Development of Accounting Theory Based on Islamic Teachings: A Glance over Principle of Al-Adl and Al-Ihsan

Abstract

The beauty of accounting based on Islamic principles is that it not only deals with the valuation but also deals with an inbuilt accountability mechanism. Generally the accounting should be able to perform roles like keeping safe custody of interests, certifying true and fair view of business, enabling accountability and providing reliable information for successful decision making to all the stakeholders. In this context there are three main issues with respect to present system of setting accounting standards. These are undue pressures of certain groups in setting these standards, no role of owners in setting these standards, and flexibility/discretion in applying these standards which may lead to subjectivity. These may results in incorrect valuation of business transactions, increasing management discretion which in return will increase corporate governance issues including incorrect financial reporting, earning management and limiting decision making ability of the stakeholders. In order to overcome to this situation there is an urgent need to revamp the accounting theory in such a way that when it is put into practice it performs its due role as being, discussed here. The best way to correct this situation is to develop a new accounting theory based on Divine guidance. In this background, the Islamic principles of “Amanah” (Custody) (Amer2007), “Shahadat” (Testimony), (Amer, 2008) “Shura” (Counseling) (Amer, 2012) and settlement in “Bay” (business transaction) (Amer, 2013) can lay down a solid foundation for a new accounting theory. In Islam the concept of AI-Adl and AI-Ihsan are leading and guiding principles. In this paper an effort has been made to look into that how these two concepts can be applied to accounting theory.

Keywords: AI-Adl, AI-Ihsan, Accounting Standards, Financial Reporting