Alternative (conventional accounting) rules may, for the individual citizen, mean the difference between employment and unemployment, reliable products and dangerous ones, enriching experiences and oppressive ones, stimulating work environments and dehumanising ones, care and compassion for the old and sick versus intolerance and resentment. (Tinker, 1985, p xx)


3.0        Introduction and Chapter Outline:


In the previous chapter (chapter 2), the researcher outlined the world view and value system of Islam and compared it with that of the Western worldview; he highlighted the consequent economic implications and the accounting implications of these differences. In this chapter, the critique of conventional accounting from the social and critical literature and behavioural accounting literature will be reviewed. The review is undertaken through five main themes: objectives, fundamental assumptions, characteristics, macro-consequences (effect on social and environmental well being) and micro consequences (i.e. internal behavioural consequences).  During the course of the review, the researcher will attempt to extend this literature through an addition of an Islamic perspective to this critique. The aim of this chapter is to examine why the objectives, characteristics and consequences of conventional accounting and its behavioral implications are unsuitable for an Islamic society, using the social, critical and Islamic critique of conventional accounting.

This analysis will attempt to answer the following questions: (i) what are the objectives of conventional accounting (based on the capitalist economic system) and are these acceptable from an Islamic economic point of view? (ii) What are the fundamental assumptions of conventional accounting and do these hold for the existing and desired socioeconomic framework of Muslim and Islamic societies? (iii) What are the social and economic consequences of conventional accounting and are these consistent with the objectives and norms of Islamic society and organisations? (iv) Are the measurement/valuation and disclosure principles and practices of conventional accounting appropriate for Islamic society? (v) What are the internal and external behavioural consequences of accounting for Muslim managers and employees, and are these are in line with Islamic values?

The researcher argues that conventional accounting in terms of its objectives, characteristics and consequences is a negative force from an Islamic perspective and classifies these characteristics as the “push factors” necessitating the search for an alternative Islamic accounting.

In the next section (3.1), an outline of the critique of conventional accounting literature is given. Next, an examination of the critique with respect to the objectives, assumptions (section 3.2), accounting concepts and characteristics (section 3.3) and the economic, social and environmental consequences of conventional accounting (section 3.4) is undertaken. In section 3.5, the management accounting and the critical accounting literatures relating to budgeting and control systems will be used in considering the behavioural effects of management accounting and financial reporting on employees and management.  Section 3.6 adds an Islamic perspective to the traditional critique of conventional accounting

This chapter is concluded (section 3.7) with a summary of the arguments and a  model of the  “push factors” depicting the need for Islamic accounting. The next two chapters (chapters 4 and 5) will discuss the “pull factors” which express the theoretical and practical need for Islamic accounting.

The same themes using objectives, characteristics, consequences and behavioural effects will be used as basis to explore the issues and remedies which have been suggested in the Islamic accounting literature, in Chapter 6. This procedure will help in identifying the objectives and nature of Islamic accounting, which will satisfy the need of Muslim users and organisations 

3.1         An Outline of various Accounting Critiques.


The literature, which criticises conventional accounting, draws on various perspectives:

      i)        Social and environmental accounting (Maunders & Burrit, 1991; Gray et al., 1996; Gray & Bebbington, 1998),

    ii)        Marxist/ critical accounting (Tinker et al., 1982; Tinker, 1985; Cooper & Hopper, 1990; Lehman, 1992a; Galhlhofer & Haslam, 1995),

   iii)         Feminist critiques (Cooper, 1992; Reiter, 1997) and

  iv)        Public interest arguments (Arrington, 1990, Briloff, 1990).  

Although all of the different critique of conventional accounting point out its deficiencies from their own perspectives, many of the issues raised are common to which Islamic academics would have concerns. Some of the concerns about the application of conventional accounting to Islamic societies are similar to that raised by researchers in other areas.  In spite of this, not all the concerns of Islamic societies are addressed by these critiques as they all represent variants of the Western worldview  (in both its capitalist and Marxist forms). Therefore, the critics agree with many of the capitalist system’s core principles. Further, they specifically exclude a religious content due to the ontological and epistemological differences between Islam and the history of secularisation of knowledge in Western society.  The researcher attempts to highlight these differences especially when the values or proposed solutions are not compatible with an Islamic framework.

However in all fairness, it must be said, that these different views do try to avoid or lessen the worst excesses of modern capitalism in which conventional accounting is embedded. Despite their common worldview at the fundamental level, the mainstream of Western thought- itself dominated and ‘captured’ by capitalist, individualist and utilitarian ideologies- do not allow them to be very successful. This can be seen from the fact their recommendations are not adopted in mainstream accounting practice and do not take pride of place in mainstream accounting research (e.g. Tinker et al., 1991; Lehman, 1992a; Lee, 1997).


There is no dearth of criticism of conventional accounting. The criticism began soon after accounting started to grow in prominence and stature in the early part of this century: this was especially the case in the USA and the UK where modern corporate accounting can be said to originate. Early accounting critiques were based mainly on the problem of obtaining a ‘true income’ figure. Very few academics with the exception of writers such as MacNeal (1970 [1939]) criticised the accounting principles and valuation methods and tried to infuse a moral consciousness and public spirit into the profession. Writers such as Sprague  (1971, [1922]) and Scott  (1931) focused on the Philosophy of accounts and the cultural significance of accounts respectively.

Accounting has faced ever-increasing criticism since it became an important discipline and a profession in the early part of this century. In its attempt to become a respectable discipline akin to that of Law and Medicine, the AICPA (and their academic counterparts- the American Accounting Association), attempted to develop a theory of accounting (AAA, 1936;1966; 1977).

However, the various schools (multiparadigm) (AAA, 1977), and various ‘images’ of accounting (Davies et al., 1982) attracted criticisms especially on the valuation and income determination aspects of accounting, sometimes dubbed the true income school (AAA, 1977). Until the late 1970’s, when the decision-usefulness paradigm took over conventional accounting (ASSC, 1975; FASB 1978), the true income problem, constituted the subject of most accounting debate.

The prominence of Accounting as a  ‘social’ institution (Roslender, 1992), owes much to the development of corporations as major business organisations in the early part of this century. In fact, one can say, accounting achieved prominence as a profession in tandem with the growth and diffusion of the corporate enterprise in the USA, UK and its spread in the form of the multinational corporation. It was not too long ago that corporations were relatively small; however, they have become very large and hold a significant amount of power and wealth to such an extent that some have become wealthier than certain governments and countries. The rise of “Managerial Capitalism” (Chandler, 1977), or “Investor capitalism” (Bryer, 1993a) led to the concentration of power and wealth in the hands of a few people. This resulted in a greater emphasis on market efficiency and shareholder value in society with the associated environmental destruction, nihilistic consumerism, wealth appropriation and social conflicts. This phenomenon also gave prominence to the accounting profession in the guise of multinational audit firms especially the Big Six (now the Big four). The critique of these excesses of the corporation started in the 1970’s when their social costs became staggering and could not be ignored. This led to a debate regarding the moral and social responsibility of corporations (e.g. Donaldson, 1982; Mintzberg, 1983) and extended to corporate accounting and governance, e.g. Gray et al., (1988,1991) and Benston (1982). The Corporate Report (ASSC, 1975) was an attempt to incorporate the social responsibility of corporations in accounting although it adopted a ‘decision-usefulness’ framework.

The true income school and corporate social responsibility debate gave way to development of a theoretical framework for accounting in the guise of a search for a conceptual framework; as accountants sought a theoretical justification for  ‘professional’ status akin to medicine and law.  After a series of attempts to develop statements on ‘objectives’, conventions and postulates of accounting, for example, with the Trueblood report, (AICPA ,1973), the FASB completed its conceptual framework project resulting in the Statements of Financial Accounting Concepts (FASB, 1985). However, this attempt according to Solomons (1986) missed the chance to revolutionise accounting; nevertheless it established for accounting a particular ‘decision-usefulness’ framework which emphasised the focus on investors and creditors in the capital market. In the researcher’s opinion, it was a typical Friedmanian approach to conceptualizing accounting as an “objective”, “neutral” tool of profit maximizing business based on the capitalist society and world-view[1].

From the late 1960’s, a capital market orientation in accounting research and theory development arose out of criticism of armchair theorising (AAA, 1977). Instead of trying to develop the notion of ‘true income’ or of thinking about what accounting ought to be, the positive accounting theorists argued that accounting should study ‘what is’ and try to investigate whether financial statements could predict future events (Watts & Zimmerman ,1979 and 1986). Capital market studies such as Ball & Brown (1968), Beaver (1981) and Watts & Zimmerman (1979 and 1986), together with agency theory (Jensen & Meckling, 1976) which assumed that people are self-seeking zealots, led accounting away from moral and social issues to concentrate on increasing the wealth of finance providers and market players.  This became the mainstream of accounting research and the primary focus of practice which saw finance and financial markets develop as important disciplines in their own right, separate from that of accounting.

 This capitalistic orientation has attracted a great deal of Marxist critique of accounting which argues that accounting is merely a tool which increases the gap between the rich and the poor and leads to class conflicts (Tinker, 1985; Lehman, 1992a ).  Marxists also launched their attacks through the medium of critical theory (e.g. Laughlin, 1987; Cooper & Hopper, 1990). This theoretical approach was an offspring of the Frankfurt School expounded by Max Horkheimer (1895-1973) according to which “only a radical change in theory and practice can cure the ills of modern society, especially unbridled technology”; in turn it attacked Marxism itself as a “one-sided doctrine subject to criticism” (Honderich, 1995,  p290). Further critical theory contends that since theory and its concepts are products of social processes and therefore, instead of accepting and endorsing them as they are, as positivism and empiricism does, it should  trace their origins (cf. historical materialism of Marx)

The Critical school is also used by Feminist and Deep Green groups who have criticised accounting (Cooper, 1992; Reiter, 1997).  Radical Feminists hold that accounting promotes male chauvinism and that a feminine perspective would give accounting much needed balance as well as reducing male superiority (Cooper, 1992). The Deep Green perspective on the other hand views modern society as unsustainable; their extreme proponents insist on human depopulation to let the animals and plants reclaim their portion of  world. They view corporations and accounting as agents for the destruction and pollution of the environment and the biosphere (Maunders & Burritt, 1991).

