Thoughts on Economics
Vol. 20, No. 01
A Comparative Analysis of Conventional Ethical Code
and Islamic Ethical Code in Accounting Profession
;Md. Kamal Hossain ;;Mohammed Shamsul Karim ;;;Serajul Islam
Abstract : Conventional Accounting organizations and Capital Islamic organizations have developed their respective ethical codes of accounting for professional accountant(s) and member(s). This paper tried to examine here whether Islamic ethical code of accounting is more beneficial for the values and norms for both the members and organizations on the basis of studying different articles, research papers, Al-Qur’an, Al-Hadith and other related books. It argued that Islamic ethical codes of accounting ensures the best result for both the organizations and the members.
Ethics, Professionalism, Transparency, Accountability, Accounting and Islam. 1. Introduction
The word “ethics” is derived from the Greek word “ethos”, which means the character, spirit and attitudes of a group of people or culture. Ethics may be defined as the set of moral values and principles that distinguish what is right from what is wrong. Ethics has a twofold objective: it evaluates human practices by calling upon moral standards; also it may give prescriptive advice on how to act morally in a given situation. Ethics, therefore, aims to study both moral and immoral behavior in order to make well-founded judgments and to arrive at adequate recommendations. Sometimes ethics is used synonymously with morality. An action, which is morally right, is also called an ethical one. Ethical codes of different professions guide professionals to maintain professional standard acceptable to the stakeholders and people in the society. Though there are debates on the definition of ethics as it varies from society to society and religion to religion, the main objective of this study is to discuss the supremacy of Islamic ethical code of accounting profession over the traditional ethical code of accounting profession while the traditional code could not protect the image of the
; Lecturer, Department of Business Administration, International Islamic University Chittagong. ;; Associate Professor, Department of Business Administration, International Islamic University Chittagong. ;;; Assistant Professor, Department of Business Administration, International Islamic University Chittagong.
40 A Comparative Analysis of Conventional Ethical Code .........................
profession during the last four decades. Corporate scandals of HIH & Harris Scarfe in Australia, Enron & Worldcom in the US, and Parmalat in Europe and financial scandal of corporate houses in USA in recent years have made doubts if the present ethical code of the accounting profession is sufficient to guide the accountants in their professional life.
Accountants are the trustees of financial reporting of an organization. Though ethical codes are maintained in accounting practices for a long time a continuous corporate scandal makes it doubtful whether traditional ethical code of accounting is sufficient to guide the accountants in financial reporting. Some studies on corporate collapses in the last four decades identified that all collapsed firms received clean images for their operation by the auditing firms and there was no technical mistake of professional accountants but ethical standard of professionalism was under question in each case (Ashkanasy and Windsor, 1997; Giacomino, 1992; Ponemon, 1995; Gaa, 1994). A recent survey (Jacling et el, 2007) among 66 members of International Federation of Accountants (IFA) identified nine factors for ethical failure. These are mentioned below in order of significance: self interest; failure to maintain objectivity and independence; inappropriate professional judgment; lack of ethical sensitivity; improper leadership and ill-culture; failure to withstand advocacy threats; lack of competence; lack of organizational and peer support; and lack of support of professional body. Accountants work to maintain a clear financial picture of the organization for the stakeholders. Because of agency relationship, there is a conflicting relation among the parties. Sometimes accountants compromise for subjective judgment instead of objectivity for the sake of their appointment which created corporate dilemma and ultimate major corporate failure.
Considering the failure of traditional accounting education Jacling et el (2007) recommended to introduce ethical education at pre and post-qualification level. But our argument is ethical codes were prevailing at the time of collapses and the professionals of „Big‟ auditing firms were not unaware of those codes. Considering this, it is necessary to see whether traditional accounting codes are sufficient to address the problems. In view of this it is also of our interest to see whether Islamic ethical code in accounting can address the issues. Our final objective is to recommend how the superior ethical codes could be implemented.
Many articles, papers, books etc have been written and published on both traditional and Islamic ethical code of accounting. Even if accounting organizations such as American Institute of Certified Public Accountants (AICPA), International Federation of Accountants (IFAC), American Accounting Association(AAA), Confederation of Asian and Pacific Accountants (CAPA),Institute of Management Accountants(IMA),
Thoughts on Economics 41
Association of Chartered Certified Accountants(ACCA) etc have developed and been developing conventional ethical code of accounting according to ongoing requirement of the organizations without focusing on Islamic values and norms which cannot provide the practitioner a concrete goal of obtaining here and hereafter‟s benefits. On the other hand, many research articles and papers have also been published regarding Islamic ethical code of accounting on the light of Islam. But as it appears no comparative study has so far been done in this field. And this has led us to do a comparative theoretical research study regarding this.
