The Level of Compliance with AAOIFI Accounting Standards: Evidence from Bahrain

[Abstract] The objective of this paper is to explore the attitudes of accountants about the level of compliance with AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) accounting standards. Understanding the basic principles of accounting standards for Islamic Finical Institutions (IFIs) has become increasingly important among most Shari'ah scholars and researchers towards the implementation of accounting standards for IFIs. Currently, IFIs are one of the fastest growing sectors locally and globally. A review of the current framework of AAOIFI was undertaken to determine the level of compliance with AAOIFI accounting standards; the AAOIFI Framework for IFIs is currently the subject of much discussion and review. The findings of this paper, therefore, indicate that, Islamic banks of Bahrain have fully adopted the AAOIFI accounting standards. However, the contribution of this paper is to understand the conceptual framework of AAOIFI accounting standards and could benefit future research. [Keywords] Islamic accounting; accounting standards; AAOIFI; Islamic banks Research Overview The Kingdom of Bahrain acting as the hub for many Islamic financial organizations to develop the Islamic banking and finance industry, including the International Islamic Financial Market (IIFM) and the Islamic International Rating Agency (IIRA), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the General Council for Islamic Banks and Financial Institutions (Ernst & Young, 2011). Islamic banks operate mainly in developing countries in the Middle East, Africa and South-East Asia and are facing some difficulties adopting unique accounting standards into their practice due to the absence of a legal framework and inconsistency of financial reporting. For instance, financial institutions in some countries, such as Jordan, the UAE and Qatar, are officially required to comply with the International Accounting Standards (IASs). Meanwhile, in countries such as Saudi Arabia, the authorities require compliance with both IAS and local accounting standards. In Malaysia, there are national accounting standards, which are based on IAS (Ahmed, 2002). In Bahrain, the authorities require compliance with both AAOIFI and IFRS as requested by central bank of Bahrain (CBB). The dilemma currently experienced in term of the divergence of accounting standards implementations poses a great threat to the sustainability of IFSs. For example, some of the Islamic banks treat investment accounts that are based on the mudarbah contract as liabilities and report them unbalance sheet (e.g. Jordan Islamic Bank, Bahrain Islamic Bank and Qatar Islamic Bank). Other banks treat investment accounts as fiduciary investments and, accordingly, report them as off-balance sheet (e.g. Al Rajhi Bank and Shamil Bank of Bahrain) (Ahmed, 2002). For those reasons, researchers in the area of financial reporting for Islamic financial institutions have conducted a considerable number of studies to investigate the issues of compliance with accounting standards and the need for a unique of accounting standards to be adopted by IFIs. For instance, Karim (1987), Abdel Magid (1981), Pomeranz (1997), Hameed, Alrazi and Nazli (2006), Che Pa (2006) and Shadia Rahman (2007) researchers have examined the understanding, acceptability, and level of compliance with accounting standards for Islamic financial institutions. The Afghani of the Islamic bank economist, Abdul Haqiqi, recommends that the establishment of accounting standards for of Islamic banks and a focus on auditing could possibly address the issue of accounting, conformity to Islamic and Arab social and religious objectives, and a coordinated and unified approach to the interpretation of pertinent Islamic law (Pomeranz, 1997). However, currently, the level of compliance with AAOIFI requirements is unknown and needs to be investigated because the absence of specific accounting standards for Islamic financial institutions being adopted globally could create some difficulties for users of financial reporting. …