A Public-Interest perspective is taken by writers like Briloff (1990), who argue that Accountants have not honoured their duties of public service by shamelessly paying littler attention to their ethical codes and by being involved in a number of high profile scandals. The Social and Environmental Accounting writers criticise modern accounting from various perspectives mentioned above. However, its main advocates (e.g. Gray et al., 1996; Matthews, 1994) favour an evolutionary approach of extending conventional accounting to recognise, report and disclose social and environmental information leading to their discharge of accountability to society.

Finally, a critical cultural perspective has developed which argues that accounting has cultural relevance and should be tuned to the cultural idiosyncrasies of space and time especially in the different cultural and economic environments of developing countries (Perera, 1989).  Writings in this area range from culturally developed accounting (Wallace, 1990a) to those which question the relevance of conventional accounting to other cultures (Baydoun & Willet, 1995).

From a management accounting perspective, critique has focused on two main issues i.e. the behavioural problems (Argyris, 1953 and 1990) and the of management control of the individual and society (Miller & O’Leary, 1987).

All the above perspectives have lessons, which can be learned by Islamic accounting.  However to focus the research, this review will concentrate mainly on, the social and the critical accounting literature, including the Marxist critique of accounting.  The critical school share similar concerns to the researcher, as the research is an attempt to look into the ills of society and to emancipate and change it for the better. The social accounting school provides some lessons on how the fundamental philosophies underlying conventional accounting can be recognised and serves as an example of an evolutionary method to change the status quo (a method favoured by Islam).  The accounting ‘principles’ and ‘true income’ debate raises some issues of concern to the content of Islamic accounting. The public interest accounting literature being mainly concerned with the failure of the accounting profession is not reviewed, as this research does not concern itself with this issue in any detail. The feminist critique is not discussed except to take some lessons for Islamic accounting from ‘enabling accounting’ (Reiter, 1997).

The discussion starts in the next section with the objectives and assumptions of conventional accounting.

3.2        The Objectives and Assumptions of Conventional Accounting: Some Problems with the Decision Usefulness Paradigm.


From the period 1977-1985, the Financial Accounting Standards Board of the United States of America spent millions of dollars and thousands of man hours trying to develop some theoretical basis for accounting in the form of a conceptual framework. This was supposed to be a “ coherent system of inter-related objectives and fundamentals ...that prescribes the nature, functions, and limits of financial accounting and reporting (FASB, 1981). Their project resulted in six  “Statements of Financial Accounting Concepts” (SFAC).   SFAC No. 1 (FASB, 1978) states that:

“Financial Reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions ...(through the provision of information that will help them to assess)..... the amount, timing and uncertainty of net cash inflows to the related enterprise”.                             (FASB, 1978, p16 &18)


The objective was not new (except in the importance given to cash flow) as this “decision usefulness” objective, which has become the main paradigm of accounting, had been emphasized before the FASB’s conceptual framework project began. (See for example, (AAA, 1966 & 1977; ASSC 1975).  In fact the American Accounting Association (AAA, 1977) attributes Chamber’s (1955) article on the “Blueprint for a theory of accounting” as having served as the starting point for a “decision-usefulness” theory of accounting. All the pronouncements of AAA and the conceptual framework projects led to the dominance of this paradigm. The main stream capital market research is an outcome of a particular variant of this paradigm i.e. on the aggregate behaviour of decision makers (i.e. Market players) as depicted by changes in security prices (e.g. Ball & Brown, 1968; Beaver et al.,1968).

Lehman (1992a) notes the change of emphasis from stewardship to decision usefulness or ‘decision informativeness’ from the AICPA’s Study Group report on Objectives.  He contends that the traditional stewardship role always necessitated considering management’s effectiveness and efficiency, despite the tendency to justify this slant towards decision usefulness as a “higher form of stewardship” (p20). The difference is not superfluous but calculated to emphasise  “the informational role of accounting being regarded as crucial to the efficient allocation of society’s resources by individuals, enterprises and government” (p21). Combined with agency theory and positive accounting theory, this became the dominant paradigm of accounting in the 1990’s; adoption by the FASB’s conceptual framework project probably added to its central role. In fact, decision-usefulness has become the dominant paradigm of all subsequent conceptual frameworks since the FASB’s first pronouncements on the issue (for example, IASC, 1989; ASB, 1992).

On the face of it, the term “decision-usefulness” seems rational, innocuous, and perfectly acceptable from an Islamic perspective. However, when one examines the concept in depth, a number of problems arise. These include (a) the economic-environmental context in which it was developed and therefore the environment under which it may be appropriate; (b) the economic assumptions underlying decision-usefulness, the under-specification and achievability of social welfare; (c) the decision-users who are targeted; and (d) the societal assumptions underlying decision-usefulness.

Each of these will be examined  in turn.

3.2.1        The Economic Environment of Decision Usefulness


The decision-usefulness paradigm was born in the United States and spread to the UK as noted above. In these countries, the underlying economic environment is very different  from that which operates in Muslim countries. The United States and the  UK are advanced  exchange-based  economies with developed capital markets. It is in this economic context that the decision-usefulness paradigm was arrived at. In discussing the environmental context of the objectives of financial reporting,  the Statement of Financial Accounting Concept 1 (FASB, 1978)  notes that:

“The US is a highly developed exchange economy where large amounts of capital is required for maintaining the complex production processes which result in the production and exchange of goods and services. These processes require economic resources, which is allocated by the market mechanism. The effectiveness of individuals  (through buying, selling or holding shares & bonds) and enterprises, markets and government in allocating scarce resources among competing uses is enhanced (.i.e. allocated to enterprises that use them efficiently) if those who make economic decisions have information regarding the standing and performance of business”.                                 (FASB, 1978, p 5-8).


In this context, competitive markets are seen as a significant factor in resource allocation in the economy (in addition to government whose intervention is frowned upon). Thus, “decision usefulness relies heavily upon the language of self-seeking rationality, markets and economic efficiency to describe accounting problems and interpret accounting events” (Williams, 1987).

While, these objectives may be valid in the developed economies of the West, it may not be suitable in economies such as those of Muslim countries where the economic realities are different. For example, many Muslim countries do not have established or developed stock exchanges. Many industries are government owned (although privatisation has started in earnest in Malaysia, Pakistan, Turkey and Egypt).  A large section of the economy is non-monetised and most people are involved in agriculture which do not produce huge financial surpluses.  In such situations, a decision-usefulness form of  accounting oriented towards market participants does not make a great deal of social or economic sense except as a tool for overseas capitalists interested in appropriating the wealth of these countries (see Tinker, 1985). In Muslim countries where stock exchanges are fairly developed (such as Malaysia), the ‘decision-usefulness’ orientation serves the same role as in the West with the same undesirable consequences of financial hyperreality (McGoun, 1997) ; these consequences are not desirable from an Islamic perspective. Therefore, the basis and thrust of accounting needs to be changed.

3.2.2        The “Ceteris Paribus” of Decision Usefulness.


The essential message of decision usefulness is that accounting provides information which leads to the efficient allocation of resources  (AAA, 1977). This is apparently through the process of providing information, which results in information efficiency in the market, which in turn  leads to allocation efficiency. Although efficiency (the most output per unit of input) may well be a useful goal to aim for, it cannot be the ultimate aim of human society. It is an intervening variable which perhaps leads to a better life or more utility (perhaps at least in the material sense).  This deficiency has led a committee of the American Accounting Association (AAA, 1975) to add “social welfare” as the ultimate aim of allocation efficiency.

Commenting on the inadequacy of a report by the Study Group on Objectives of Financial Statements (AICPA, 1973), this committee (AAA, 1975) observed that the Study Group’s assertion that financial statements should provide information useful for making decisions , “was not broad enough to lead a complete set of criteria against which accounting alternatives should be judged” (p 42). It suggested that decision usefulness was a necessary but not a sufficient condition. It argued that “Financial Statement alternatives should be judged by their impact on social welfare”. Hence it is proposed that the objectives of financial statements should be,  “to provide information which is potentially useful for making economic decisions and which if provided, will enhance the maximisation of social welfare” (AAA, 1975, p 42).

The above discussion can be summarised in the following figure (3-1).  If decision-usefulness is adopted as the objective of accounting, then it is posited that social welfare through the following processes:

Figure 31: Accounting route to social welfare















Leaving aside the definition of “social welfare” for the moment, (discussed in section 3.2.3.), the question arises, does conventional  accounting really lead to social welfare (even in the material sense) through the chain depicted in figure 3-1 above? In other words, does accounting information lead to information efficiency, does this in turn lead to the right decisions, do these decisions lead to efficient allocation of resources, and does the efficient allocation of resources lead to social welfare? The probability that all these assumptions hold might be dubious.

Lehman (1992a) argues that the assumption that if   “accounting information is provided to investors, the marketplace will function efficiently, ensuring maximum social welfare” (p 22) has some limitations. He contends that there are fundamental problems with the use of neo-classical economic model (on which conventional accounting research relies heavily), that makes this chain dubious. These include:

(i)                 The breakdown of the assumption about perfect competition leads to “inconsistencies and problematic implications for the role of accounting. Some researchers (e.g. Benston, 1982) contend that there is no need to regulate accounting as markets are efficient by themselves. Other researchers   (e.g. Ronen, 1979 as quoted in Lehman, 1992) argue the importance of accounting in regulating behaviour because of information asymmetry between management and investors. The question therefore arises as to whether accounting leads to efficient allocation of resources or whether markets are efficient in spite of accounting regulation.

(ii)               The generalisation of individual preferences to collective preferences by aggregating individual utilities of shareholders who have heterogeneous interests, to obtain society’s collective preferences is questionable. This has been questioned by Arrow (1971) (as quoted by Lehman, 1992), who concludes that it would take a dictator to make social choices affecting more than one individual. This has resulted in the recognition by Beaver & Demski (1974) that choice among reporting alternatives has social consequences that affect non-users and users of accounting information in terms of the distribution of wealth.  Hence, ethical judgements must be made as to whose well being should be enhanced and whose should be diminished.

(iii)             The separation of social and economic spheres of analysis is another assumption, which has been questioned. For example, Lehman (1992) contends these two spheres cannot be separated. He questions the maxim that it is inappropriate for accounting to consider the distribution of resources of income and wealth while at the same time insisting that it leads to social welfare by maximising wealth. It is not logically possible to develop production conditions independent of distribution conditions.  The neo-classical economic model (marginal productivity theory), by seeking to ignore income and wealth distribution becomes a tautology as when determining the optimal vector of factor input prices, one needs to assume a given distribution of income, which in turn is what the model tries to explain.

