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.

Key words
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 profession during the last four decades. Corporate scandals of HIH & Harris

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 .........................

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.
Rationale
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),
Association of Chartered Certified Accountants(ACCA) etc have developed and been
Thoughts on Economics 41

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.
Methodology
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.
Limitation
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
significant similarities across international accounting codes of conduct. However,
42 A Comparative Analysis of Conventional Ethical Code .........................

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.
Thoughts on Economics 43

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
prejudices.
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
presented.

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
Thoughts on Economics 45

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 [1] )
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):

Meaning:
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.
Thoughts on Economics 47

‘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):

Meaning:
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:

Meaning:
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)
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:
4. Credibility Integrity, Vicegerency, Sincerity,
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
Thoughts on Economics 49

with ethical issues, member should follow organization’s established policies on the
resolution of such conflict. If these policies do not resolve the ethical conflict,
member should consider the following courses of action:
a. Discuss the issue with immediate supervisor except when it appears that the
supervisor is involved. In that case, present the issue to the next level. If you cannot
achieve a satisfactory resolution, submit the issue to the next management level. If
your immediate superior is the chief executive officer or the equivalent, the
acceptable reviewing authority may be a group such as the audit committee, executive
committee, board of directors, board of trustees, or owners. Contact with levels above
the immediate superior should be initiated only with your superior's knowledge,
assuming he or she is not involved. Communication of such problems to authorities or
individuals not employed or engaged by the organization is not considered
appropriate, unless you believe there is a clear violation of the law.
b. Clarify relevant ethical issues by initiating a confidential discussion with an IMA
Ethics Counselor or other impartial advisor to obtain a better understanding of
possible courses of action.
c. Consult your own attorney as to legal obligations and rights concerning the ethical
conflict.
From the above discussion it is clear that the traditional codes of conduct have much
more problems while these are applied in professional dealings and conduct.
Regarding these, resolutions are incorporated. But the Islamic ethical codes of
accounting so far do not face any problem while these are applied in professional
dealings and conduct because these are designed and developed comprising Islamic
norms and values.
In the Islamic scheme of things, adherence to moral code and ethical behavior is a part
of Iman (faith) itself. According to the Islamic teachings, Muslims have to jealously
guard their behavior, deeds, words, thoughts, feelings and intentions. Islam asks its
believers to observe certain norms and moral codes in their family affairs; in dealings
with relatives, with neighbors and friends; in their business transactions; in their
social affairs, nay in all spheres of private and public life. Islamic ethical codes of
accounting ensure the following as
- Protecting the derailment of accountant from malpractice of codes;
- Reminding their responsibility which is part of their personal values and
beliefs.
- Providing benefits for the organization as well as for the user.
- Implementing professionalism, transparency and accountability in practice.
50 A Comparative Analysis of Conventional Ethical Code .........................

Practicing of traditional ethical codes of accounting may yield benefit for here but
practicing of Islamic ethical codes of accounting brings benefit for both here and the
hereafter. So undoubtedly it can be said that Islamic ethical codes of accounting play
a supreme role over the traditional ethical codes of accounting by encouraging the
professionals to follow self management system.

6. Is Islamic Accounting Code complementary to Conventional

Accounting code?
Visibly there is no acute difference between conventional and Islamic accounting
codes. But conventional code of accounting cannot fully protect the derailment of
accountant while adopting and practicing the conventional code of accounting due to
lack of Islamic norms and values reflected in those codes.
Specific responsibilities of the accounting profession are expressed in the various
codes of ethics promulgated by major organizations such as the AICPA. The AICPA's
first principle of professional conduct states: "In carrying out their responsibilities as
professionals, members should exercise sensitive professional and moral judgments in
all their activities." A profession is formed on the basis of (1) a generally accepted
body of knowledge, (2) a widely recognized standard of attainment, and (3) an
enforceable code of ethics. A code of ethics is a crucial element in forming a
professional. The three major accounting professional organizations have an ethical
code. The main reason for having ethical guidelines is not to provide a cookbook
solution to every practice-related problem, but to aid in the decision-making process
for situations that involve ethical questions. Business persons will encounter novel
situations in their jobs and will need ethical guidelines to handle them effectively.
Ethical codes are necessary to provide such guidance. To aid its 100,000 members in
resolving ethical dilemmas, the Institute of Management Accountants recently
established an "ethics hotline." Ethics counselors offer confidential advice, solace, and
comfort to management accountants who may have no other place to turn for help.
When societal values are deteriorating, maintaining high ethical standards in
accounting and business grows increasingly difficult. The deterioration is must
because these real world ethical codes have been developed and designed without
touching the Islamic norms and values. If Islamic ethical codes are practiced by
professionals and other members’ for protecting public interest as well as owners’
then all sorts of related ( directly or indirectly) class of people will be benefited here
and the members will gain Almighty’s favor in hereafter. Therefore Islamic ethical
code of accounting is not alternative to traditional code of accounting but these must
complement the lacking of traditional codes of accounting.
Thoughts on Economics 51

7. Conclusion
Accounting is a profession of trustee of stakeholders of an organization. Since the
shifts of flow of financial world is on the basis of accounting reporting, a minor
breakdown of trust in the trustee relationship, which may also be called agency
relationship, will blow the financial world which ultimately might collapse the whole
organization as well as might jeopardize the financial system of the world. To get rid
of this problem accountant should follow a superior ethical code for professional
guidance. In this analysis, it was found that Islamic ethical code of accounting is
superior than traditional ethical code of accounting. But there might emerge a
question whether non Muslim should follow Islamic ethical code or not. As Islam is a
human life oriented generalized religion, any body with faith and a sense of
accountability can be guided by Islamic ethical code of accounting.

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