ABACUS, Vol. 29. No. 2, 1993

SHAARl HAMID, RUSSELL CRAIG AND FRANK CLARKE

Religion: A Confounding Cultural Element inthe International Harmonization of Accounting?

Discussion of the influence of culture on the international developmentand harmonization of accounting has focused primarily upon indigenouscharacteristics which are confined within national boundaries. But culturalinputs, such as religion, which transcend national boundaries, should notbe overlooked. Islam is a particular case in point. Its principles commitMuslims to a definitive code of ethical commercial and personal behaviouraffecting both the structuring and financing of business affairs betweenthe faithful, and between Muslims and non-Muslims. Islam has the potentialfor influencing the structure, underlying concepts and the mechanisms ofaccounting in the Islamic world. Its potential for influencing accountingpolicy is illustrative of religion as a confounding element in the analysisof national idiosyncrasies in accounting practice and in deconstructingthe impediments to international harmonization.

Key words: Accounting; International; Religion; Standards.

INTRODUCTION

Considerable attention has heen devoted in the international accounting literatureto the influence of culture on accounting policy and practice (Hofstede, 1983; Gray,1988). Particular attention has been given to the identification of culture influencingthe manner in which accounting develops and is regulated within national boundaries.Gaining a better understanding of how national differences may be impedimentsto international harmonization has heen the objective.

Numerous factors have been identified: the different profiles of user groups; thestructure of the profession; the nature of indigenous business organizations; andlocal economic vicissitudes — such as the rate of inflation, rate of economic growth,state of the country's balance of payments, its balance of trade, exchange ratestability, level of puhlic and private ownership of husiness enterprise, legal system,education levels and policies, and the level of government interference in businessactivity (e.g., Mueller, 1968; Radebaugh, 1975; Previts, 1975; American AccountingAssociation, 1977; Choi and Mueller, 1978; Nair and Frank, 1980). Most of thecurrent literature focuses upon the influence of indigenous legal, social and economicstructures on the processes of accounting. It has enquired into the idiosyncratic

SHAARI HAMID is a Senior Lecturer, Department of Aceounting and Finance, Universiti PertanianMalaysia, Serdang; RUSSELL CRAIG is Professor of Accounting, Department of Commerce, AustralianNational University, Canberra; and FRANK CLARKE is Professor of Accounting, Department ofCommerce, University of Newcastle, N.S.W.

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cultural factors, allegiance to which serves to distinguish the policies and practicesof one society of accountants from another.

Such a method of inquiry in the context of the harmonization debate mighthe criticized. It centres attention on those matters which are particular to the nationsunder scrutiny, upon idiosyncratic national differences. It does not appear tocontemplate that harmonization may entail a two-way process. It proceeds consistentwith the assumption that harmonization entails imposing Western (European andNorth American) accounting practices and the theories underlying them upon nationswhose commercial and accounting practices are perceived by the researchers tobe less developed than in the West. It is oriented primarily to identifying non-European and non-North American factors impeding harmonization. And virtuallynothing extracted from those enquiries provides insights into possible alternativeexplanations for the modes of financial calculation and accounting which areentrenched in Western business school curricula.

Enquiry into matters which transcend national boundaries and which can infiueneethe development of accounting thought and practice on an international front maywell prove more fruitful. Allusions to suspected, but vaguely described, culturalfactors which might affeet international harmonization have been canvassed in theliterature. But the focus has been more to identify what practices and underlyingtheories have to be changed to fit into the Western paradigm, rather than to discoverwhether those not eonforming to it might give insights to alternative, theoreticallydefensible accounting processes.

This article explores that possiblility with a view to opening the way to a broaderinternational dialogue on the infiuence of culture in general, and religion in particular,on accounting thought and practice.

Culture: The Idiosyncratic and the TranscendentCulture in this setting may be taken to refer to all those social, political and otherfactors which influence individuals' hehaviour. As such, religion is admissible asa cultural factor. Curiously, its infiuence upon the development of aecounting andbusiness structures has not been explored in depth. Religion enjoys the potentialto have a less than universal acceptance within national boundaries yet the capacityto transcend them. A complex factor, it is as likely to confound as it is to explicateanalyses based on indigenous national characteristics.

Little has been said of the consequences of the contrasting fundamental religiousand philosophical underpinning of societies with Judaic-Christian traditions onone hand, and those with different traditions on the other. Yet these are issueswhich should be addressed. For, whereas issues relating to the North American,British and other European sovereign loyalties enter the harmonization debate withconsiderable force, they arise from within a rational structure of commonphilosophical and religious traditions. In most analyses, harmonization (or thetransportation and adoption of accounting techniques and basic concepts overnational boundaries) is pursued more as a matter of setting issues of jurisdietionand political process than of pursuing change in underlying philosophies.

In countries where the Judaic-Christian philosophies are foreign, but thecommercial community has been Anglicized (e.g., in Singapore or India) or

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Americanized (as in Japan and the Philippines), injection of Anglo-Americanaccounting practices and concepts has been a predictable, even if a contestable,outcome. In many ways the capturing of accounting in those countries in this mannermight be regarded as offensive and patronizing. It certainly proceeds from an assumedsuperiority of Western traditions.

That the transportation of accounting practices has been from West to Eastprobably is best explained in terms of the perceived greater commercial and politicaldevelopment of the Western world. Characterizing the more developed parts ofthe world as the West, ironically commits the world to a dominant allegiance toJudaic-Christian influences and ignores traditions founded in Eastern philosophies.It appears to dismiss without enquiry, for example, the implications of accountingbeing required to conform with the philosophies underlying Islam, which has sucha significant influence across national boundaries.