Gray et al., (1996) put this problem as the case of ‘too many ifs”. Thus:

If all agents were equal, and if markets were information efficient and if, ,this led to allocative efficiency and if, this led in turn to economic growth and if , this ensured maximum social welfare and if, maximum social welfare is the aim of the society then accounting is morally, economically and socially justifiable”.                                       

                                                                             (Gray et al., 1996, p 17).

3.2.3        The Question of Social Welfare:



The introduction of the term “social welfare” leads to more questions than answers. Social welfare obviously means the welfare and goodness of the community.  However, “welfare” and “goodness” again depend on the value system of the community. The differences between the values of Western civilization and those of Islam have been discussed in chapter 2. Although there are similarities in moral values (Kant’s – categorical imperatives), the modernist and post-modernist trends of Western civilization are not identical with Islam and have many differences. Hence, social welfare in Islam might mean equitable distribution of wealth in an Islamic economy, equal distribution in the communist system, and concentration of wealth to the ones who make use of opportunity in the capitalist system.  Another instance would be perhaps, in the West, welfare may be measured more in material terms, while the Muslim might trade-off some return in favor of religion (El-Ashker, 1987) or other ethical objectives. Even in the West, ethical investors may trade-off some monetary  return in favour of ethical /religious values (EIRIS, 1993). Hence, social welfare may be culturally defined.

Even if social welfare is defined in pure economic terms, the provision of decision useful accounting information may not lead to its achievement because of the operation of the so called  “Lipsey-Lancaster Theorem” (Laughlin & Puxty, 1981, p63). Thus:

“Social Welfare cannot be appealed to by suggesting that, if users’ needs are satisfied, greater welfare will result, because of the operation of the Lipsey-Lancaster Theorem"                                                                 (Laughlin & Puxty, 1981, p46).


This “Lipsey-Lancaster” theorem argues that, in a non pareto-optimal world, removal of one constraint to a pareto-optimal situation  (e.g. lack of accounting information disclosure) “ may affect welfare or efficiency either by raising it, by lowering it or by leaving it unchanged.” (Lipsey & Lancaster, 1957, as quoted by Laughlin & Puxty, 1981).    Thus, Laughlin & Puxty (1981) argue that  the direction of change in social welfare cannot be forecast simply from the direction of change (of the constraint) itself and therefore further investigation is necessary.

Thus increasing decision useful information may lead to an increase, decrease or no change in social welfare, not necessarily an increase all the time.  A further consideration is that decision usefulness does not elaborate on what uses the information is put to by users. Such disclosure can actually harm the organisation and society (at least locally). For example, Laughlin & Puxty (1981) quote the example of  (i) a self-interested union that makes use of information to force a firm out of business by insisting on high pay and (ii) the social consequences arising for a particular geographical area which was dependent on the business. In this case, decision-usefulness was not useful to the local community.

In certain cases, firms may wish to restrict information disclosure i.e. in the case where a firm exploits a gap in the market and exploits arbitrage opportunities and in the case where they have come up with better techniques of production due to their research and development activities. In this case, the disclosure of segmental information  “useful  to users” would lead to the  entry of competitors resulting in loss on the part of the firm disclosing the segmental information. Laughlin & Puxty (1981) argue that this ability to keep trade secrets (non-disclosure of information) is important if there is to be continuous incentive to develop new products and services and the continued operation of businesses.

Another pertinent question to ask  is who are the targeted users for whom the accounting information is  useful and is an  increase in their welfare synonymous with all or even major sections of society?

Cooper & Sherer  (1984) point out that

“Focussing on informational efficiency in the capital market may contribute towards an efficient allocation of resources from the perspective of the shareholder class, but the resulting equilibrium may not be efficient for other members of society”. (Cooper & Sherer, 1984, p211).


Further, Lehman (1992a) argues that the heterogeneous interests of the shareholders are not representative of the interests of all social members but conventional accounting assumes that it is. Thus, “maximisation of shareholder investment wealth does not guarantee an adequate criterion for societal wealth (financial or non-financial)” (p22). This point is particularly pertinent as, even in the case of a developed country such as the UK, less than 30% of the public are direct investors in the share-market (Mullin, 1998). In developing countries, especially Muslim countries, this percentage is even less. Hence this point is particularly valid for Muslim countries who do not have developed stock markets and who may not wish to construct “wealth-siphoning” structures in their countries.

3.2.4        The Societal Assumptions of Decision-usefulness



Accounting is normally seen as a complex set of socially neutral techniques which are value free and objective. However, the reality is that accounting is a social construction (Hines, 1988). Gray et al. (1996) warns us that reductionism leads to artificial systems boundaries around those parts we might choose to ignore (e.g. ethics, values, exploitation, and the natural environment). Using the General Systems Theory framework, they assert that accounting, ecology, society, organisations etc., are all systems, which interact.  These systems can be conceptualised and their interaction conceived of differently. They assert that role of accounting can be better understood if the world in which it is  assumed to operate is made explicit.

They posit that accounting (in the Western developed world) operates under an assumed “pristine liberal economic democracy” (p14). This assumed society, under which accounting operates, is a world of equal individuals (or groups) who are free to act (liberal) and to express choice through actions in markets (economic) and actions in the political (democratic) arena.  The role of the (small) government is to maintain their freedom and be neutral with respect to serving particular interest groups in society. Hence an individual’s freedom is paramount and all are equally able and free to exercise their political and economic choices through the ballot box and in the market. The self-interested pursuit of economic efficiency ensures that profit and economic growth is maximised making society better off (financially). An ethic of utilitarianism is assumed which evaluates an action in terms of its consequences or utility (measured by profits, cashflows and GNP). A profitable action is thus a good action (Gray et al.,1996).

Gray et al. (1996) posits that decision usefulness is a normative justification for accountants and the accounting profession acting under such a conception of society. Such a society is beset with contradictions. In real life, people are not equally endowed financially, intellectually and socially. It is powerful groups acting in their own interests, which make decisions. Decision usefulness is viewed by Gray et al. (1996) has having many internal contradictions e.g. the financial measure of societal wealth and its distribution.  This sometimes leads to anomalies where environmental degradation is counted as an increase in GDP. The increasing gap between rich and poor is not questioned in such a society.  It has no room for environmental or ethical values other than self-interested utilitarianism.

Thus accounting which emphasises the desirability of actions by its financial consequences (i.e. profits as a ‘good’) supports a certain moral position and encourages a certain behaviour, which is represented as “ moral” by accounting numbers.

In questioning why a talented group such as accountants should exert so much effort to ensure the richest and most powerful group in society become still richer and more powerful, Gray et al. (1996) conclude that :

“The links between individual self-interest (‘greed’ as manifested in conventional economic, finance and accounting literature) and social welfare cannot be demonstrated. It is vaguely possible that such a link exists- and in very specific circumstances might actually do so – but it cannot be show to hold for everyday western economics”. (Gray et al., 1996, p 20)

and therefore

“Decision usefulness has little positive value  ...(as)..the research literature (indicates)....that current financial statements do not represent the information that investors most desire...(therefore).. ...there is no justification for the normative position of decision usefulness....if it is to be useful, why should it be only useful to investors? ....we can only justify such an assumption in a pristine liberal economic world”. ( ibid., p 74-75).


Williams (1987) asserts that, it is not proper to adopt decision-usefulness as a principle for organising accounting practice because accountants cannot avoid making certain judgements characterised by “fairness”. Hence, a more explicit moral language of accountability and fairness must be added to the lexicon of accounting. He posits two conceptual problems with decision usefulness: the asymmetry of decision usefulness and ignoring the simultaneity of efficiency and distributive effects.

The asymmetry of decision-usefulness arises from the non-substitutability of  the dual role played by it; as a criterion for making judgements about the value of accounting data and as an explanation of the phenomenon the accounting data represent. The consequence of this asymmetry is that contradictions are created; for example , in the case of the FASB project between SFAC 1, objective and the constraints imposed in SFAC2 , Qualitative characteristics. According to Williams, there is no necessary property to explain these constraints on the production of accounting data. Accountability on the other hand, is a more appropriate principle as it implies constraints and possesses fairness as an inherent property.

The second problem asserted by Williams is that the rationale of decision usefulness in the efficient allocation of resources is problematic because it ignores issues about the distribution of those resources. He argues that  “Efficiency or allocation is but one aspect of a two-aspect process” (p176). Although accountants seem to ignore the problem, they implicitly make normative value judgements on distribution e.g. by using price theory (Tinker et al., 1982). He also suggests that “reliance on the efficiency criteria and market justice only serves to make accounting’s fairness judgement implicit not absent” (p185).  Since these interpretations of accounting’s reliance on such devices lead to the conclusion that fairness is not assured, more explicit concern with fairness is required. This implies a moral dimension to accounting, which in turn has consequences for the design of accounting systems and semantic interpretations of accounting numbers. Labels such as profit, dividends, contribution etc. take on different meanings if defined from a perspective of fairness rather than decision-usefulness.

3.2.5         The Dysfunctional Effects of Decision Usefulness:



Laughlin & Puxty (1981) also point out that decision usefulness could lead to possible dysfunctional policy decisions of organisations as a consequence of accounting standards which are based on users’ needs. In this case, businessmen may be obliged to act in a way, harmful to their firms. For example, property development companies would have had to split up their operations into property development and property investing and pay substantially more tax, if they had, had to adopt the provisions of SSAP 12. Although these companies were exempted in the UK, companies in the US were not spared the negative economic and organisational consequences of the introduction of SAS 8 on Foreign exchange transactions.

Laughlin & Puxty (1981) blame the myopia of “decision usefulness” on the misinformed dichotomy between external and internal accounting which ignores “ the control nature of all accounting information and the need to take account of the reporting entity’s needs in financial reports” (p74). They suggest an alternative framework of organisational control which they claim can lead to social welfare (under specified conditions).

They posit that internal and external accounting should be designed in such a way so as  to meet the needs of the organisation i.e. the content should be such that it increases organisational effectiveness in terms of goal achievement. Under this framework , the  major function of accounting would be  to act as a regulator to reduce the effect of  environmental disturbances on the organisation because the disturbances make it difficult for the organisation to achieve its objectives by changes in the controllable elements (internal accounting). Another control model proposed is to use both accounting and systems design to directly attempt to affect the environmental state so that the objectives might be furthered by making the environmental constraints less damaging.

