Accounting Proposal about the crash that happened in Saudi Arabia 2006 Essay Example

13Doctoral Research Proposal

Role played by accounting during financial crisis in Islamic banking

Participant(s)

Sattam Alrowais

1.0 Background

The financial systems play a major role in the development of the world economy (Merrouche and Nier, 2010). The banking system, whether Islamic of convention plays a central role in the economic development. Islamic financial institutions have showed a positive growth over the years based on their strong economic growth on their countries (Iqbal & Mirakhor, 2007). The latest financial crisis saw the collapse of several conventional banks. Despite this, the Islamic banks were the least affected. This led to a lot of interest on the resilience of the Islamic banks to financial crisis (Maher and DridiJ2010). The financial crisis was associated with the financial imbalances and accounting failures. Islamic banking started in the 1970s and is based in many Islamic countries. The Islamic banks operate on different financial laws and accounting procedures (Archer, Abdel Karim and Al-Deehani, 1998). This study aims at analysing the role of the accounting procedures in the making Islamic banks more resilient to financial crisis than the conventional banks. The study also examines the performance of the Islamic banks during and after the 2007 financial crisis.

1.1Main objectives

  • The study will make clear the role played by the accounting during the financial crisis in the Islamic baking.

  • The study will bring coherent understanding of the concept of accounting failures and helps in identifying the accounting and auditing practices that made Islamic banks more resilient during the crisis.

1.2 Specific objectives

  • To historically examine the accounting standards in Islamic banking and their role during financial crisis.

  • To be part of investigation on what made the Islamic banks more resilient during the crisis.

  • To give insight on the role of accounting failure on financial crisis

1.3 Research questions

  • How is financial crisis related to accounting failure?

  • What is accounting fraud and its role in financial crisis?

  • Does the accounting in Islamic banks make them more resilient

  • Is accounting failure a major cause for the financial crisis?

1.4 Study justification

During the financial crisis of 2008, Islamic financial institutions were resilient compared to the conventional banks. This is an issue that has attracted a lot of interests (Hasan and Dridi, 2010). The Islamic banking systems use a different form of accounting compared to the conventional banks. With the claims that accounting failure played a major role in financial crisis, there is need to know its role in Islamic banking. According to analysts, cyclic patterns related to booms and busts underpin a neglect of self-regulation during growth periods, which is a problem that causes or at least adds to oppressive over-regulation during recessionary periods (Carnegie and O’Connell 2014, p. 450). The accounting profession becomes the center of attention in times of financial crisis. Also, there is little research on role of accounting profession in the Islamic banking. This study offers an investigation on the topic of accounting and financial crisis. It helps to gain insight on what accounting practices makes Islamic banking more resilient than conventional banks during financial crisis.

2.0 Literature review

According to Jones (2011) accounting profession helps a lot in delivering information required to make decisions. To ensure that there is quality information, the quality standards setters always ensures that the standards are up to date (Carnegie and West, 2005). After the recent financial crisis, the role of accounting has come under scrutiny. The crisis has been blamed mostly on the accounting failure. This is especially the fair value of accounting. Value of accounting helps a lot in increasing the firm transparency (Verrecchia, 2001). The history of Islamic banking began in 610AD and since then, Islamic principles and concepts have been widely used in their banking sector (Sulaiman, 2003). Since the fall of the Islamic empire and increase in the European influence, during colonisation, some of the Islamic banks have begun adopting the conventional economic system. With the revolution of the Islamic knowledge, Islamic countries have been reintroducing their financial systems which adhere to sharia (Hasan and Dridi, 2010).

According to Al-Moghaiwli (1999), the revolution of the modern Islamic financial system began in 1970s in Gulf and Middle East countries. The Islamic finance system has been operating under the guidance of the accounting and auditing organisation for Islamic financial institutions (AAOIFI). AAOFI was established in the 1991 and has 25 accounting and 5 auditing standards. Through AAOFI guidance on zakah and interest accounting there have been need for disclosures (Abdel Karim, 2004). Despite this, some of the Islamic financial institutions still follows the General Accepted Accounting Practices (GAAP) or International Financial Reporting Standards (IFRS) together with AAOIFI (Sundararajan and Errico, 2002).