Certainly the East/West dichotomy cannot be explained in terms of any superiorethical conduct within Western commerce. To the contrary, recent events indicatethat there has been far less than honourable corporate conduct in those developedeconomies. Corporate failures in the United States, Britain and Australia sincethe Second World War have initiated overwhelming demands for greater ethicalbehaviour in the West.' In many of those company failures, conventional Westernaccounting played a significant role in making the outcomes financially devastating.In this respect, contrasting the influences of fundamentalism in Christianity andIslamic fundamentalism is interesting. Mahoney (1990, pp. 8-10) explains that theexaggerated respect for the work ethic of extreme fundamental Protestantismunderlies the American admiration for the do-or-die, boots-and-all way of doingbusiness — an ethos which he observes is nurtured in American business schools.In contrast, Mannan (1986, p. 5) declares that, for the followers of Islam, 'theindividual value judgement.. .should always be subordinated to the ethicaljudgement'. Islam pursues the integration of secular and economic endeavour —the tawhidic paradigm. The neo-classical concept of economic man being subjectonly to budget constraints in the pursuit of maximizing profits and in equalizingthe marginal utility for all goods and services, runs counter to the common effectof Islamic injunctions on economic as well as spiritual life (Siddiqi, 1987).

It is not surprising, therefore, that despite some British influences in countriesin the African and Indian subcontinents, the natural Islamic tradition has prevailedover colonial traditions to influence the practice of commerce and finance. CompleteAnglicization or Americanization of business practice has not occurred; theindigenous Islamic code continues to be a major determinant of behaviour. Assuch, commerce appears to have a greater exposure to jurisprudential elementsunder the Islamic, than under the Western, tradition.

' These demands have arisen, for example, from corporate scandals involving the savings and loanindustry and the insurance industry in the U.S.A.; from the insider trading activities of Boesky etal. in the U.S.A.; from the collapse of Bond Corporation and Qintex Ltd in Australia; from themysteries surrounding Maxwell's empire in the U.K., the action ol' the Guinness directors and fromthe collapse of the Vatican-associated Banco Ambrosiano in Italy.

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The existing literature dealing with the interaction of business activity and Islam(Gambling and Karim, 1986; Abdel-Magid, 1981; Alam, 1991) needs extending tocapture the particular effects which compliance with Islamic beliefs have on thestructure of business and finance within an Islamic framework. In particular, theincompatibility of many Western accounting practices with Islamic principles requiresexplanation. For jurisprudential Islamic law influences the conduct of businessesin a manner not accommodated automatically by Anglo-American accountingpractice. And many Western accounting practices draw upon assumptions whichconflict with the tenets of Islam.

Many, perhaps most, non-Muslims have forged a misunderstanding of Islam asnothing more than a religion. They do not have a clear understanding of thejurisprudential framework within which everyday commerce would have to bepractised were it to comply with Islamic traditions. Whether Islamic societiescurrently are structuring their business affairs strictly in accord with the dictatesof their religion is not to the point. Of importance is the growing evidence ofpressures for them to do so: Pakistan legislated during 1992 to enforce the Pakistanibanks' pursuit of Islamic compliant business only (Accountancy, July 1992, pp.46-47), Tomkins and Karim (1987, pp. 101-103) note the expansion of the Islamiccompliant banking institutions in Britain and continental Europe. Gambling andKarim (1991, pp. 41-7) heed The Revival of Islam and Modern Business Activity.Islamic banking only permits financial support and offers banking services to Islamiccompliant businesses; the greater the incidence of strictly Islamic banking, the greater(one could reasonably presume) would be business compliance with Islamicprinciples. There is a distinct likelihood of increasing compliance with Islamicbusiness practices.

Yet the accounting harmonization debate has proceeded without due regard forthe accounting consequences of that possibility. In particular, there seems to belittle understanding that, unlike the Western tradition, fundamental business ethicsflow automatically from the practice of the religion, rather than from the codes(mainly of etiquette) devised and imposed upon members by professionalassociations. Those consequences are pursued here.

THE ISLAMIC TRADITION

Islam, literally meaning 'peace' and 'obedience', is the religion which was preachedby the Prophet Muhammad from AD 610 to 632. Currently, there are about 900million adherents worldwide. The better known Islamic countries of the MiddleEast which have been the focus of recent, well-publicised conflict (e.g., Iraq, Iran,Syria, Lebanon) account for only about 25 per cent of the world's Muslim population.The majority of Islamic adherents are inhabitants of many non-Arabic countries,particularly those in Africa (Mauritania, Senegal, Nigeria, Sudan, Somalia andEthopia), the subcontinent of India (Pakistan, Bangladesh and India) and theASEAN region (particularly Indonesia and Malaysia). Many Muslims are foundalso in Inner Asia (Uzbekistan, Azerbaijan, Kazakhstan, Turkmenistan, Tajikistan

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and Kirgizia) and China. In addition, Muslims comprise large minority groupsin many multicultural societies in the Americas (Canada), Oceania (Australia) andWestern Europe (U.K.).