How this leads to social welfare is explained by (Laughlin & Puxty, 1981) using the inducement-contribution theory. This theory states that an organisation continues to exists as long as its inducements to participants is greater than the contributions it needs from them. As long as this happens, it is contributing towards social welfare (at least that of the participants).  The authors attempt to extend this argument to the whole of society by presuming that “a viable society in course of development, depends on the continued viability of the enterprises which constitute it. Since viability implies control, societal welfare depends on adapting the enterprises’ ability to control their relationship with society” (p77).

3.2.6        Conclusions on the Decision-Usefulness Objectives of Conventional Accounting.


We can therefore conclude that the decision usefulness paradigm of conventional accounting is flawed because:

1.      The theory that provision of conventional accounting information leads to efficient allocation of resources is tenuous because there are two many ‘ifs’ in the sequence of assumptions.

2.      Even if information results in shareholder and creditor wealth maximization, this does not mean better welfare even for themselves, much less for the wider community and society because material wealth may not necessarily mean better quality of life and welfare.

3.      Even in economic terms, decision-user based accounting may be economically harmful to the organisation providing the information which may even result in social dislocation.

4.      The economic environment hypothesised for decision useful accounting is a developed exchange economy with a capital market focus. This implies that conventional accounting is only relevant to countries with similar economic environments.

5.      The societal assumption of “pristine liberal economic democracy” (PLED) under which decision-usefulness makes sense (Gray et al.,  1996) is not true even for some capitalist oriented societies. According to Gray et al (1996), the actuality in these countries is neo-liberal democracy in which there are groups of unequal power centres. The power gap between groups have implications on the supposed sovereignty and ability of the consumer (i.e. the user of accounting information) to make the appropriate decision to achieve an efficient allocation of resources which might lead to social welfare.

3.3        The characteristics of conventional accounting; the problem with ‘accounting principles’


Financial reports under conventional accounting are prepared according to certain concepts, which are variously referred to as postulates, principles conventions and concepts. Belkaoui (1992, p 229) defines accounting principles as general decision rules derived from the objectives and theoretical concepts of accounting, that govern the development of accounting techniques. He includes the historical cost, revenue, matching, objectivity and full-disclosure, conservatism, materiality and the uniformity and comparability concepts as principles.  Belkaoui classifies  the monetary measurement and entity concepts as postulates.

Accounting information produced in accordance to these principles is often put forward as objective, neutral, verifiable and reliable. However, even the economic consequences produced by the accounts prepared under these principles were shown to be wanting as early as 1931 by MacNeal. These principles and concepts have been criticised both from the capitalist (e.g. Edwards & Bell, 1961; Chambers, 1966; Stirling, 1970) and Islamic points of view (Abdelgader, 1994) although the latter was at a superficial level (see Adnan & Gaffikin, 1997).

MacNeal (1970, [1939]), argued that accounting was ‘untruthful’ as it consisted of ‘unsound accounting principles’ which he claimed was based on ‘expediency rather than the truth’ (p vii). Financial statements prepared under this principles  misled  investors because it failed to take into account current values (values in exchange) of assets and instead used historical  (original) costs and justifying them in terms of a  ‘going concern’ theory. According to him, the unwillingness of accountants to recognise unrealised profits leads the investor to make wrong economic decisions on lending, buying and selling securities. He further advocated that all profit and losses whether realised or otherwise should be disclosed (a position later upheld by Edwards & Bell (1961) and the Trueblood Committee (AICPA, 1973).

MacNeal (1970) argues that the historic cost principle was relevant when businesses were owner managed,   where   the function of accounting was ‘counting’ the costs of a project or venture. As the project or venture was of short duration, historical cost sufficed to track the cost and profits accumulated to the end of the venture as no external parties relied on this information. The growth of bank credit perpetuated this principle because the bank required only a conservative estimate of the value of the net assets of the borrower to guarantee the return of loan. An under-valuation due to historic costs would be that much better and the conservatism concept would ensure that current assets were written down in value if its cost was higher than the prevailing market price. Thus, the accounting principles were acceptable for this period, as the accountant could satisfy both the interest of the banker by being conservative, and the businessman/owner would not be mislead as the latter knew the real value of his assets independent of the accountant. The accountant, left with the question of valuing non-marketable fixed assets invented his theory of the going concern so that he could justify its valuation in terms of its original cost less depreciation for maintenance and renewal.

 Mergers and Acquisitions led to bigger and bigger corporations controlled by non-owner management. This led to a situation where many small shareholders were entirely dependent on financial statements for information to make their investment decisions. The accounting principles led to the preparation of financial statements which ‘frequently allow managers and directors of a company to enrich themselves at the expense of the stockholders in a most comfortable and legal manner’.

The prudence and realisation concept is also not appropriate although a fixed asset may be carried for a long term, investors change during this period. Hence,  if investors are not given the market values,  this favours,  the insider who can buy up the shares, knowing the real values of the assets and rake in the profit at the time of realisation, thus in effect defrauding the previous shareholder who would have sold his shares for a value less than its worth

[SH1] .Although the accountancy profession has increased its standards of reporting, overall it has followed the latter course of redefining accounting objectives. The historical cost, realisation, going concern and prudence concepts continue to be the bedrock accounting principles, fifty years after MacNeal wrote his book. Financial scandals continue to rock the world (Briloff, 1990)  and the profession refuses to budge from its basic position with respect to recognition and measurement conventions despite the increasing ‘audit expectation gap’.

The Trueblood Report  (AICPA, 1973) tried to change the status quo by suggesting the use of current values. It rejected  the traditional emphasis on prudence and suggest the fullest disclosure of the uncertainties involved’ (Peasnell, 1974,  p38). Other  proposals called for a middle position between full current value accounting and historical accounting include those by Lowe (1970) for “multiple-column reporting” alternate values and the proposal to report both realised and realisable profits by Edwards & Bell (1961). The Trueblood Committee Report was rejected because it was too revolutionary.

The monetary measurement concept also produces problems as it implies only activity, which is measurable in terms of money, are recorded and reported. This may leave out activities, which are termed externalities because they are too difficult to measure but which have grave consequences to society. Further, the most important asset, the human asset is not recorded on a balance sheet.

Besides the economic consequences on investors noted above, Accounting rules have also social consequences, Tinker (1985) observers that:

“Accounting rules though galvanizing and adjudicating social relationships are  not supported by ‘contemplation, reflection, criticism  and debate about the nature of society and its potentialities ‘ but by ‘ expedient reasoning, ad-hoc explanations and piecemeal rationalizations”.                                                       (Tinker, 1985, p XX)


Tinker argues that the power of accounting has been underestimated, as has the accountant’s  responsibility for the social evils “through the partisan set of accounting rules that governs the reporting and disclosure of information about corporations” (p xix). Through the making of accounting rules (standards, principles and concepts) accountants  supply one of the most fundamental ingredients of economic and social choices; the valuation of alternatives’ (p xx). Accounting rules attach values to economic choices made by individuals, groups and organisations thus affecting decision making and thereby distributing benefits and damage between different members of the community.

The accounting principles also lead to different profit figures for similar businesses. This is due to the differences in the methods of calculating depreciation and the quantum and timing of income and expense recognition. For example, in the  Pergamon- Leasco Affair where Pergamon Publishing Company’s profits for the year ended 1968 was certified to be  £1.503 million by its auditors. it was recalculated to a £60,000 loss by the subsequent audit of Price Waterhouse (Lowe & Tinker, 1977).  According to them:

“About half of this difference was attributable to the method of valuing stocks of books and back issues whilst the remainder of profits on transfers between affiliated companies”. (Lowe & Tinker, 1977, p271)


These income determination problems become more acute in an Islamic environment because, Islam does not allow pre-arranged fixed return investments and therefore the income calculation is the only way to ascertain returns on an Islamic investment. Hence, its importance.

3.4         The macro Consequences of Conventional Accounting


Professional accountants argue that the political and social consequences of accounting practice  should not be  considered because accounting strives to be objective and neutral in social conflict. Accounting records, measures and reports the results of ‘economic activities’ of enterprises which are delineated from social activities (AAA, 1966). This separation of social and economic spheres of activity has already been criticised from an economic viewpoint, in section 3.2.2 above.

However, the corporation is increasingly seen as not only as a nexus of commercial contracts but as a moral agent with social responsibilities and functions (Donaldson, 1982) to a variety of stakeholders (Sutton & Arnold, 1999). Even if managers insist that corporate functions are primarily economic, the consequences of their economic activities impinge on the social in terms of their effects on the local community, consumers, employees and the environment. The activities of Multinationals seem to attenuate these effects to a global scale. Accounting plays a dominant role in reifying these organisations.

According to Tinker (1985), the image of the accountant as the ‘innocuous bookkeeper’, whose trustworthiness comes from his lack of  “creativity and imagination” , is in fact a mask which shields accountants and accounting from their impact in the social and political arena (p xv).  Hence, the power of accounting has been underestimated and the accountants’ responsibility for social evils has been and continues to be systematically understated.

 Tinker contends that accountants are not harmless bookkeepers but arbiters in social conflict, architects of unequal exchanges, instruments of alienation and accomplices in the expropriation of the life experience of others “through the partisan set of accounting rules that governs the reporting and disclosure of information about corporations” (p xix) ,

In this context, accounting has been accused of playing changing roles in social conflicts (Lehman, 1992a) and creating social and environmental disasters (Tinker, 1985), its principles unsuitable in the context of providing information on ecological issues (Maunders & Burrit ,1991).  It has been accused of creating employment problems especially through promoting privatization by demonstrating the efficiency of downsized companies using accounting numbers (Cooper & Hopper, 1988; Arnold & Cooper, 1999). Accounting has also been accused of directly causing social conflict by increasing the gap between rich and poor through the wealth distribution effects inherent in the provision of conventional accounting numbers (Tinker, 1985).  Further accounting has also been accused of dehumanizing effects arising from the construction of the “governable person” who is a more manageable and efficient entity (Miller & O’Leary, 1987). It has also been accused of promoting gender discrimination (Cooper, 1992; Reiter, 1997).  These injurious practices of accounting have led Briloff (1990) to charge that accountants have desecrated  their covenant with society by not practicing what they preach in the public interest (Briloff ,1990).