The study was conducted through existing literature review and published materials and of different accounting bodies across the different countries. As it was a theoretical research, our concentration was to explore the published articles in academic journals, materials of professional accounting bodies and report of the corporate scandals. Newspapers, magazines, and web sources were also explored to collect relevant data. Based on the collected data a comparative analysis was done to determine the position of the ethical codes.
Because of the nature of the work, the validity of the research remains within its domain. Time and language constraint made the research limited from an extensive work. The work would have been more authenticated and interesting if a detail opinion of Islamic scholars and analysis of Holy Quran and Hadith could be addressed. However, in spite of all limitations strenuous efforts were made to make the study worthwhile.
2. Harmonization of Ethical Code of Accounting across the globe:
Most of the countries of the world have their own financial reporting standard setting body (e.g., the Financial Accounting Standards Board in the United States) and unique accounting professional organization (e.g., the American Institute of Certified Public Accountants). However, within the past few years, there grew some movements toward internationalization in the accounting profession. As an example, the International Accounting Standards Board (IASB) is attempting to harmonize financial reporting standards throughout the world. Similarly, and more relevant to this study, the International Federation of Accountants (IFAC) has recently issued a revised „„Code of Ethics for Professional Accountants‟‟ (IFAC Code). According to
Farrell and Cobbin (2000, p. 182), the IFAC Code is „„intended as a model code
directed at national associations of accountants.‟‟ In other words, the IFAC Code can potentially serve as the basis for various national accountancy codes of conduct. As we are approaching a global economy, one might predict that there would be
42 A Comparative Analysis of Conventional Ethical Code .........................
significant similarities across international accounting codes of conduct. However, there may be cultural, institutional, philosophical, and nationalistic influences on the purposes, approaches, and content contained in codes of ethics in the accounting discipline across the world.
The International Federation of Accountants currently has 134 members and 24 associate member organizations. According to IFAC code, the mission of the International Federation of Accountants is „the worldwide development and enhancement of an accountancy profession with harmonized standards, able to provide services of consistently high quality in the public interest‟ ( IFAC, 2005, p. 2).
Adoption of the IFAC Code is not a prerequisite for membership in the IFAC. However, according to the IFAC Code, „ A member body of IFAC or firm may not
apply less stringent standards than those stated in this code‟ (IFAC, 2005, p.2). IFAC
member organizations may therefore adopt their own code of conduct for their members. However, any code adopted by IFAC member organizations must not be „less stringent‟ than the IFAC code. IFAC Code is oriented toward professional accountants in public practice, while the vast majority of IMA members are involved in corporate or governmental accounting. It seems likely that professional organizations representing public accountants performing attestation work such as auditing financial statements would be concerned with ethical issues relevant to that work, while managerial accountants would have different ethical concerns. Accounting organizations in lower income economics may not have the resources needed to develop an effective code of conduct on their own. These organizations would therefore find it cost beneficial to simply adopt the model IFAC Code. It is also noted that there is potentially a difference between an accounting organization adopting a code of ethics and that organization being able to enforce such a code upon its membership. In other words, it may be relatively easy (i.e., low cost) for an organization in a lower income economy to adopt the IFAC code, while the conditions within that country, including cultural and socioeconomic factors, might make it very difficult for the organization to enforce the ethical code. It may very well be that an underfunded organization in a lower income country would find it very challenging to assess the extent to which members are compliant with an adopted code of ethics, let alone bring any meaningful enforcement action against members for alleged noncompliance. Therefore, Cohen et al.‟s (1992) suggestion that economic
endowment affects international accounting codes of ethics might well hold true if one examines adherence and enforcement rather than mere adoption.
2.1 Practices of Ethical Code in Traditional Accounting
Ethical professional practice includes overarching principles that express values, and standards that guide conduct of professionals. In traditional accounting, overarching
ethical principles include: Honesty, Fairness, Objectivity, and Responsibility.
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Professionals shall act in accordance with these principles and shall encourage others
within their organizations to adhere to them.
In conventional accounting, the following ethical codes are seen to be practiced i.e.
Box 1: Traditional Code of Accounting
1. COMPETENCE: It indicates the quality of being adequately or well
qualified physically and intellectually.
Each member has a responsibility to:
-Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
-Perform professional duties in accordance with relevant laws, regulations, and technical standards.
-Provide decision support information and recommendations that are accurate, clear, concise, and timely.
-Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.
2. CONFIDENTIALITY: It indicates
1.the state of being secret.
2. discretion in keeping secret information
Each member has a responsibility to:
-Keep information confidential except when disclosure is authorized or legally required.
-Inform all relevant parties regarding appropriate use of confidential information.
-Monitor subordinates' activities to ensure compliance.
-Refrain from using confidential information for unethical or illegal advantage.
3. INTEGRITY: It indicates
1. Steadfast adherence to a strict moral or ethical code.
2. The state of being unimpaired; soundness.
3. The quality or condition of being whole or undivided; completeness.
Each member has a responsibility to:
44 A Comparative Analysis of Conventional Ethical Code .........................
-Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
-Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
-Abstain from engaging in or supporting any activity that might discredit the profession.
4. CREDIBILITY: It indicates
The quality of being believable or trustworthy.
Each member has a responsibility to:
-Communicate information fairly and objectively.
-Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.
-Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.
5. Objectivity: It highlights on
judgment based on observable phenomena and uninfluenced by emotions or personal
Each member has a responsibility to:
-Communicate information fairly and objectively.
-Disclose fully all relevant information that could reasonably be expected to influence an intended user‟s understanding of the reports, comments and recommendations
3. Necessity of Islamic Ethical Code
Ethics has always been significant for accounting professionals and the constituencies they serve. CPAs (Certified Public Accountants) have developed a reputation as trusted business advisors; in part due to the general perception that accounting professionals behave ethically. These reputations are not, however, beyond reproach. Recent years have seen the dimming of reputations that took decades to develop and nurture, due to well-publicized lapses in judgment by CPAs in positions of significant responsibility. The accountant having faith in traditional codes of accounting and practicing with those codes have a great chance of making conflicts between his and
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owners‟ interest due to lack of Islamic knowledge. But accountant in Islam is not only required to maintain a good relationship with superiors, clients and the management but he is also required to maintain, improve and strengthen his relationship with his Master by fulfilling his religious obligations. In fact, the relationship with the Master will determine the mode of relationship with fellow servants (Hassan, 1995). Guided by the proper relationship with Allah (SWT), the human accountant would then be inspired by the values of truthfulness, fairness, tolerance, uprightness, etc. The accountant in Islam is motivated to provide work and excellent service because as a holder of Trustee of Allah (SWT) on earth he must search for the bounties of Allah (SWT). His/Her work is a form of virtuous deed, which becomes the key for the attainment of true success in this world and in the hereafter. His/Her work is also a form of servitude to Allah (SWT) in so far as it is in conformity with the divine norms and values. The accountant who is imbued with the worldview of oneness of Allah (SWT) is not anti-profit or anti worldly gain within the limits provided by religion. His vision of success and failure, however, extends beyond worldly existence to the life in the hereafter. Islamic ethical codes are very much essential because Islam places the highest emphasis on ethical values in all aspects of human life. In Islam, ethics governs all aspects of life. Ethical norms and moral codes discernable from the verses of the Holy Qur‟an and the teachings of the Prophet (pbuh) are numerous, far reaching and comprehensive. Islamic teachings strongly stress the observance of ethical and moral code in human behavior. Moral principles and codes of ethics are repeatedly stressed throughout the Holy Qur‟an. Besides, there are
numerous teachings of the Prophet (pbuh)which cover the area of moral and ethical values and principles. Allah says in the Holy Qur‟an:(Surah Al-Imran :Verse 110)
Meaning: You are the best nation that has been raised up for mankind; You enjoin right conduct, forbid evil and believe in Allah. If only the People of the Book had faith, it were best for them: among them are some who have faith, but most of them are perverted transgressors. The prophet (pbuh) also says:
 ) I have been sent for the purpose of perfecting good morals. (Ibn Hambal This goes without saying that there is a general consensus among human beings about certain fundamental ethical values. However, the Islamic ethical system substantially differs from the so-called secular ethical systems as well as from the moral code advocated by other religions and societies.