Adherents to Islam have to be 'obedient' to God and to appreciate the purposeof their existence in this world. The human race, according to Islam, owes itsexistence to God. Thus, a Muslim businessman has to relate his conduct to thepurpose of his existence as envisaged by God. God is said to have proclaimedthat, '1 have only created... men that they may serve me' (Zariat 51: 56).^ Thenature of this service is taken to have been spelled out clearly when God, uponcreating men, declared, 'I will create a viceregent on earth' (Baqara 2: 30). Muslimsconsider humans to be viceregents of God. Whatever wordly possessions a Muslimhas are to be held in a stewardship capacity — that is, as simply in trust fromGod. Thus according to Islam, Muslims are trustees (or stewards) for God; Mantherefore agrees to assume this great responsibility in a covenant with God (al'Araf7: 172). This covenant is reaffirmed consistently by Muslims. At a minimum offive daily prayers Muslims declare: 'Truly, my prayer and my service of sacrifice,my life and my death, are for God, the Chedsher of the world' (an-Am 6: 162).

An overriding consequence of acceptance of the faith is that everything a Muslimdoes, including business dealings, is to be in accordance with God's wishes as disclosedin the Holy writ. These wishes have two major sources. First, they are prescribedby the revealed words of God, in the Quran. Second, they are exemplified by theSunnah, which contains God's inspired acts; sayings of the Prophet Muhammad;and descriptions of the conduct of the Prophet's companions of which Muhammadwas uncritical. The Quran and the Sunnah are the material sources of Islamiclaw. Together, they are referred to as the Sharia (meaning the 'path'). A Muslimwhose behaviour conforms to the Sharia is deemed to be acting in the path prescribedby God. Importantly, for our purpose here, it needs to be acknowledged that theSharia also permeates the code of commercial behaviour for Muslims.

The material source of Islamic jurisprudence (the Sharia) is supplemented alsoby the Ijma — the pronouncements representing the consensus of Islamic scholarson matters not addressed explicitly by the Quran and the Sunnah. Ijma weredetermined by different groups of scholars in the second century of Hijra (i.e.,the second century of the Muslim calendar, marked by the migration, hijra, ofProphet Muhammad from Mecca to Medina in AD 622). But scholars have exerciseddifferent methods of reasoning (ra 'y) in determining Ijma. Some, for example, usedanalogy (kiyas), while others relied upon juristic preference (istihsan). As aconsequence, four major schools of thought (each with its own group of adherents),have arisen:

I. The Hanafis, the largest group among Muslims, examined the motive, argumentor reason underlying the normal and patent actions of the Prophet (largelyin Iraq, Syria, Afghanistan, Turkey, parts of India, Pakistan and Bangladesh);

All parenthesised references separated by a colon are to chapters and verses in the Quran.

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2. The Malikis emphasized Arabic traditions (largely in Medina, Egypt andAfrica);

3. The Shafiis emphasized the common opinion of accredited Islamic jurists ineach era (largely in Arabia, South-East Asia and parts of Central Asia); and

4. The Hanbalis emphasized the rationalist interpretation of the Quran (largelyin Central Arabia and parts of India).

Generally, the four schools of thought are in accord with each other on mattersof principle. They differ, however, in respect of detail (Ahmed, 1988). The Hanafisare seen to be the most flexible and accommodative, followed by the Shafiis, theMalikis and the Hanbalis, in that order. When confronted with new or changedcircumstances, the Hanafis examine the underlying motive of relevant acts of theProphet and apply it to the circumstances accordingly. The Malikis with theiremphasis on traditions, and the Hanbalis, with their literal interpretation of theQuran, leave little scope for accommodation. The Shafiis, who emphasize thecommon opinion of jurists, are more moderate in their approach.

COMMERCE IN ISLAM

In contrast with the suspicion that frequently attaches to the business communityin Western societies, commerce and merchants are afforded a highly honoured placein Islamic society (Lieber, 1968, p. 230). The Quran cites God as saying, 'Oh youwho believe!... let there be amongst you traffic and trade by mutual goodwill'(an-Nisa 4: 33). The Prophet Muhammad referred to the honour bestowed upontraders by saying, 'The truthful, honest merchant is with the prophets and thetruthful ones and martyrs in the hereafter' (Tirmidhi 12: 4) and 'You ought tobe engaged in commerce because ninety-nine per cent of the bounties of God arecontained therein'(Mansor, 1984, p. 11).

Islamic Rules Governing CommerceIslam recognizes and encourages commerce, but it requires commercial activitiesto be undertaken in accordance with principles enshrined in the Sharia. What islawful (Jhalat) and unlawful (Jharam) for various aspects of commercial activity isprescribed. The Sharia^ prescriptions encompass all spheres of trading activity.It prescribes the nature of allowable traded goods and services as well as the moresof business conduct. Trading in goods and services deemed unlawful for Muslimsto have contact with in everyday affairs (consumption of, and therefore the dealingin, pork, for example) is also unlawful. The Prophet made this clear: 'When Godprohibits a thing. He prohibits [giving and receiving] the price of it as well' (al-Qardawi, n.d., p. 253). In a wider framework the Sharia requires Muslims to pursuethe universally desired ends of justice, goodwill and honesty. It is thus perceivedthat the Sharia explicitly forbids transactions involving uncertainties, pricemanipulations, hoarding, free market interference, exploitation and fraud. In thisrespect, the pursuit of trade and commerce under Islamic traditions contrasts with

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the oft-quoted Western maxim that 'all is fair in business' and somewhat doesaway with the need in Western business for the warning caveat emptor.

Classical Forms of Islamic Business OrganizationWestern-style corporations operate freely in most Muslim countries. Many Islamicbanks operate as corporations. However, whereas the benefits of incorporation areappreciated by Muslims in general, its widespread adoption awaits the much-neededreformation of stockmarket operations to conform more to Islamic traditions. Islamapproves of the acquisition of stocks as investment instruments, but it abhorsspeculative transactions. As such, forward purchases and sales, margin trading andthe like need to be dispensed with before shares of an Islamic organization willenter the stockmarket.