It is difficult to compartmentalise these negative consequences neatly into social, economic or environmental problems, as they are often intertwined. Tinker (1985) examines accounting’s role in perpetuating social and environmental problems by studying several cases of multinational exploitation, stock price collapses, the dumping of toxic waste, price gouging by public utilities and the frailties of the world banking system. These cases, according to Tinker, illustrate accounting’s “camouflage of objective and technical expertise and expose the discipline’s social, human and moral malaise” (ibid., p xxi). For example, the love canal incident (discussed below) created both social (health and housing) and economic (loss of houses which were mortgaged to banks) problems for the local community, the company involved and the government who had to subsidise the community. It also was a disaster for the environment as it polluted land and made it a health hazard.

The negative social consequences of accounting are emphasised by Marxist writers who criticise accounting in the historical materialist framework of Marx. They emphasise class-conflicts. Even within the limited insight of Marxism, the social, environmental and economic problems caused by conventional accounting which they highlight is of concern to Muslims.

Some of these problems will be examined under the following headings; Multinational exploitation, privatisation and loss of work and environmental problems. The dehumanising effects of internal accounting systems are considered under the behavioural effects of accounting in section 3.5.

3.4.1        Multinational Exploitation


Tinker  (1985) examined the accounts of the Sierra Leone Development Corporation from its inception until its dissolution over a pre and post independence period. Although the traditional profit and loss accounts shows a profitable operation, behind these numbers lay a very different social and economic story. He concluded that investment by Multinationals in developing countries  does not benefit the majority of host countries but perpetuated power groups and elites and destroyed traditional accountabilities. Even in an economic sense, the host country government and people enjoyed only 15-20% of wealth, and after independence, this percentage was even smaller (at 11.25%). These economic and social facts were masked by the accounts as payments to suppliers (for machinery imports, services and expatriate management). The establishment of the company had also led to conflict and coercion; using British troops. The local black people had been forced to leave agriculture due to an increase in local taxes by authorities who were installed by the colonial administration. The company also bribed local government officials to receive loans and bailouts (Tinker, 1985).

This exploitation continues today with the use of transfer pricing and franchising fees. Transfer pricing accounts for 30-50% of the total revenues of multinationals. The use of transfer pricing has helped to maximise the after-tax global profits of multinationals because they provide an opportunity to allocate profits around the world irrespective of the productive results of the individual subsidiary (Mouritsen, 1995).  For example, foreign lumber companies operating in Papua New Guinea, sell their lumber to associated companies in Hong Kong at a lower than world market prices in order to reduce payment of local taxes. As in the Sierra Leone Corporation’s case, local people are paid miserably lower wages than the expatriates who occupy the management and technical positions.

The use of franchises allows a company to milk its overseas associates through charging advisory or franchise fees, which are based on the revenue received, and not profits.  These fees are reported as expenses and sometimes manipulated to avoid local tax. According to Mouritsen (1995), local governments have to implement benign procedures to control transfer pricing as they are under the constant threat of withdrawal of the foreign investment and the ensuing loss of jobs. The establishment and adoption of International Accounting Standards perpetuate this problem of transfer pricing by multinationals (see Hove, 1989).

3.4.2        Privatisation ,  Loss of work and  Public Property


The Privitisation craze extended the philosophy of liberal economic democracy principles during the Thatcher and Reagan eras. These heads of states believed that the social democracies do not work and that  welfare state had to be curtailed. There was a political facet to this because the unions were getting too powerful (rivaling the ruling political parties).  State help to the poor was to be replaced with the equal opportunity of the market. The free market would henceforth decide wealth creation and distribution. Henceforth state industries which were inefficient and bureaucratic would go into private hands to increase their efficiency (measured in accounting profitability terms). Thus, for example, in case of the water industry, the UK government’s white paper on the privatisation of the water industry suggested that:

“Privatization should lead to improved standards, greater efficiency, and a better allocation of resources within the water industry. Provided that the customers are fully protected...the water industry, their customers and the nation as a whole should all benefit”.      (Cmnd. 9734, Department of the Environment, 1986, p13).


 No mention is made of the protection of  workers. The social importance of the water, rail and even health sectors (henceforth to be called industries) were to be de-emphasised. New accounting based performance indicators were to be used to gauge their viability. Accounting was used to prove them inefficient and non-viable, although this was contested by the academic accountants (Hopper & Cooper, 1988).

Recent studies (e.g. Shaoul, 1997a) have shown that even the economic objectives of efficiency and the anticipated ‘benefit for all’ have not been realised.  Shaoul (1997a) critically studied the financial performance of ten water and sewerage companies, which were privatised in 1989. He concluded that private ownership did not increase the efficiency of the industry and that ownership was not the most important factor in determining performance. Further, the privatisation transferred wealth from the public at large to a relatively few individuals and corporate entities. “Consumer found that prices rose by more than 50%, workers lost their jobs and the nation... made a huge loss on the sale” (p 500). A further more important social effect was that it created the conditions whereby the other stakeholders will be disadvantaged in the future” as the privatised infrastructure was deteriorating faster than it was being replaced. Shaoul (1997a) also quotes research showing that in other examples of privatisation, such as that of British Telecom and  British Gas,  because of  the absence of substantive competition, privatisation did not result in efficiency gains.

The moral depravity and the social problem of lost work are shown in the study of the privatisation of Medway Ports (Arnold & Cooper, 1999). In this case, the government-owned Medway Ports were sold in a Management and Employee Buyout in 1992 under the expert advice of Price Waterhouse. Dockworkers and other employees bought up to 10,000 shares  valued at £1 each. Later about half the workforce were dismissed and re-employed on a casual basis. These workers were forced, under the articles of association, to sell back their shares to the company as they were no longer employees of the company. The shares were valued at £2.50 by KPMG Peat Marwick.  Six months later, the port was sold to Mersey Dock and Harbor company for £37 per share which enriched the Directors and financial backers of the company by millions of pounds. The value of the share had increased from £1 (at which the Treasury had sold it) to £37 in 18 months. Some employees later sued KPMG Peat Marwick for undervaluing the shares. The case was settled out of court. The industrial tribunal found that the company has constructively dismissed the workers but also awarded them a paltry sum of £10,000 for the loss of security and work conditions and benefits. The same story is repeated in other cases of privatisations e.g. British Gas, British Telecom and Water Authorities where Directors are awarded huge executive salaries and perks when the companies were down sized to affect the “efficiency” indicators of accounting numbers.

The above cases show the role of accounting in the redistribution of wealth resulting from privatisation, especially the social implications of accounting and accountants’ involvement in privatisation consulting. It shows the role of major accounting firms in the neo-liberal privatisation program.  An Ernst & Whinney report claimed that the Big Six firms were the dominant providers of privatisation advisory services (EW, 1994 as quoted by Arnold & Cooper, 1999). According to Hanlon (1994,1996, as quoted b Arnold & Cooper, 1999), the accounting profession has transformed itself from a semi-autonomous public service profession to a highly commercialised service industry.  Thus:

“Accountancy institutions have played a pro-active role in executing transformations prescribed by the neo-liberal economic agenda.  In particular, the consulting divisions of the major accounting conglomerates have organised, directed and implemented privatisation on a global scale”.

                                                               (Arnold & Cooper, 1999,  p 129).

3.4.3        Environmental Problems


Ecological and environmental problems are increasingly receiving attention as it turns from a local to a global problem (e.g. Earth Summit at Rio). Many problems,  such as the green house effect, acid rain and damage to sea-life are caused by polluting emissions of industry and commercialised agriculture. Others result from the transport and  the use of fossil fuels such as oil which is used to drive these industries.  Further the consumer culture created by mass advertising of corporate products leads to an unsustainable life style which generates huge amounts of non biodegradable chemicals and other rubbish which has to be disposed off and drains non-sustainable resources (e.g. oil and other minerals). Hence business has to play an effective part in controlling, reducing and perhaps reversing the damage to the environment by using different energy sources, using recyclable raw and packaging materials, using pollution control equipment, promoting a greener employment and consumer practices.

Accounting plays an important part in disguising the environmental impact of economic activities because it only considers financially measurable economic events. Even for these events, it fails to take into account disposal and winding down and contingent cleaning up costs. For example, in the case of nuclear plants, substantial expenses are incurred in shutting down old plants because of the cost of disposing radioactive materials safely. These deferred costs are not accrued and hence earnings are higher than they should be. Further social and health costs are passed on to the community and government because they are termed externalities and are not costed by the conventional accounting system unless there is a legal liability. Hence, the community bears the social and economic costs of environmental degradation and not the corporation which caused it.

Maunder & Burritt (1991) argue that the conventional accounting principles of going concern (entity) , accruals, consistency , prudence and  monetary measurement lead to a mismatch between accounting information and its application to ecological issues.  The principles act to ‘exacerbate or reinforce the primary factors (such as ideologically induced attitudes towards the desirability of economic growth) responsible for the ecological crises’. For example, the going concern concept excludes externalities (such as pollution emitted by the organisation) from the measurement of the entity’s performance.  The prudence (historical cost convention) induces a backwards looking approach which is less appropriate to examining future ecological effects such as species extinction as no amount of ex-post analysis can make these effects reversible. The accrual concept leads to the slicing up of an entity’s life.  However, as Maunders and Burritt (1991) observes  “many ecological impacts exhibit lags compared with causal events  (e.g. the influence of CFC’s on the ozone layer)” (p.11). Thus, the environmental impact of an economic activity of one period may not be discernible until many accounting periods in the future. In these circumstances, contingent liabilities need to be disclosed in the notes to the accounts.

An instance in point is the case of the Love Canal (Tinker, 1985). Here, the company caused pollution by dumping toxic wastes into the Love Canal, which were covered up with earth. Later a housing development was undertaken on the same land. The residents later noted serious health problems including miscarriages and premature deaths. The whole area became uninhabitable, and the residents had to move to another area losing money on their mortgages as well as suffering health problems.

The company polluting love canal did not disclose, even as contingent liabilities, the cost incurred in the clean up and upheaval later. Tinker rightly asserts that there are broad implications of these costs  for calculating and reporting period profits. The matter of what additional costs and when these costs should be reported are not clear. According to Tinker (1985), the Generally Accepted Accounting Principles under-rate long-term costs and excludes externalities with their focus on monetary values.  Tinkers asks how one can measure the social and emotional cost of miscarriages or premature deaths (or likewise, the environmental cost of the extinction of a species) in monetary terms?  He therefore concludes that this understatement of the social costs of corporate  behaviour by conventional accounting makes the  claims of objectivity and independence by accountants spurious.