During the financial crisis, Islamic banks experienced less deposit withdrawals as compared to conventional banks (Olson and Zoubi, 2008). Some of the Islamic banks recorded increase on their deposits during the same period (Abul, 2009). The Islamic banks were able to maintain supply of credit during the financial panic. Also, the lending by Islamic banks was seen to be less sensitive to changes in deposits as compared to the conventional banks (Chapra, 2008). During the financial crisis, Islamic banks held a higher intermediation ratio, had higher asset quality and were in a better capital position (Maher and Dridi, 2010). The main aim of the Islamic banks is not only creating a maximum return on capital but also attaining the social economic goals based on the Islamic religion. The concept of justice is attained through use of sharing of risks (Hasan and Dridi, 2010). There is sharing of loss and profit which is different from the conventional banks where sharing is based on the interests (Simon and Rifaat, 2009).

There has been a lot of argument about the role of fair value in the financial crisis. Also, faulty accounting practices by the conventional banks have been witnessed. Managers are willing to bend the accounting rules in order to meet the expectations by the public and shareholders. Also, failure to fully disclose information as seen in the Lehman brothers and Repo 105 has been blamed for the crisis (Jones, 2011). These point out to faulty accounting processes that happened before the financial crisis. Despite this, the Islamic banking was resilient during the financial crisis (Abul, 2009). Despite the concerns on the Islamic accounting procedures, Islamic banks were less affected by the financial crisis compared to conventional banks. The research on impact of accounting during financial crisis on the Islamic banks have been little and inconclusive (Chapra, 2008).

3.0 Approach and methodology

The study will gather both qualitative and quantitative data and add to the body of knowledge on role of accounting during the financial crisis in Islamic banking. The study aims at gaining data on accounting standards in the Islamic banking and how they make the bank resilient. The study will trace the research and commentary of the histories of the settings particularly focusing on accounting and auditing in Islamic banks and the respective responses of the general public, the government, and accounting professional bodies. The paper main focus will be the 2008 financial crisis and how it was handled by the Islamic banks through AAOIFI.

3.1Methods

Data from the Islamic banks on their performance during the financial crisis will be analysed from their annual reports. A longitudinal study on the financial crisis and the resilient of the Islamic banks will also be done. The paper reviews the events surrounding the financial crisis globally and impacts on the Islamic banking. Respective responses of the general public, the government, and accounting professional bodies will be sought from firsthand research using survey research, such as online quantitative surveys and focus group interviews. The data gathered will be used to answer the research questions.

3.2 Interviews

Interviews offer a great and valuable source of evidence. Despite this, it is important to ensure that the interview gathered is not biased (Burnard, 1991). In this case, there is use of standardized open ended interviews. These are extremely structured interviews in terms of words and questions. The participants in open ended interviews are asked open ended questions. The researcher can ask probing questions as a follow up. This will be done through use of focus group interviews.

3.2.1 Interview preparation

To prepare for the interview, it will be vital to select the appropriate spot. This is a setting where there is no distraction for the participants. All participants will be explained the purpose of the interview and terms of confidentiality (Burnard, 1991). The interview format which is standardized open ended interview will be explained. The participants will have to be informed the length of the interview.

3.2.2 Selecting the participants for the interview

Only participants who are willing and honest to share the information on Islamic accounting and financial crisis will be selected. Use of critical based sampling and criterion sampling will be utilized in this case. Those selected includes the general public, the government workers, and accounting professional bodies and media who are willing to share the information on resilience of Islamic banking and the role played by accounting.

3.2.3 Implementing interviews

The interview will be conducted in an environment where the participants are willing to share their information freely. All the equipments such as recorders will be tested before the interview starts to ensure that they are working correctly. Each of the questions on stock market crash will be asked at a time while remaining as neutral as possible. The interview will be both recorded and handwritten. The participants will be asked questions regarding the resilience of the Islamic banking and role played by accounting during financial crisis. The interview will also look at the role of the media, government and traders before the financial crisis by asking questions based on the same.