There are not any specific criteria in the Sharia to which a Muslim might referfor guidance as to what constitutes an allowable, non-speculative investment. Theassessment is a matter of conscience for the individual to grapple with, and Muslims'decisions in this respect are fashioned by their belief that only God knows whatis speculative and what is not, and that they are answerable before God for theirinvesting actions.

A mixture of both traditional Western and Islam compliant business organizationsoperate side by side in most Islamic countries. The notion of corporation was saidto have existed during the Prophet's era, when many people pooled their resourcesin commercial ventures which operated on principles akin to those of modern-day corporations (Afzal-ur-Rahman, 1982, p. 242).

Proceeding to impose Western accounting rules and Western theoreticalexplanations for them appears predicated upon at least that co-existence beingpermitted to continue. But capacity to continue in that fashion is problematic.It is dependent upon the extent to which the campaigns in Muslim countries toachieve complete compliance with Islamic ethics succeed. Specific progress in thisdirection is evident in some Muslim countries; Pakistan, for example, has legislatedto force its banking companies to cease all interest (riba) related business.

In contrast with the West, under Islam partnerships {sharika), mudaraba (trustfinancing) and murabaha (the combining of credit with cost-plus pricing) are thebasic forms of Islamic business organization. Each would fall under the genericWestern labels of partnership or joint venture. In the West, incorporation wasintroduced as a mechanism to cope with the perceived inability of partnershipstructures to facilitate the marshalling and managememt of the large capital outlaysrequired to exploit the emerging technologies of the industrial revolution.Contemporary partnership structures were perceived to be inadequate for thatpurpose. Interestingly, that does not appear to be a commercial problem withinthe Islamic commercial framework. To the contrary, the cooperative ethos whichpermeates the Islamic commercial code virtually eliminates the basis for adversarialposturing by providers of capital, labour and management so common in the West.In particular, the separation of ownership and control of business activity is notthe vehicle for conflict creation under Islam that it is under the Judaic-Christianframework of the West.

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Examination of sharika, mudaraba and murabaha structures provides insightsto the recent Western development of partnerships in which the members havelimited liability, and with the development of complex financing arrangements. Ina perverse way, a degree of convergence between the West and the Muslim worldappears with respect to the use of partnership structures. In contrast, greaterdivergence appears likely by virtue of the development in the West of financingstructures of ever increasing complexity.

Finance, Labour and Credit PartnershipsAs in the West, Islamic partnerships can be categorized, depending on the formof 'capital' contributed by the partners, as a finance partnership {sharika mat)\a labour partnership {sharika a'mat); or a credit partnership {sharika wujuh).

Finance partnerships (sharika mal). These must be formed only with cash ascapital. Equity contributions in cash by all partners {musharaka), although aninfrequent arrangement, comes closest to Western joint-venture partnershipstructures. Cash capital contributions in mixed currencies are permissible. But, unlikeestablished Western practice, a partnership in which the capital comprises goodsis deemed invalid under Islam. Agency (one of the indispensable features ofpartnership) is considered to be impossible with goods. Essentially, the problemis rooted in Western valuation practices. If capital were to consist of goods, difficultiesare thought likely to result in determining the partners' respective residual sharesupon termination. The exact value of partnership shares would be a matter ofconjecture and possibly the source of disputes and recrimination. Hence the useof goods as contributions to partnership capital is inconsistent with Islamic law.So, some valuation disputes which emerge as intractable problems in conventionalWestern accounting do not arise if Islamic principles are complied with.

Labour partnerships (sharika a'mal). Here the capital contributed consistsprimarily of the partners' labour. The type of labour envisaged is usually an artisan'sskill to be used in a manufacturing venture. This type of partnership is designatedvariously as: sharika fl 'amal bi aydihima (a partnership of work with hands); sharikabila'mal (a partnership in work); sharika as-sana'i (a partnership of crafts); andsharika at-taqabbul (a partnership of acceptance of work). The partnership is formedupon the partners' joint initial acceptance of the job. Labour partnerships are notvalid, according to the Shafiis, who regard partnerships to be proprietary and theintermingling of partners' separate labour to be simply impossible. Irrespective ofthe kind and amount of work contributed by each partner, the distribution of profitsamong them is according to the proportion agreed upon at the formation of thepartnership."

^ The discussion here is limited to commercial partnerships (sharika at-aqad) only. Proprietarypartnerships (sharika al-milk), involving joint ownership of property but without necessarily jointexploitation of it, are not discussed. Proprietary partnerships may arise as a result of inheritance,gifts, etc. For the purposes of this paper this form of partnership is irrelevant.

' While partners' labour is a necessary feature of a work partnership, it is not a measure of the partners'respective investments. The reward in work partnership derives from the liabilility for the workundertaken and not from the execution of the work itself.

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Credit partnerships (sharika wujuh). These partnerships derive their name fromthe notion that the capital of the partners stems from their wujuh (good reputation)on the basis of which credit is extended to them. These are also sometimes termedsharika al-mafalis (a partnership of the penniless), to capture an arrangement inwhich people without any cash capital form a venture partnership. A creditpartnership is not permissible according to Shafiis because the chief function andpurpose of a partnership is the augmentation of capital investment. In the viewof Shafiis this could be achieved only with a tangible investment such as cash;it could not be achieved with labour or credit.

