I slamic banks and conventional banks offering Islamic financial services have to be audited according to the same criteria and standards as any other financial institution, but it is important that the firms conducting the audits have an understanding of the distinctive nature of Shariah compliant assets and liabilities. It is in this respect that AAOIFI, the Accounting and Auditing Organization for Islamic Financial Institutions, has performed a useful function for over a decade in devising distinctive standards. One issue is whether the AAOIFI standards should be regarded as a substitute for conventional standards, or an add on. In practice the answer is the latter. For example current accounts with Islamic banks are no different to conventional current accounts, and in accounting terms should be treated in the same manner. Investment Mudarabahah accounts, which cannot be guaranteed under Shariah, are clearly distinctive, and it is these that should be treated differently from conventional savings deposits. It is here that AAOIFI standards matter. The way forward is for the established international accounting firms to encourage some of their staff to take an interest in Islamic finance, and where there a sufficient business, to set up units within their firms that specialize in this type of audit, or at least to have one or more partners with designated responsibilities for Islamic finance. This is already happening. Such an approach is preferable to having small independent specialized firms of accountants focused on Islamic financial institutions. The latter sounds appealing, but the wealth of expertise that the major accounting firms can provide is difficult to match, and most Islamic banks prefer to be audited by leading international accountancy firms, as having them sign off the audit provides greater credibility.
PROFESSOR RODNEY WILSON:
T he AAOIFI Board contemplated this issue at the very onset of the development of accounting standards for IFIs way back in 1990. Two workable approaches emerged. The first is to develop accounting standards from the principles of Shariah and then adopt them and implement them – this is akin to the “reinvent the wheel” approach. The second approach is to review the standards which have been developed by prevailing accounting thoughts, test them against Shariah then adopt those which are consistent with Shariah and exclude those which are not. After in-depth studies of Shariah and accounting aspects, it was decided to adopt the second approach. Hence the accounting standards developed by AAOIFI consist of the following: Syed Alwi bin Mohamed Sultan:
T he issue as to whether accounting standards should be re-invented or be adopted with modification is no longer a question when the process is already in the phase of convergence. In the past, different views of the role of financial reporting made it difficult to encourage convergence of accounting standards. Now, however, there appears to be a growing international consensus that financial reporting should provide high quality financial information that is comparable, consistent and transparent, in order to serve the needs of investors. Over the last few years, we have witnessed an increasing convergence of accounting practices around the world. And there is no reason for Islamic finance accounting standards setters to do otherwise. If convergence of disclosure and accounting standards contributes to an increase in confidence on the industry, the players would then benefit from increased volumes of business. So, why put the extra cost to develop accounting standards in isolation when the approach is no longer required.
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