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28.8.10

Towards a Theory of Islamic Financial Reporting

Towards a Theory of Islamic Financial Reporting
Anaf Masood, The Boston Consulting Group and
Mohammad Iqbal Tahir, GIFT Business School
January 2008

"This paper has two major streams. It seeks to devise an entity that will allow Muslims to raise the necessary finance to conduct large-scale commerce. Simultaneously, it presents ideas for a reporting scheme that suits this new structure. The need for a connection between the business form and its disclosure scheme is illustrated by reviewing the results of the attempts by the Accounting and Auditing Organization for Islamic Financials Institutions (AAOIFI) at setting accounting standards for a Mudaraba, a uniquely Islamic enterprise. The position of the Western corporation in Islamic law is then examined. It is found that Islam can only accept a separate legal entity that has unlimited liability. To overcome this constraint, a corporate structure that primarily channels investment through Islamic financial institutions is proposed.

The paper also identifies the quality and type of disclosures that any Islamic entity will need to make and then applies these criteria to create a reporting system for the proposed Islamic company. Among the central requirements, apart from financial information, are Zakat and Shariah compliance. It is pointed out in the paper that the proposed Islamic structure promotes a scheme of shareholder-regulated disclosure that can be used to achieve the necessary reporting standards. Even Shariah compliance can be handled for the most part internally through the Islamic bank's Shariah Supervisory Boards. It is, however, felt that Zakat is best policed by an independent agency, which would selectively audit returns submitted by the company. This method also has the advantage of accommodating the as yet unresolved difference about whether Zakat is a personal obligation or one owed by the corporate entity. Through the ideas contained in this paper, Muslims should be able to share in the benefits of modern, large-scale commerce without having to compromise their religious teachings."

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