According to the circumstances, each type of partnership may take a limited{al-inan) or an unlimited {mufawada) form,̂ being a partnership of equals. Theremust be complete equality of the partners in all respects (personal status as wellas capital and division of partnership profits), the inclusion of all trade activitieswithin its scope, and the mutual agency and surety of the partners. For practicalpurposes, only Hanafis recognize the validity of mufawada.

A limited partnership arises when two or more partners contribute to a capitalfund, share profits in an agreed manner and bear losses equal to their proportionof the mutual contribution. Only that part of capital which the prospective partnerwishes to invest becomes part of the common fund. Each partner is the agentof (though not a guarantor for) the other partners: mutual agency is valid forthe type of business covered by the partnership, or to the extent of joint capital.This means that only the partner who has concluded a transaction can sue theother contributing party. The latter has no action other than one against thecontracting partner. In this respect, partners in the limited partnership bearobligations different from the joint and several liability attaching to partnershipsin the Anglo-American tradition.

MudarabaThis is an arrangement in which an investor or a group of investors {rab al-mal)entrusts capital or merchandise to an agent-manager {modarib). The intent is thatthe agent shall trade with the capital or merchandise and then return the principalto the investor(s), together with the previously agreed-upon share of profits. Asa reward, the agent receives the remaining share of profits. Losses from anunsuccessful business venture are borne exclusively by the investor(s); the agentis in no way liable for losses of this nature.^ The agent's loss is limited to theopportunity cost of time and effort expended in the business.

5 This is in distinct contrast to Western nomenclature in which the designation 'limited' and 'unlimited'denote the extent of each company shareholder's liability to third parties. In Sharia, the liabilityin all forms of partnerships is unlimited.

* The mudaraba combines the advantages of a loan with those of a partnership. It contains elementscharacteristic of both, but cannot be classified strictly as either. As in partnership, profits and risksare shared by both parties; the investor risks capital, the agent risks time and effort. However, inthe mudaraba no social capital is formed, and the investor does not become directly or jointly liablewith the agent in transactions with third parties. As in a loan, the mudaraba generally entails noliability for the investor beyond the sum of money or quantity of commodities entrusted to the agent;and in the event of successful completion, the agent returns the capital plus a share of the profits.

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In a mudaraba contract, any proportional division of profit agreed upon at thetime the contract is negotiated between an investor and an agent is acceptable.However, the division must be strictly in accordance with some agreed ratio. Hanafisdistinguish two types of mudaraba contracts — an unlimited and a limited mandate.

Unlimited-mandate mudaraba. Contrary to the Western tradition, the unlimited-mandate mudaraba bestows the agent with a wide discretion in any business matter.This form is invoked where the investor (principal) gives a blanket authorizationto the agent to act with the investment in whatever ways the latter sees fit. Extremelywide latitude is afforded the agent. Agents are able to commingle invested capitalwith their own, reinvest either or both in a mudaraba or partnership with thirdparties, and employ virtually any technique of commerce variously used in thepursuit of profitable trade. This appears to conflict with the Western notion ofpartnerships creating a specific, identifiable accounting entity.

The creation of an unlimited-mandate mudaraba opens the way for the use ofmudaraba as an instrument of financial entrepreneurship. Capital may be entrustedto a well-known and experienced trader who could then skilfully reinvest it, sharein its profit but not risk any losses personally. In this respect the investment trailhas the potential to be extremely complex. The governance element underlyingthe apparent flexibility in the lawful actions of the agent lies in the underlying,but overriding, requirement that the agent complies with the dictates of Islamicbehaviour. The compulsory compliance therewith amounts to an automatic injectionof a code of business ethics. But, unlike the Western tradition, because of theirorigin, no differentiation is drawn in Islam between business ethics and moral codesto be followed in other activities.

Limited-mandate mudaraba. When an investor does not give a blanketauthorization, a limited-mandate mudaraba exists. This is more akin to the thinkingunderlying Western partnerships, for agents may not commingle investments andtheir personal capital, nor ordinarily invest it in a mudaraba or partnership withthird parties. However, agents are allowed freedom of action in the commercialfields in which they customarily trade.

Malikis and Shafiis limit the flexibility enjoyed by the agent: the agent's taskis to achieve profit primarily by means of buying and selling for cash. A rightto engage in other transactions is not considered to be part of an agent's mandatefrom an investor. Without an investor's express permission, an agent is not permittedto sell mudaraba goods on credit, to accept an assignment of debt (hawala) inpayment, to entrust goods to outside parties, to invest them in a mudaraba orpartnership with third parties, nor even to leave them as a deposit (except in extremeand extenuating circumstances). Engaging in any of these activities withoutauthorization subjects the agent to liability for the investment in case of losses.

Principals are permitted to impose specific restrictions on agents; such specificrestrictions could appear in a limited, as well as in an unlimited-mandate mudarabaand could relate to the trading area, traded object or methods of trading. Theonly requirements are that the restrictions be useful and beneficial from the investor'spoint of view, and that it coincides with the primary purpose of a mudaraba —that of achieving a profit. When investors' instructions conflict with this profitgoal, they are overridden and customary practices prevail.

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One of the conditions of a valid mudaraba is the alienation of the investor'scapital from the investor. There can be no effective mudaraba while capital is stillin the investor's possession. The application of this principle also prevents the investorfrom insisting on full personal participation in the commercial conduct of mudarababusiness. The mudaraba contract is invalidated if the principal's personalparticipation is made a condition of the mudaraba, because no longer would therebe the required separation between the investor and invested capital.