46 A Comparative Analysis of Conventional Ethical Code .........................
4. Comparison between Traditional and Islamic Ethical
Codes of Accounting
Traditional codes of conduct are not morally strong though these are ethical code of conduct. Learning and application of these codes may be threatening to the interest of the organizations‟ because members who practise based on the knowledge of these
traditional codes must deviate from moral values and practice injustice . On the contrary,
Islam is premised on ethical and moral conduct. This can be inferred from the Hadith narrated by Abu Hurairah, saying that the Prophet Muhammad (pbuh) has been sent only for the purpose of perfecting good morals. Naqvi (1981) views that the Islamic ethical and moral code of conduct permeates human life whether individual or collective in a way that Islam considers ethics as an offshoot of the Muslim belief system itself. Allah (SWT) says in (Surah Al-Bakarah : Verse 177):
It is not righteousness that ye turn your faces towards east or west; but it is righteousness- to believe in Allah and the Last Day, and the Angels, and the Book, and the Messengers; to spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves; to be steadfast in prayer, and practice regular charity; to fulfill the contracts which ye have made; and to be firm and patient, in pain (or suffering) and adversity, and throughout all periods of panic. Such are the people of truth, the Allah-fearing.
This could be considered as the summary of the entire morals in the economic enterprise derived from the Qur‟an. These values, in his opinion, are the basic values,
which offer guidance in almost every action in human life. Therefore, Islamic business should also be characterized with these manners. These twin concepts of justice and benevolence need some elaboration and will be discussed further.
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‘Adala (Justice) alias Integrity
Allah has commanded the maintenance of justice under all circumstances and in all aspects of life. Allah (SWT) says (Surah Al-An‟am : Verse 152):
And come not nigh to the orphan's property, except to improve it, until he attain the age of full strength; give measure and weight with (full) justice;- no burden do We place on any soul, but that which it can bear;- whenever ye speak, speak justly, even if a near relative is concerned; and fulfil the covenant of Allah: thus doth He command you, that ye may remember. He further says in Surah Al-Maida: Verse 9:
To those who believe and do deeds of righteousness hath Allah promised forgiveness and a great reward.
Meanwhile the Prophet (pbuh) has also reiterated the maintenance of justice and has sternly warned against indulgence in injustice. The Qur‟an commands Muslims to be just and truthful while bearing witness and while deciding a disputed matter, which is not only among them but also when dealing with their enemies. Muslims are, therefore, enjoined to cooperate with each other in the establishment of justice and righteousness. In other words, they are not allowed to exploit others and also may not let others exploit them (Ahmad,1995).
Ihsan (benevolence) means good behavior or an act which benefits other persons without any obligation (Beekun, 1997). Siddiqi (1979) views Ihsan as being even more important in social life than justice. If justice is the corner stone of society, Ihsan is its beauty and perfection. If justice saves society from undesirable things and bitterness, Ihsan makes life sweet and pleasant (Siddiqi, 1979). In the realm of business, Ahmad (1995) outlines certain manners that would support the practice of
48 A Comparative Analysis of Conventional Ethical Code .........................
Ihsan. They are (1) leniency; (2) service motives; and (3) consciousness of Allah and of His prescribed priorities.
According to Ahmad (1995), leniency is the foundation of Ihsan. It is a highly praised quality and encompasses every aspect of life. It is an attribute of Allah Himself and Muslims are encouraged to incorporate it in themselves. Leniency can be expressed in terms of politeness, forgiveness, removing of other people‟s hardship and providing help.
Different approaches in developing accounting have resulted in different objectives of Islamic accounting. The AAOIFI, for instance, with its inductive approach has proposed objectives, which are similar to the current objectives of accounting practice based on the decision usefulness approach. The structure of the AAOIFI‟s code of
ethical conduct consists of three sections; namely the foundations of accounting ethics, the principles of ethics for accountants, and the rules of ethical conduct for accountants. The foundations of accounting ethics delineate seven basic foundations; namely, integrity, vicegerency, sincerity, piety, righteousness, Allah-fearing, and, accountability to Allah. From these seven foundations, AAOIFI developed six basic ethical principles; namely, trustworthiness, legitimacy, objectivity, professional competence and diligence, faith-driven conduct, and professional conduct and technical standards. Finally, for all six ethical principles, they developed guiding rules for accountants in their professional works. The following table comparing the conventional and Islamic ethical codes of accounting can clarify the position:
Traditional Accounting Code Islamic Accounting Code
1. Competence 1. Adala ( Justice)
2. Integrity 2. Ihsan ( Benevolence)
3. Confidentiality and 3. *AAOIFI‟s Code:
Integrity, Vicegerency, Sincerity, 4. Credibility
Piety, Righteousness & Allah Fearing.
5. Objectivity. 4. Accountability to Allah.
* Accounting and Auditing Standards of Islamic Financial Institutions.
5. Supremacy of Islamic Ethical Code over Traditional Ethical
Code of Accounting
In applying the Standards of Ethical Professional Practice, member may encounter problems identifying unethical behavior or resolving an ethical conflict. When faced