3.2.4 Interpreting data

The data and information gathered during the interview process has to be interpreted properly. This research will involve a third party who will help in verifying the codes and themes as well as determine quality and effectiveness. This will help in eliminating bias and cases of over analyzing. Qualitative research methods used in interviews leads to huge amount of data which is contextually laden and highly subjective (Burnard, 1991). The data received from the interview transcript must be reworked to ensure it represent the major themes that describe accounting failures. Through data reduction, it will be possible to reveal all findings in a simple and efficient manner.

3.2.5 Using interview data for research

The data from interview will provide very vital insight into the accounting role during financial crisis in Islamic banking. Through the interviews, the resilient of Islamic banks during financial crisis will be well understood. The information and data provided will help in determining whether the current perceptions of the general public, the government, and accounting professional bodies regarding accounting role and prevention strategies for financial crisis is consistent with the literature. It will also be possible to use this data and information to determine whether accounting failure is a major cause of financial crisis.

4.0 TIMELINE

It is anticipated the study will take six semesters.

References

Abdel Karim, R.A. 2004, Accounting Standards for Islamic Financial Services: A Standard- setter’s Perspective, Paper Presented at the International Islamic University Malaysia Accounting Conference II on Islam and Accounting: Accounting Theory and Practice for a Different Worldview, Kuala Lumpur, Malaysia, 16-17 September.

Abul, H. 2009. The Global Financial Crisis and Islamic Banking, retrieved 29th February 2016 from, (http://www.iefpedia.com/english/wp-content/uploads/2009/10/The-Global- Financial-Crisis-and-Islamic-Banking.pdf)

Al-Moghaiwli, M. H. A. 1999. Economic consequences of accounting standards: implications for the Saudi organization for certified public accountants. PhD Thesis, The University of Wales.

Archer, S., Abdel Karim, R.A. and Al-Deehani, T 1998, Financial Contracting, Governance Structures and the Accounting Regulation of Islamic Banks: An Analysis in Terms of Agency Theory and Transaction Cost Economics, Journal of Management and Governance, 2(2) pp. 149-170.

Burnard, P., 1991. A method of analysing interview transcripts in qualitative research. Nurse education today, 11(6), pp.461-466.

Carnegie, G. D. and West, B. 2005. Making accounting accountable in the public sector. Critical Perspectives on Accounting 16, pp. 905 — 928

Carnegie, G. D. and O’Connell, B. 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting. 2(6),pp.446-468

Chapra, U., 2008, The Global Financial Crisis: Can Islamic Finance Help Minimize the Severity and Frequency of Such a Crisis in the Future?, paper prepared for Conference on «Forum on the Global Financial Crisis» (Jeddah, 2008: Islamic Development Bank)

Hasan, M. and Dridi, J. 2010, The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study, IMF Working Paper 10/201 (Washington DC: International Monetary Fund)

Hasan, M. and Dridi, J. 2010, The effects of the global crisis on Islamic and conventional banks: A comparative study, IMF Working Paper, WP/10/201, 2010.

Iqbal, Z., & Mirakhor, A. 2007, An introduction to Islamic finance: Theory and Practice, Singapore: John Wiley & Sons (Asia) Pre Ltd.

Jones M. 2011. Creative accounting, fraud and international accounting scandals. Chichester: John Wiley & Sons.

Maher, H., and Dridi, J. 2010. The Effects of the global financial crisis on Islamic Banking and Conventional Banks, A Comparative Study, Journal of International Monetary Fund, Septemper 2010.

Merrouche, O. and Nier, E., 2010. What caused the global financial crisis? Evidence on the drivers of financial imbalances 1999-2007. IMF WP/10/265.

Olson, D. and Zoubi, T. 2008. Using accounting ratios to distinguish between Islamic and conventional banks in the GCC region. The International Journal of Accounting, 43(1): pp.45-65

Simon, A. and Rifaat, A. 2009. Profit Sharing Investment Account in Islamic banks: Regulatory problems and possible solutions, Journal of Banking Regulation, 2009, 10, 300-306

Sulaiman, M. 2003. The influence of riba and zakat on Islamic accounting. Indonesian Management and Accounting Review, 2(2), pp.149-167.

Sundararajan, V. and Errico, L., 2002, Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead., IMF Working Paper 02/192 (Washington D.C.: IMF)

Verrecchia, R., 2001. Essays on disclosure. Journal of Accounting and Economics, 32, 97-180.