Interdenominational mudaraba is permissible under certain circumstances. Itdepends upon the religious affiliation of the agent. If the agent is a Muslim, thecontract is permissible and valid like any other between two Muslims. However,if the agent is a Christian the agreement, though not invalid, is discouraged (makruh).Such a mixed-religion mudaraba is disapproved of because of the difficulties facedby the investor in ensuring the agent performs activities according to Sharia. Malikidoctrine generally accords with the Hanafis' position of disapproving of thearrangement. But Malikis even disapprove of a mudaraba between a Muslim agentand a Christian investor, or anyone according to whose religion the eating ofprohibited things is permissible.^ They disapprove of entrusting funds to a non-observant Muslim agent.

By definition, profit from a mudaraba venture is the sum remaining upon itsdissolution after the repayment of the invested capital to the investor and thededuction of all legitimate business expenses incurred by the agent. The limit oflegitimate business expenses is defined by its conformity to the dual criteria of'customary commercial practice' and 'the pursuit of profit'. The same principlesgovern the agent's expenditure on personal needs while engaged in mudarababusiness. Though the admissible expenses of the agent are determined by commercialcustom, the amount that can be recovered legitimately is determined by social status,and the nature and scope of the agent's commercial affairs. If the agent's privatefunds are mixed with those of the mudaraba investment, or if the agent tradesseparately with personal funds while travelling, the personal expenses are coveredby the mudaraba in a direct ratio of the investment divided by the total amountof money being traded with. If, with regard to the quantity and quality of personalexpenses, the agent exceeds the customary level, the excess is recovered from theagent's own funds.

The most innovative feature of the mudaraba contract (and the aspect thatdistinguishes it most clearly from other Islamic business structures) is its treatmentof the distribution of liabilities between contracting parties. Absent from it is theformation of social capital. Consequently, the agent is not liable for any part ofthe investment in case of loss. In turn, the investor is not jointly liable with theagent in transactions with third parties.

No time Hmit is stipulated at the outset for the duration of the mudaraba agreement,but it is concluded normally when the agent returns from business travels or whenthe related transactions are completed. At that time, the investor's capital is returned

' Prohibited food includes pork, animals not slaughtered in the name of God, animals with canineteeth and birds with claws.

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and the remainder (i.e., the profit) is divided between investor(s) and agent aecordingto the agreed proportions. If for some reason the agent and the investors divideonly the profit, while the amount equivalent to the investment remains in the agent'shands and the latter maintains trading with it, the original mudaraba is consideredto be continuing. Were the agent subsequently to suffer any business reverses, thereturn of part (or even the entire amount) of the agent's share of the profit wouldhe required, until the amount of the original eapital was returned entirely to theinvestor.

MurabahaThis is a form of cooperative venture partnership in which a bank or investmentcompany finances the purchase of goods and sells them, at an agreed mark-upon cost, on behalf of a partner client. It thereby combines partnership with amechanism of cost-plus pricing. It is intended to protect innocent public consumersfrom the wiles and stratagems of shrewd traders. By basing the sale priee on theoriginal cost of the item to the vendor, the purchaser is provided with an elementof protection against unfair exploitation by unscrupulous merchants.

The chief concern in setting out detailed guidelines regarding the determinationof the priee of all items is to avoid any fraud hy the vendor. A variety of expensesconnected with the maintenance, improvement and transport of goods may beincluded in the cost which forms the basis of the murabaha sale. The customsof the merchants serve as the criteria for determining exactly which expenses areto be included and which are to he excluded. Generally, money expended directlyon goods or on services which are indispensable to the sale of merehandise maybe ineluded. Overhead cost allocations may be included if the vendor and purchaseragree that doing so will give a truer estimate of the cost. In the negotiations leadingto this agreement the common guiding principle is that each party should not exploitthe other in any way. The personal expenses of the merchant, and those otherexpenses not involved directly with the goods, are to he exeluded from the calculationof cost on which the murabaha transaction is based.

Those dominant Islamie business structures and the commercial ethos of whichthey are part are not congruent with pervading themes coursing through Westernaccounting thought. In many instances Western accounting methods contradict thebasic Islamic principles.

Implications for Western Finance and Accounting Theories and PracticesBy virtue of the prohibitions on deliberate uncertainty and exploitation in commerce,traditional elements of Western eommerce, particularly those drawing upondiscounting mechanisms, are prohibited in principle. The loci of alternative economicsystems according to Western tradition also shift. The fundamental principles ofIslamic economics stand between the extremes of capitalism and Communism usuallydrawn in Western thought. Private property is encouraged under Islam, its useto provide a just reward for its owner is permitted. But ultimate ownership ofproperty lies with God, according to the Islamic tradition. Muslims considerthemselves merely stewards for private property. Accordingly, money and propertyhave to be utilized for the common good, not exploited, not overworked, not left

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unused. The Sharia specifies eight rules which are to govern private ownershipand use of property. There is to be: continuous utilization thereof; payment ofthe zakat according to its market value; beneficent use; care not to have its useharm others; possession of property must comply with Islamic law; use must beneither parsimonious nor prodigal; self due benefits to the owner are permitted;and property transfers are to be subject to Islamic inheritance laws (Mannan, 1986,pp. 55-74). Those matters have potential consequences for the imposition in generalof Western finance and accounting practices on an Islamic commercial communityand with asset valuation practices in particular.

