meaning:

Peace (in this world andhereafter)

obedience to Allah as his/herGod, comply withthe motivation of

Gods creation ofMan, which is toserve Allah, to be his viceregenton earth.


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Contd

A comprehensive worldview, a unity of God,

and an integra

tion be

tween world andhereafter.

Islamic principles: truth, justice, fair, goodwill,honesty, benevolent, accountability beforethe God.


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Islamic Worldviews

A worldview can be thought of as the

set of implicit and explicitassumptions aboutthe origin ofthe

universe and the nature and purpose

ofhuman life (Chapra, 1992)


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Contd

A worldview is the way in which a

person sees and explain the worldand his place in it. Your worldview

not only affects the way you think. It

also affects the way you act orbehave. Your worldview shapes the

quality of your life (Al-Faruqi,

1992)


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Contd

Islamic ontology presents a dual

worldview, this world (universe) andthe hereafter. What man does (in all

areas) in this short life affects his

prospects in the hereafter (Shahul,2000).


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estern/Capitalist WV Islamic WV Western/CapitalistEc N Islamic Ec N

Material

worldview

Democracy

Secularism

Individualism

Utilitarianism

Welfare

Liberalism and

freedom

Dual worldview

Khilafah "Shura

Tawhid

Amanah, Trust

Ikhtisab,

Accountability

Public benefit

Responsibility

Capitalism,

Primacy

of profit

Deregulated

market

Empiricism

Sanctity of private

property

Consumerism

Welfare benefit

Market values,competition

Primacy of justice

and social welfare

Generally non-

inter vention in

markets

Obey God's Laws

Property as trust

from God

Moral Filter

Zakat fulfillment

Market values,

negotiation-cooperation

(Adapted Shahul, 2001)COMPARISON OF WESTERN CAPITALIST VS ISLAMICWORLDVIEWS AND ECON. NORMS


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ISLAMIC AND WESTERN PHYLOSOPHY, PRINCIPLESAND CRITERIA IN FINANCIAL REPORTING

(Baydoun & Willet, 2000)

Characteristics Western fin. Acc. System Islamic Corp.

Philosophical

viewpoint

Principles

Criteria

Economic rationalism

Secular

Individualistic

Profit maximization

Survival of fittest

Process

Based upon modern com-

mercial law

Limited disclosure

Personnal accountability

Tawhid

Religious

Communal

Reasonable profit

Equity

Environment

Based upon ethical law ori-

ginating in the Islamic Law

Full disclosure

Public accountability


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The Foundation of the Shariah Islamiiah Paradigm

Al QuranHadithIjmaQiyas

Objectives Shariah Islamiiah::Al-adlandAl-ihsan

(social justice and compassion for fellow human)

Barakah

(Allahs blessings)Al Falah

(Realise benefit forthe people in this world

and hereafter)

Philosophical Tawhid(Unity ofAllah)

viewpoint:

Divine Law forHuman Conduct:


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Islamic accounting: Hayashi

is an integrated discipline with social,

political and economic domain ruled by Allahor meta rule. Islamic accounting should

regulate and establish a harmonious

integration among the parties ofthese

diverse domain.


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Conventional Vs IslamicAccounting

ConventionalAccounting:

Based upon moderncommercial law-permissive rather thanethical

Limited disclosure(provision of

information subject topublic interest)

Personalaccountability(focus onindividuals who control

resources)

Islamic Accounting:

Based upon ethical laworiginating in theQuran (Islamic law,As-Sunnah)

Full disclosure (tosatisfy any reasonabledemand for information

in accordance with theSharia)

Public accountability(focus on thecommunity who

participate in exploiting


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The practice of Islamic Accounting

The development ofIslamic Banks has been

very rapid in the whole world. Suleiman (1999) says thatthere are 189

Islamic Financial Institutions as in 1999.

In Indonesia, there are three IBs, 28 Islamic

Banking Unit and 126 Islamic Rural Banks(Bank Indonesia, 2008)


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Contd

The existence ofIslamic banks creates the

need for different accounting. It is because the characteristics and

operational ofIslamic Bank different as

compared to Conventional Banks.


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Contd

In Indonesia, IAIhas anticipated this need by

promulgating PSAK no. 59 and it wasreplaced for with PSAK no. 101-106

However, some accounting matters which

are not covered by PSAK 101-106 still refer

to PSAK No. 59, such as forIjarahTransaction.


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. .System

THE SOCIO ECONOMIC OBJECTIVE OF

THE SHARIAH

THEISLAMIC ECONOMICS SYSTEM

THEESTABLISHMENT OF ISLAMIC SOCIO ECO

ENTERPRISES & INSTITUTIONS

ISLAMIC ACC CONSISTENT WITH

ISLAMIC VALUES

CONSISTENT BEHAVIOR IN LINE WITH

ISLAMIC NORMS

(HOMO ISLAMICUS)

INCONSISTENT OR DEVIANT

BEHAVIOR

OF MUSLIM USERS

(HOMO ECONOMICUS)

CAPITALISTECONOMICS INSTITUTIONS

THE SOCIO ECONOMICS OBJECTIVES

OF THE SECULAR CAPITALIST

ECONOMIC SYSTEM

USE OF CONVENTIONAL ACC

BASED ON SECULAR

PHYLOSOPHYCAL

VALUES INCONSISTENT

WITH ISLAMIC VALUES

(Shahul,


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Muslims Countries Exposures

Belkoui (2001) argues that accounting is a

language of business. It should be acknowledged that out ofIslamic

financial industries, it is rare to find thatthebusiness in Muslim countries are muchinfluenced by the Islamic values.

To ImplementIslamic Accounting, there is aneed to Islamize our behaviour

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