In some instances, corporations have also used accounting (i) to legitimate their existence and (ii) to manipulate environmental pressures such as those of anti-pollution regulation and environmental concerns of stakeholders. One such case is that of Falconbridge (Buhr, 1998). In this case, the Falconbridge Company’s smelting process resulted in sulphur fumes which led to  acid rain. In the early part of the Century, the heap roasting method  which set logs alight to burn for 3 – 4 months, destroyed vegetation (including crops) in the whole locality converting the surrounding areas into a barren landscape as early as 1901. In 1930, the company put up a smelter, which ended heap roasting, but it only served to diffuse the fumes over a wider area. The mining companies were able to stave off anti-pollution regulation until 1969, for almost 70 years. Initially,  the economic rationality of reducing costs was used to rationalise the measures to reduce sulphur emissions. Only after legislation was imposed, did the company set up an Environmental Improvement Project which resulted in an improvement to its bottom line as a result of technological development. There was tension between profits on the one hand and pollution prevention on the other, during the 1970’s, when technology did not keep pace with regulation. The environmental disclosures in the corporate reports were scarce in the early years, as there was nothing positive to report.  Buhr (1998) posits that, by focusing on economic concerns and not on the pollution prevention efforts, the accounting reports were used to stave off further legislation by showing how costly it was for the company to adhere to the anti-pollution legislation. However, from 1980 to 1984, the disclosure of improvement in pollution prevention technology (which had a positive impact on the bottom line) offered an image of an environmentally friendly company. Later, public opinion had swung so far over to pollution prevention, that the company openly discussed and emphasised government regulation in its accounting reports.

As the above case shows, a company  can use accounting to (i) legitimate their existence, trying to change the environment in their favour or (ii) react to the environment when they are unsuccessful in changing it. Accounts are never used to assess accountability in a socially responsible way. This is despite the extent of the damage done in the above case, which was described in the following words:

“It will take centuries to repair the effects of logging and smelting, which left Sudbury’s landscape looking so much like the moon that the US space agency sent its lunar astronauts here to train”.                                                                                                 (Bailey, 1991, as quoted by Buhr, 1998, p 163)


Despite this, the only considerations at play were technological or financial thus:

“What has motivated the process (reduction of sulphur emissions) are the engineers who just want to make things work better and the financial people are behind it because it is more profitable”.                                                                                                 

                                       (Endicott, 1991 as quoted by Buhr, 1998, p 186)


Lehman (1995), on the other hand, argues that a moral obligation exists to provide additional environmental information in published accounting reports.  In this way, corporations would satisfy accountability relationships as part of an administrative solution to the environmental crisis. He argues that “through this accountability nexus, accounting would take on the role of constraining organisational activities, particularly those that may be considered environmentally degrading” (p396). Thus the legitimate concern for fairness (Williams, 1987) i.e. the moral aspect should establish the need for corporations to disclose environmental data, not technology, profit and legitimation exercises.

Lehman bases his argument on Rawl's theory of Justice and Political Liberalism. This theory draws on the sanctity of the individual which is  decided by the inter-subjectively shared group language of the new pluralism. Although this basis may not be acceptable from the Islamic viewpoint, the researcher supports his call.

Gray (1992) envisages a similar change in thinking and life-style in his call for a “radical reconsideration of current attitudes, structures, beliefs and modi operandi, ” [to] “reintroduce protection and care for the environment” (p 399).  He opines that even a pragmatic approach to survival and sustainability of current human societies forces the realisation that the roots of Modern (especially Western) society, based on short term human and economic self- interest, are essentially incommensurable with their continued survival. He blames conventional economic thought of dominating the conceptualisation, language and explanation of the world, which influence attitudes and behaviour (negative) towards the world. He rightly asks what one could expect from the economic decisions of the rational economic man, devoid of the traits of “loyalty, compassion, altruism, sympathy and concern for others” except dehumanising actions and consequences.

3.5        the micro consequences of conventional accounting -  Behavioural problems.


The implementation of decision-making and control techniques such as budgeting, variance accounting and performance measurements leads to certain motivations and behaviour within the organisation. Although these techniques are rationalist-technical in character, the social consequences can be both positive (e.g. Roberts & Scapens, 1985) or negative (Argyris, 1953; Richardson et al., 1996). These techniques are meant to achieve goal congruence between the employees and the organisation, for example, by enabling individuals to take responsibility (as in responsibility accounting) for their actions and rewarding  or disciplining  those who succeed or fail according to the accounting numbers. When the goals of the organisations are based on utilitarian and marginalist economics, they may not be compatible for Islamic organisations, which have socioeconomic goals and values other than profit or wealth maximisation.

Although these accounting techniques on the surface seem to make individuals responsible for the economic consequences of their actions and decisions, it seems that a rift has arisen between accountability and accounting which results in negative human and social consequences. What is worrying is that accounting has been employed as a calculative practice, as part of a wider modern apparatus of power, is used  to construct individuals into more manageable and efficient ‘governable’ persons (Miller & O’Leary, 1997). Humphrey & Olson (1995) also view  the introduction of the management accounting techniques and philosophy into the public sector (or its privatised equivalent) as a  cause of concern because the methods being introduced are simplistic caricature of private-sector practice. According to them, the individualistic enterprise culture, grounded in market-based philosophy, which accompanies the introduction of these techniques, may lead to overall reduction in effectiveness and weaken commitments to service and collegial relations.

While these practices may be beneficial for the organisation in the short-term, they have long term social implications both for the mental attitude and social behaviour of the individuals affected by such systems. These include an increasing selfishness and conflict, immoral behaviour, becoming more individualistic and materialistic, becoming susceptible to manipulations by others, and personal and family problems. Nervous breakdowns and stress may also arise. In the long run, the effect on the individuals is reflected in the organisation which can become “schizoid” (Richardson et al., 1996) and progress into wider social conflict (Lehman, 1992a).

The problems associated with conventional management accounting technique of budgeting , performance measurement and the problem of  control will  now be reviewed briefly as these problems of conventional accounting techniques have implications for Muslim employee and organisational  behaviour which may make these techniques inappropriate for Muslim users and Islamic organisations.

3.5.1        Behavioural research: human problems of budgets


The human problems with budgeting have long been recognised. In 1952, Chris Argyris (Argyris, 1953) found that that budgets were viewed as a “pressure” device to increase production efficiency by raising workers’ goals and increasing motivation (to produce more).  He found that budgets being written, concrete, evaluatory instruments, they were used by supervisors as “whipping posts” in order to release their feelings about other unrelated problems. This led to resentfulness among low-level employees  (supervisors and workers) because of the management attitude towards them as a lazy lot out to cheat the company.  This in turn led to formation of groups to counter management pressure. Further budget pressures led to inter-departmental strife, and tension and unhappiness among supervisors. Subsequently, budget pressures introduced a fault-finding culture, which created tensions between line and staff functions. Supervisors could also misuse the budget to express leadership styles that ends in hurting other people. Argyris (1953) suggested a more participatory budgeting system.  However, although Argyris noted the “narrow-minded, figure conscious nature of accountants” he failed to question the notion of efficiency itself as a valid objective.

In a more recent article, Argyris (1990) asserts that the use of accounting controls results in conflicts between those who use the claim of objectivity and rigorousness to defend accounting and those who use accounting but disbelieve the claim. The discussion of the conflict could lead the players to feel embarrassment or threat.  Using budgets to compel, force, search out mistakes can lead to activation of organisational “defensive routines” [2], such as gaming, smoothing, filtering, biasing, focusing, and illegal acts, that by pass the cause of the threat and cover up the by-pass.

Hughes (1965), notes another problem with budgeting, that of padding the budget. This is particularly problematic if managers threaten sanctions for over-spending.  If each level of management punishes the next lower level for overspending, then each level will add contingencies to its estimates, inflating the total budget.

While accounting control techniques results in accountants becoming coercive, fault-finding and  threatening, and creates tensions and pressures on line supervisors and workers, it also leads to dysfunctional effects (violation of system rules and procedures) on other departmental managers as well  (Jaworski & Young, 1992). In a survey of 500 marketing

managers, they found that when the individual internalizes the goals, values and beliefs of the organisation, his actions are more likely to correspond with the activities desired by the firm.  In turn, as person-role conflict decreases, job tension decreases with a consequent reduction in dysfunctional behaviour. Conversely, the reverse is true.

3.5.2         Management Control and Performance Measurement


A management control system has been defined as :

“A system of organisational information seeking and gathering, accountability and feedback designed to ensure that the enterprise adapts to changes in its substantive environment and that the work behaviour of its employees is measured by reference to a set of operational sub-goals (which conform with overall objectives) so that the discrepancy between the two can be reconciled”.

                                           (Lowe, 1971, as quoted by Otley, 1995, p 47)


The limitations of an ‘accounting’ approach to control systems are recognised by Otley (1995). In criticising Anthony’s (1965) emphasis on accounting control systems, he observes that “a useful Management Control System cannot confine itself solely to accounting measures of performance. It should also take into account the non-financial and technical measures of performance and those areas of performance that cannot be measured in precise, quantitative terms. However, the example of such areas, he quotes i.e. market share and competitive position, are still profit oriented measures.

The cybernetic or feedback control system is the most often used model for accounting control (e.g. Berry et al., 1995). However the effectiveness of this cybernetic model has been found lacking in effectiveness and attributed to failure and hence in need of revision (Dermer & Lucas 1986). Dermer & Lucas (1986) assert that managerial control is an illusion, which fosters the belief among managers that conventional controls such as operating standards, profit targets, and budgetary criteria accurately and validly measure and determine behaviour. Quoting Hofstede (1978), they assert that prior social conditions

implied by cybernetic models or the social consequences of such models have not received the attention they deserve. There is a focus on the manager as the sole causal agent, denigrating and the degree to which non-managerial agents really influence outcomes. Thus, they wrongly assume that the unilateral exercise of power is control- irrespective of the effects these changes may produce.

Neimark &Tinker (1986) observe that management control systems, until then, have been heavily influenced by neo-classical economics and organisation theory, thereby ignoring the social origins and the social consequence of corporate control systems. Using the Marxian dialectical approach in a case study of the internationalisation of General Motors, show that corporate control systems are not just the consequences of exogenously determined forces but also agents of social change. This is effected through the chain of events, which are a consequence of the corporations’ decisions to further their own self-interests. The consequence of the control system does not only affect other corporations but also ultimately affect the originating entities.