Islamic commerce thus proceeds most conveniently under an equity-basedstructure. Cooperation between the providers of human capital and money capitalis the motivational force which is to drive commerce according to Islam. Clearlypartnership and partnership-type structures facilitate compliance with the religiousedicts. In this respect it differs considerably from Western recourse to debt financingwhen economic conditions make it financially attractive. For, whether equity ordebt financing promises the best financial return to owners, or the best financialperformance to managers, is not the motivating factor in Islamic commerceundertaken according to the Islamic tradition.

Essentially, Islam precludes debt financing: first, because of God's absolute,categorical prohibition of interest; and second, because of the Prophet's admonitionagainst debt itself Interest is prohibited explicitly in the Quran. God said, 'Ohyou who believe! Devour not interest, doubled and multiplied; But fear God, thatyou may really prosper' {al-Imran 3: 130) and 'That which you provide for increase[riba^ through the property of other people will have no increase with God. Butthat which you lay out for charity, seeking the countenance of God will increase'{al-Rumm 30: 39). God also said, 'Those who devour interest will not stand exceptas stands one whom the evil one by his touch hath driven to madness. That isbecause they say "Trade is like riba'\ but God has permitted trade and has forbiddenriba- {Baqara 2: 275).

Riba literally means 'increase'. Experts on Islamic jurisprudence agree that anyincrement over and above the amount of capital loaned is riba.'^ Riba is forbiddenbecause the potential for the borrower to invest money and earn a profit introducesan unacceptable speculative element into the business undertaking. To exact a higheramount than the sum lent on that conjectural basis is regarded as being a kindof unjust exploitation (Islahi, 1988, p. 130). Injustice is presumed to arise whereverthere is a guaranteed and fixed return to one party (in this case the lender), butan uncertain and variable return to the other (the borrower). As a consequence,all fixed income securities, such as preferred stock, are also unlawful. This contrastswith the Western tradition in which preferred stock is perceived to be a meansby which an equitable element may be injected into capital formation by limiting.

The term riba is broader than 'interest'. Used in the modern sense (riba al-jahitiyah), it also includesincrements that may arise from barter exchange. For example, riba at-fadl arises from an exchangeof unequal value for the same commodity. Riba is also defmed to include an interest-free loan inwhich there is an advantage or benefit to the lender.

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ceteris paribus, the return to the preferred shareholders and increasing the potentialreturns to the common shareholders. Common shareholders thereby bear the greatestpotential risk and enjoy the prospect of greater returns. Uncertainty in the outcomefor the common shareholders is seen in the West as having some virtue.

Although interest-free loans are allowable, they are discouraged. There is clearevidence of this in the Sunnah. The Prophet disliked Muslims being in debt.According to al-Qardawi (n.d., p. 268), debt was 'a worry by night and a humiliationby day'. The Prophet is said to always have asked for God's protection fromindebtedness, saying, 'Oh God, I seek refuge in Thee from the burden of debtand from the anger of men'. Asked whether he equated debt with unbelief, theProphet is reported to have replied, 'Yes' (al-Qardawi, n.d., p. 268). And whenasked why he sought the protection of God from debt so often, the Prophet'sanswer is recorded to have been that debts frequently cause people to tell lies andbreak promises {Bukhari 41: 582): 'Everything will be forgiven to the martyr inthe cause of God except debt' (al-Qardawi, n.d., p. 269).

Prohibition oiriba has important implications for the harmonization of accountingprocedures, insofar as harmonization is perceived necessarily to entailimplementation of many standard Western accounting procedures in which interestcalculations are integral. Many past and present Western standards entail discountingprocedures invoking a time value of money concept, which is not admitted byIslam; for example, with respect to the accounting in the United States of Americafor pension benefits (SFAS 87 and 88), amortization of long-term debt (APB 12),interest on receivables and payables (APB 21), lease capitalization (SFAS 12), debtrestructuring (SFAS 15), debt defeasance (SFAS 87), assessing and reportingsuperannuation liabilities (SFAS 88), and the early extinguishment of debt (APB26). Likewise with respect to similar standards in other Western countries. Forexample, in Australia in respect of lease accounting (AAS 17), debt defeasance(AAS 23), superannuation funds accounting (AAS 25), accounting by generalinsurance companies (AAS 26), as proposed in relation to accounting for employeeentitlements (ED 53), and as contemplated as a part of the likely procedure ofthe valuation of non-current assets (AASB 1010).

In more general terms, most of the discounting-based explanations of the capitalbudgeting techniques used for project evaluation do not conform to the Islamicprinciples. Nor does the use of discounting expected future cash flows to assessthe likely recoverable amount of assets from their continued use. For the timevalue of money concept (as it is explained traditionally in Western fmance andaccounting theories) does not exist in Islam.

Other asset valuation issues in Western accounting which have attractedconsiderable (often heated) debate could be non-events under Islamic principles.In the accounting literature there is considerable argument supporting the valuationof physical assets at their replacement price on the grounds that current replacementprices are surrogates for the discounted net present values of the anticipated futurenet cash flows from their use (Gynther, 1966, is an apt example). No defence ofreplacement cost valuations on those grounds survives. Yet there is a voluminousWestern literature advocating an ideal measure of income to entail the discounting

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of anticipated cash flows (e.g.. Canning, 1929; Staubus, 1961; Ladd, 1963; Hansen,1966; Gynther, 1966; Edwards and Bell, 1967): it too cannot be promoted underIslam in those terms.

Inadmissibility of the surrogate rationale for replacement price valuations forphysical assets strikes deeply into a strong world-wide advocacy thereof. Considerablesupport for replacement price valuations underlies most of the professionallyendorsed mechanisms proposed for incorporating the effects of price and (in someinstances) price level changes in accounts to offset the distortions of inflation (Clarke,1982).

