The Need of Accounting Standards for Islamic Financial Institutions

[Abstract] The accounting and auditing organization for Islamic financial institutions (AAOIFI) has taken the proper initiative to develop accounting, auditing, governance, ethics, and Shari'ah standards for Islamic Financial Institutions (IFIs). The AAOIFI standards serve as a guideline that may reflect the unique characteristics of IFIs and become a useful tool to meet the various needs of IFIs. Currently, one the major challenges facing Islamic Financial Institutions (IFSs) lies in the preparation of financial statements under different accounting standards and which may result to problem of comparability, reliability and compliance level's measurement. This has, however, resulted in a heated debate among scholars that has hitherto translated to the evolving existing literature surrounding the interpretation of the level of compliance with the Islamic accounting standards. This paper, therefore, discusses the Islamic accounting standards through a review of the literature. Overall, the evidence reviewed suggests that the need of the Islamic accounting standards to fill the gap in the Organization of Islamic Conference (OIC) countries. This paper concludes with various recommendations for future research, the most important of which is the need for future studies to be done to implement the Islamic accounting standards, such as the AAOIFI accounting standards. The current paper, therefore, contributes to a better understanding and acceptability of the Islamic accounting standards, such the AAOIFI. [Keywords] Islamic accounting; Islamic financial institutions; AAOIFI; accounting; standardsIntroductionAt present, Islamic banks represent the majority of Islamic Financial Institutions (IFIs), which are spread locally and internationally across both Islamic and non-Islamic countries. The emergence of Islamic banking is due to the increasing demand from Muslims communities worldwide for shariah's complied Islamic financial products, services, and the variety of modes of Islamic finance. However, Islamic banking is evolving and growing at a rapid rate with an impressive record of more than 200 Islamic financial institutions (IFIs) operating in 63 Islamic and non-Islamic countries. The past ten years has seen high growth in the number of IFIs around the world, and the industry of Islamic financial institutions has attracted major Western institutions, such as Citibank, HSBC, and Deutsche Bank, which operate Islamic windows within conventional banks (Maali & Napier, 2010). Furthermore, given the rate of growth of the IFIs, the continuous sustainability of the development currently witnessed by Islamic financial institutions in both Islamic and non-Islamic countries needs the Islamic accounting standards, known as AAOIFI accounting standards, due to the unique characteristics coupled with the growing demand of IFSs' products and services so as to facilitate and enhance the credibility and reliability of the financial statements and reports.Thus, the current standards, which are based on conventional frameworks, seem insufficient to guide the Islamic financial institutions. Currently, the various IFSs institutions apply different accounting standards in their preparation of their accounts due to the absence of Islamic accounting standards (Zaini, 2007). The trend towards the accounting and auditing organization for Islamic financial institutions (AAOIFI) standards has become a pressing issue that has generated heated debate in the Organization for Islamic Conference (OIC) countries.Islamic Accounting Standards: Literate ReviewThe needs for accounting and Islamic financial institutions are emphasizes in the Quran. It has been clearly stated in the Holy Quran that ". Never get bored with recording it, however small or large, up to its maturity date, for this is seen by Allah closer to justice, more supportive to testimony, and more resolving to doubt. " (al-Baqara: 2: 82). In addition, "Those who eat Ribâ (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitân (Satan) leading him to insanity. …