Argyris (1990) holds that managerial accounting systems can be threatening because they evaluate performance. Further, Townley (1996) asserts that individuals have been called to account for their performance through the “process of examination and confession” which serve as disciplinary practices and impacts on the construction of accountability within organisations.  Townley argues that the examination form of appraisal reflects a lack of trust, which it seeks to circumvent through compulsory visibility. The confessional form of appraisal is more discreet but the “power-knowledge dyad and the mechanism whereby humans are objectivised are not absent.

From the above discussion, it can be seen that management accounting tools such as budgeting, performance evaluation and variance accounting have negative individual and social consequences. These consequences are also not acceptable from an Islamic perspective. This calls for alternative Islamic accounting techniques to induce more appropriate Islamic behaviour.

3.6        conventional accounting critique: an islamic perspective.


From the discussions in Chapter 2, we can see that the worldviews and philosophical assumptions of the West and Islam are different. This gives rise to different socioeconomic objectives, different norms and different economic systems. The implications of these differences for accounting were discussed very briefly. This chapter has thus far undertaken a review of the critique of conventional accounting from various ‘Western’ perspectives. This together with the discussion in Chapter 2 leads next to an Islamic perspective of the critique of conventional accounting.  This is carried out through the same themes used in this chapter; objectives and fundamental assumptions, characteristics, macro and micro consequences of accounting.

3.6.1        The Inappropriateness Of Conventional Accounting Objectives And Fundamental Assumptions From An Islamic Perspective The unsuitability of decision-usefulness accounting from an Islamic perspective


From an Islamic viewpoint, the pleasure of God is the ultimate aim and ‘falah’ - success in the world and the hereafter, - the ultimate objective. Hence, social and individual welfare and quality of life is not merely measured in material terms but both spiritual and material. Islam has comprehensive principles and elaborate rules in the economic, social and political arena. Hence utilitarian social welfare is not the aim of Islam and therefore should not be the aim of a Muslim society.

From the Qur’anic abhorrence of inequity and concentration of wealth among selected groups of people, Muslim society would certainly not to seek to enrich only shareholders and even less creditors (because interest is forbidden). Its imposition of the halal/haram dichotomy in transactions is meant to ensure equitable investment and earnings. With the imposition of Zakat,  Sadaqah  (charity) and Infaq  (any benevolent spending approved by the Shari’ah) as  wealth redistribution measures, Islam seeks to have equitable distribution of wealth to all members of society.  Thus making money and unbridled consumption is not the objective or even an important objective in Muslim life. Thus, the shareholder/creditor orientation and hence the ‘decision-usefulness’ objective of conventional accounting may be unacceptable from an Islamic viewpoint, considering the size, power and the social consequences of business organisations of today.

From a perusal of the Qur’an, Hadith and the Sharia’h, the objectives of Islamic accounting would seem to be the avoidance of doubts and (consequently disputes) between parties by ensuring fairness accounting (Al-Qur’an 11:84-85, 6:152). Other objectives may seen to be the equitable transfer and distribution of property rights and wealth  (Al-Qur’an 4:29), besides ensuring an equitable base for calculating Zakat.

“O You who believe!, when you contract a debt for a fixed period, write it down. Let a scribe (accountant?) write it down in justice between you.....Let him who incur the liability dictate...And get two witnesses out of your own men.....You should not become weary to write it down whether it be big or small....that is more just with Allah, more solid as evidence  and more convenient to prevent doubts among yourselves, save when it is a present trade  which you carry on , on the spot among yourselves, then there is no sin  on you if do not write it down”.                                                                                      (Al-Qur’an, 2:282).


Although, the above verse apparently refers to writing of debt contracts, it would not be too far fetched to extend it to accounting. For example, Littleton (1966) has mentioned that amongst the other antecedents of modern accounting, credit and writing are two important preconditions for the emergence of systematic bookkeeping under stewardship accounting. Investors are almost akin to creditors, their capital is akin to a loan (a liability of the business to its owners), which has to be paid back barring losses or with the addition of the agreed share of profit.

The inherent accountability to God in all actions point to an accountability framework such as that of Gray et al. (1996) but modified for an Islamic setting.  This will be taken up in more detail in Chapter 6. Accounting objectives; an Islamic framework


Other than the framework of accountability, the following objectives of accounting may be more suitable from an Islamic point of view.

(1)   To provide a fair basis for the calculation of Zakat.

(2)   To avoid disputes among members of society by providing a fair basis for the sharing of profits, wealth transfers and the full disclosure of activities and values.

(3)   To promote and ensure only Islamically permitted economic activities are carried out by the business.

(4)   To ensure the quest for profits by the business does not infringe society’s rights (e.g. for a clean environment, fair employment practices, contribution to the well being of the community etc.)

Many writers have called for the provision of a fair Zakat base to be the most important objective of Islamic accounting (Adnan & Gaffikin, 1997; Gambling &  Karim, 1991; Baydoun & Willet, 1998). This may seem very strange to conventional accountants many of whom make their living by giving advice on how to avoid tax! However, under an Islamic world-view, the pleasure of God and accountability to Him is uppermost. “This accountability has to be manifested in the form of how one can account for his or her Zakat obligations properly” since Muslims cannot differentiate a worship activity from a non-worship activity (Adnan &Gaffikin, 1997). The God fearing Muslim may be more unwilling to cheat  on Zakat (although he might cheat on tax!) because unlike tax, Zakat is a religious obligation for which He has to account for,  to Allah on the Day of Judgment.

 Further, the assurance that Zakat has specific recipients defined in the Qur’an itself, motivates one to pay more rather than less because the Zakat payer knows it will be mostly used for the poor and the destitute rather than grandiose projects of governments.  However, there is a need for greater accountability and transparency through a more suitable accounting system than the one practiced at present to avoid irregularities.

If Zakat is made the main objective of accounting, there is a possibility that window dressing will be reduced while fraudulent disclosure and creative accounting which are ever present in conventional accounting might disappear. The Muslim accountants and Muslim managers may not undertake such ventures because they would be depriving the poor and destitute of their rights if they were to undervalue the Zakat base. In conventional firms where the objective of the firm might be to maximise profits, Islamic accounting may not be suitable. However, in Islamic organisations and possibly Muslim organisations, the objective may be different. An Islamic accounting may help to achieve the social objective of Islamic organisations and Muslim society through a Zakat oriented Islamic accounting system. Different environment and fundamental assumptions of Muslim society and Islamic economic system.


Further as has already been noted above, the political and economic environments of many Muslim countries are not developed exchange economies with developed capital markets. Most Muslim countries are not democracies but dictatorships with very inequitable and unequal distribution of wealth and income. Since Muslim countries went through a different historical development, the ideas of  ‘pristine liberal economic democracy’ is foreign to Muslim countries.  Because Gray et al. (1996) argue that the decision usefulness route to social welfare (figure 3-1) makes sense only in a pristine liberal economic democratic environment, the objectives and decision-usefulness framework may not be suitable for Muslim countries. It is even more unsuitable for those Muslim countries, which are trying to develop an Islamic society with an Islamic economic and financial system.

Muslim society normatively has different ethical value systems with corresponding economic codes. Even if it is argued that Muslim countries are developing along the lines of the West and conventional accounting will be useful for developing these countries in the Western model, there are both practical and religious reasons why these countries should not adopt such a development model (see for example, Ahmad, 1979). Despite the pressures of globalisation intended to create Muslim societies in the “Pristine Liberal Economic Democracy” (PLED) image, Islamic resurgence in Muslim countries has been in some ways going in a different direction. Some of these trends are discussed in Chapter 4 and 5. Decision usefulness based accounting can only lead to consequences, which are not the main aim of these societies and in  the case of Islamic, organisations trying to achieve specific Islamic objectives, could be even positively harmful.

We have also seen in section 3.2.5 that according to Laughlin & Puxty (1981), decision usefulness based accounting may be economically harmful to the organisation providing the information, which may even result in social dislocation. This is not acceptable from an Islamic viewpoint because an Islamic organisation is setup to achieve the socioeconomic objectives of a Muslim society. This is especially true of Islamic banks, fund investment institutions and government and relief organisations.  Hence, information disclosure of Islamic organisations should be related to its control and accountability to all its stakeholders. Instead of their  ‘inducement-contribution theory’, a ‘mutual-contribution’ theory may be more relevant. Muslims may be prepared to trade-off some material inducements for contribution towards their values. For example, El-Ashker (1987) in his study of Egyptian Islamic companies showed that Muslims may take a lower return from their investments in such companies to gain what he terms '‘religious utility’. Under this framework, both the organisation and the stakeholders contribute to the betterment of the Muslim society within the framework of its values.

3.6.2        Characteristics of conventional accounting The unsuitability of  the historical cost and the  prudence concept.


From, an Islamic point of view, the reasons given by MacNeal (1970) for the unsuitability of the conservatism and cost concepts are particularly relevant.  Since Islam bans interest, the cost and prudence concept, which arose in relation to interest- based banking and credit, would not be applicable under an Islamic economic system. Further, the maintenance of equity between current, past and potential shareholders is very important in Islam’s quest for fairness accounting in line with its concept of justice. The assessment of Zakat needs to be based on current value as otherwise, this would lead to appropriation of wealth from the poor to the rich in times of rising prices and values. On the other hand, current valuations of items such as goodwill and brands may overstate the value of corporate assets because they depend on uncertain forecasts. This has led to over-valuation of shares in the past and ended up defrauding outsiders. Hence, fairness of values (to the extent possible) is required in Islamic accounting to ensure that no group is deprived of its rightful share of wealth. The calculation of  income from  an Islamic perspective


Profit or income is especially important in Islam, more so than in conventional accounting for the income is the only basis on which financiers get a return on the investment of their capital. This is so because of the ban on interest in Islam, which prohibits a predetermined fixed return on capital.

This rule has made conventional interest-based banking, which is an important modern economic institution, illegal in Islamic society.  However, the absence of interest does not mean the cost of capital is zero in Islamic societies.  What is illegal is the predetermined fixed rate on capital, i.e. the return on money without sharing the corresponding risk of the borrower. Islam allows and one can say even encourages profit and loss sharing partnerships (both active and sleeping partnerships).  Islam recognises the opportunity cost and risk involved in deferred and installment sales, and allows the deferred price to be higher than the cash price. It also allows operational leasing and renting.  However, the strict prohibition on interest means, the main ways a capitalist can participate in business is by partnership, equity shareholding and commenda.  All these three legitimate methods require the computation of income and asset valuations for profit distribution.  Further in conventional accounting, the investor is considered more a lender of capital than a participant in the business. Hence, the concentration on return is geared towards interest cover.