Replacement price would not be an acceptable valuation under Islam, in anyevent. The imposition of zakat as the primary taxing mechanism under Islam placesasset valuation in a religious context. For zakat is to be based upon the excessof the wealth embodied in productive assets over a base amount (nisab). Currentmarket value (the surrender value of insurance certificates, the face value of mutualfund certificates and the selling price of physical assets) is set as the valuationbasis (see, Zakat and Ushr Ordinance. 1980. of Pakistan; Ordinance No. XVIIIof 1980, An Ordinance to make provisions relating to the assessment, collectionand disbursement of Zakat and Ushr). By virtue of zakat there is a religious obligationto surrender specified portions of excess wealth. Furthermore, holding, as it does,the second place (after prayer) in the five tenets of Islam, zakat would render thetraditional balance sheet derived under conventional Western accounting practicesinappropriate as a vehicle for Islamic financial information needs. Artefacts oftraditional Western accounting, such as provisions for deferred income tax, futureincome tax benefits, goodwill on consolidation, goodwill of other varieties,capitalized expenses and the like, which do not have any real-world referent —which do not comprise wealth in a financial sense — could not find a place inan Islamic framework of accounting. In contrast, it seems that a statement of financialposition showing the nature, composition and the current money's worth of assetsand the nature and amount of liabilities, as emerging from Chambers'(1980) CoCoA,would. Gambling and Karim (1991, p. 99) come to a similar conclusion, thoughnot (it seems) with respect to the overall system of accounting per se, insofar asit employs for Islamic accounting purposes, 'a very suitable method of valuation'.Interestingly, in a manner consistent with the tawhidic paradigm, that would eliminatefrom Islamic commerce many of the conventional avenues for creative accountingthat exist in the extant Western system.

Many modern financial instruments have underlying theories in which the timevalue of money plays a key role. Synthetic options are a salient example. It isnot merely that interest valuations are critical inputs of the mechanics, for suchcalculations as a method of calculating proportional increases and decreases asa base sum are not riba, per se. Rather it is the fact that the notion of the timevalue of money does not exist in the Islamic framework of monetary calculation.Nonetheless, whether this excludes the use of discounting-like calculations is farfrom settled. Tomkins and Karim (1987) argue that an alternative explanation fordiscounting techniques could admit them to the Islamic framework; in contrast.Gambling and Karim (1991) appear not to have sympathy with that argument.

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Clearly, while more investigation is warranted, the present uneasy position ofWestern-style discounting methods remains.

Likewise, much of Western fmance theory, in particular the capital asset pricingmodel, which draws upon interest-dependent explanations of risk, cannot be partof the accounting and finance package.

That commerce can persist within an Islamic framework of concepts withoutsuch procedures and without such explanations of price movements, invites theinference that asset valuation and explanation of price movements in terms of interestcalculations are not necessary elements of monetary systems and financial calculation.Nor are they the key elements of financial decision making which Western commercialfolklore would have us believe and which the curricula of our business schoolspromote vigorously.

Thus, for practial purposes, equity funding provides the only source of financingopen to a devout Muslim in financing business activity. Specific ways of raisingequity finance and their implications for the organizational structure of businessare to be gleaned from the practices of the Prophet, his companions, and thepronouncements of Islamic scholars. Understandably, the effects upon theorganization of commerce under Islam are profound.

CONCLUSION: QUESTIONABLE IMPERATIVES ANDPOTENTIAL IMPEDIMENTS

Injunctions permeate the everyday affairs, including the economic behaviours, ofthe followers of Islam. Central to the Islamic business ethos are the divine injunctionagainst riba, the more acceptable financing and business structure embodied inthe murabaha concept, and the alternative arrangements of sharika and mudaraba.

Prohibition of riba, in particular, presents a cultural element which adds complexityto accounting harmonization on Western terms. Outlawing riba eliminates manyconventional Western discount-calculation-based accounting procedures andfinancial calculations, some of which are enshrined in prescribed, compulsoryaccounting standards. As such, either the procedures cannot be invoked in anyharmonization package, or some explanation other than that drawing upon thetime value of money concept has to be injected into the argument. A considerablepart of Western fmance theory draws upon discounting and other interest-basedcalculations, particularly with respect to the assessment of risk. It is difficult toenvisage how the CAPM can be argued other than in the Western manner. It appearsthat much of the conventional Western finance wisdom is incompatible with Islamictraditions. Methods of project evaluation which entail discounting, too, must beat risk of rejection as conventional calculations, or be supported by otherexplanations.

That commerce according to Islamic principles thrives in monetary systems inboth Islamic and non-Islamic states invites non-Islamic introspection. TraditionalWestern explanations of the financial principles underlying calculations deemedimperatives in prescribed Western accounting standards and invoked in financetheory and other settings, and as enshrined as dogma in most Western universityand college accounting and finance curricula, deserve closer examination.

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Compliance with the Islamic tradition transcends national boundaries. Unlikethe nationally driven cultural elements which have dominated prior discussionsof the impact of culture on accounting, religions such as Islam impose a codeof ethics upon their followers transcending national boundaries. The potentialinfluence of Islam on accounting policies and practices could inject analyses ofnational accounting difference with a cultural dimension more profound than thatemanating from the impact of indigenous secular laws, general custom andcommercial habit.

Religion in general and Islam in particular have the potential to extend a profoundcultural influence in the quest for the international harmonization of accounting.

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