The search for an alternative banking institution resulted in the creation of Islamic banks and Insurance (takaful) companies in Muslim and Western countries which finance their customers through these allowed methods (See Chapter 5 for more details). The creation of these Islamic financial institutions has resulted in the mobilisation of funds from Muslims and non-Muslims (Ali, 1994) which has been estimated at US$ 137 billions (IAIB, 1997).  These funds are mobilised either based on al wadia’(safe custody) with return of deposit guaranteed but no interest is paid. However, the bank can utilise the funds while in its custody as long as the activities financed by the bank are not against the Shari’ah (e.g. gambling, alcoholic drinks industry).  Banks are allowed to pay a part of the profit they make to deposit holders as a ‘gift’ to the depositors provided it is not computed as a percentage of deposits or guaranteed in advance.

Since Islamic banks are not allowed to lend on interest, they adopt Islamic financing techniques; although they use mostly murabaha (or cost plus pricing technique) financing, they do practice musharaka (partnership) and mudharaba (commenda) which was the original equity-based instruments suggested in the Islamic economics literature (Chapra, 1992).

A whole series of accounting problems have arisen due to the creation of the Islamic financing institutions. These have resulted in the setting up of accounting standards for Islamic banks by the Auditing and Accounting Organisation for Islamic Banks and Financial Institutions (AAOIBFI) based in Bahrain.

For example, both musharakah and mudaraba transactions require income numbers for both the determination and distribution of profit to deposit holders. Abdelgader (1990) found several problems in his investigation of profit determination and distribution by Islamic banks in Sudan.  These include  including relating return on deposits to investments maturity periods, pooling of various funds and in ensuring fairness among different type of depositors. 

The development of Islamic institutions in banking, business, government and voluntary sectors and their requirement for a new form of accounting to achieve their objectives demonstrates an added urgency to the development of an alternative Islamic accounting if these institutions are not to be submerged in the capitalist economic culture. They constitute the ‘pull factors’ for Islamic accounting which will be discussed in chapter 5.

Further, both wealth and profits are the  base on which Zakat  (Islamic tax) is assessed for individuals and organisations. Hence, the continued use of a historic cost model may result in negative wealth transfer effects. The valuation of stocks at the lower of cost and net realisable value is certainly not acceptable from an Islamic perspective because it leads to lower profits (in times of rising prices) and thus Zakat being undervalued. This  leads to a reduction of the rights of Zakat beneficiaries. The non-recognition of unrealised profit may also cause timing effects on Zakat collection but more important inequitable wealth transfers between present and future shareholders.

This problem is especially acute in the case of term participation certificates which do not earn interest but instead are paid dividends based on profit during the period when the certificates are current. The return to the investor depends on a proper valuation of opening and closing assets and income during the period. If conventional accounting is used, it is possible to deny the short-term investors their equitable return if a historical cost model is used in a project, which has a long incubation period. Hence, a more viable income model for Islamic accounting may be realisable  income.

3.6.3        UnIslamic Consequences of Conventional Accounting Privatisation

From an Islamic perspective, the seemingly inexorable privatisation programs are worrying. According to Islamic principles, energy, water and pastureland (communally important resources such as clean air and navigational arteries) should be publicly owned and not subject to private ownership.  Unfortunately, the privatisation trend is being repeated in Muslim countries like Pakistan and Malaysia. In view of the fact that these countries generally do not have transparent and accountable governments, the privatisation effects are arguably worse because they redistribute wealth to cronies of politicians as well as increase the cost of living for its citizens. In case of Malaysia, for example, privatisation of sewerage services has resulted in consumers and businesses being charged on their water usage and property valuation instead of their actual use of  these services. This has resulted in windfall profits for the sewerage Company (which is a monopoly). The establishments of toll highways, which have taken over existing public highways and forced excessive charges on the public for tens of years, have enslaved generations of taxpayers to the new corporations. The lack of corresponding and effective watchdog agencies which are created in the West is also worrying; when services are privatised , these bodies are  either totally absent or are small and ineffective ‘captured’ regulatory agencies which are the skeletons of the government bodies which have been privatised.  It is conventional accounting with its rhetoric of efficiency, which provides both the “ammunition” and “rationalization” (Burchell et al., 1980) and lends legitimation to these privatisation exercises. Environmental problems: Islamic perspectives


From an Islamic perspective, the environment is a trust for which man is accountable to Allah for its use. Islam does not take a deep green position nor concedes a license to kill any species for the benefit of corporations. It views the sentient beings as creatures of Allah along with the environment which are  to be exploited for the benefit of human beings for their food, shelter, clothing and other legitimate requirements. Islam views all creation in the process of celestial praise of Allah and therefore destroying any creature is akin to  destroying this celestial praise. The Prophet (pbuh) forbade the plucking of leaves wantonly due to this.  For example, In Islamic eschatology, to avoid the punishment “of the grave”, shrubs are planted on the graves of the dead; the plants praise and remembrance of God, is supposed to deter any punishment descending from Allah on the deceased. In one of the Prophet’s Hadith, it is stated that a prostitute who used her shoes to get water out of a well to give to a thirsty dog was sent to heaven, whereas the ill treatment of a cat sent an otherwise pious woman to hell. Another Hadith states that:

“There is no Muslim who plants a tree or sows a field and a human, bird or animals eat from it, but it shall be reckoned as charity for him”.                                            (Mishkat al-Masabih, Vol.1, p115, as quoted by Akhtar, 1996)


Even in times of war, Muslims soldiers cannot follow a scorched earth policy. The first Caliph of Islam after the Prophet instructed his General to strictly observe environmental values even in enemy territory. He wrote “Do not cut down a tree, abuse a river, do not harm crops and animals, and always be kind and humble to Allah’s creation , even to your enemies.” This dictum is mostly born out in Muslim history (see for example Daniel, 1993).

Chapra (1992) bases the Islamic ethical foundations for the protection of the environment under the principal of “No injury”. Since Muslims are prevented from harming others, the environment has to be protected.

According to Akhtar (1996), the Islamic way of life and the Islamic State makes important contributions in maintaining and promoting an “environmental balance”. These are based on the Islamic worldview and the ethical values developed by an Islamic way of life based on environmental consciousness; man as custodian and trustee of Allah’s resources. Further, simplicity, which promotes a life-style, which is anti-consumerist and pro-environment, avoids wastage and extravagance, and promotes a fellow feeling for all creatures of Allah.  Akhtar also notes that “the present ecological crisis is an outward manifestation of a crisis of mind and spirit” (p58). Changing beliefs and traditions (from unIslamic to Islamic) is important so that human beings live responsibly with the rest of creation.

Thus, the importance of environmental protection from an Islamic perspective can be seen from the above discussion. Hence, an accounting system, which encourages, promotes or justifies environmental degradation is clearly unacceptable from an Islamic viewpoint. Thus, an alternative Islamic accounting system would have to identify, measure and disclose on environmental protection and damage. Micro behavioural consequences


While the protection of individual liberty or ‘class conflict’ may be the issue of most concern to Western writers who are researching this issue, both the individual and social consequences of accounting are important from an Islamic perspective. The substitution of selfishness for caring, confrontation for co-operation, a short term ‘you only live once’ paradigm for a long-term spiritual dual world-view to is both socially and religiously unacceptable from an Islamic viewpoint. The concern becomes more acute if these individuals are charged with the altruistic Islamic mission of guiding Islamic organisations which are specifically established to achieve Islamic socioeconomic objectives as outlined in chapter 2 and 5. This will certainly lead to goal incongruence between Islamic organisations and the Muslims or other employees who work for these organisations, the consequences of which, are not only economic but social and moral. Islamic organisations will certainly be unable to achieve their objectives while Muslim organisations will become the breeding ground of un-Islamic misfits. Hence, while cheating, domination, manipulation and conflict which may result from using conventional management and financial accounting tools is unacceptable from any religious/ethical perspective, it is more so in the case of Islamic and Muslim organisations who try to incorporate Islamic ideals into their financing, investment and operating decisions.

3.7         Conclusion


From the above review of various accounting critiques, the problems of conventional accounting can be summarised as follows:

·        The objectives of conventional accounting based on decision usefulness may not be acceptable from an Islamic point of view because it seeks to concentrate and accumulate wealth to certain sections of society i.e. shareholders and creditors.

·        Neither the assumptions of pristine liberal economic democracy nor the developed exchange economy with a developed stock market is valid for many Muslim countries.

·        The accounting principles on which conventional accounting reports are prepared may be unsuitable for the direct and indirect equitable distribution of wealth and the calculation of Zakat which is the one of the most important objective of Islamic accounting.

·        The problem with historic cost income models becomes more problematic in a Muslim environment where profit is the main means of ascertaining divisible returns to finance providers as interest is prohibited.

·        The negative economic and social consequences of conventional accounting on the environment, society and individuals are unacceptable from an Islamic point of view.

·        Conventional management accounting systems may leads to behaviour which is dysfunctional not only in terms of organisational goal achievement but in terms of the moral and ethical consequences of individual and group Islamic behaviour.

The researcher has grouped these factors as the “push factors” for the development of an Islamic accounting as these factors “push out” conventional accounting from being a suitable reporting and measurement tool for Muslims and Islamic organisations.  This is depicted in figure 3-2 on the next page.

In chapters 4 and 5, the researcher shall review the pull factors; the theoretical and practical factors underlying the need to develop an alternative Islamic accounting system.  The researcher hopes that the discussion in the next two chapters together with the discussion in this will demonstrate the need for Islamic accounting.







































[1] See the emphasis and rationale of  resource allocation efficiency arguments in SFAC No.1 (FASB, 1978).

[2] Gaming refers to an action, which will achieve the most favourable outcome regardless of the action that the superior prefers For example, salesmen can increase volume to show good personal performance at the expense of lower profitability or increasing bad debts. Smoothing occurs when subordinate utilises the information system to his benefit by altering the natural or pre-planned flow of data without altering the actual activities of an organisation e.g. transferring expenses and revenues from one period to another. Filtering information occurs when subordinates report only the more desirable elements of a set that favourably reflect on themselves.

Illegal acts include falsification of information where existing information is intentionally altered or fed into an information system.

 [SH1] Another consideration from Islamic point of view: preserving equity between stakeholders