Islamic financial products and services differ from conventional financial products and services in terms of philosophy and structure. This creates a challenge for Islamic financial institutions to produce a “true and fair” view of Islamic financial transaction. This task is further compounded by the rapid expansion in the breadth and depth of Islamic capital market actively as measured by the number of institutions as well as by the variety, complexity and sophistication of products and services. In some cases, Islamic financial institutions encounter accounting problems because the existing accounting standards, such as International Accounting Standards ( IASs) . Generally Accepted Accounting Principles (GAAPs) or domestic standards, were developed based on conventional institutions, conventional product structures or practices, and may be perceived to be insufficient to account for and report Islamic financial transactions. Shariah compliant transactions may not have parallels in conventional financing and, therefore, there may be significant accounting implications. For example, in the case of Mudarabah contracts, the transactions is neither equity nor liability in nature as the depositor does not assume the rights of equity holder, ( i.e., shareholder) of the Islamic financial institutions an d neither is guaranteed of returns. Hence, from an Islamic accounting viewpoint, a Mudarabah account may be presented as an ‘ investment account’, appearing as a separate line item from equity or liability on the balance sheet.
The need to develop accounting standards that adequately and appropriately reflect the nature of Islamic financial transactions was viewed by some as an important steps to enhance the reliability, consistency and clarity of financial reporting by Islamic financial institutions, which would also enhance investor confidence in Islamic finance. Arising from this, intensive efforts were made by the Islamic Development Bank (IDB) to establish a formal entity to address Islamic accounting issues. This led to the establishment of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which was registered in March 1991 in Bahrain as an international autonomous non-profit making corporate body. It has a board which includes three central bank governors. Its chairman is the undersecretary at the Bahraini Finance Ministry. AAOIFI seeks implementation of its rules partly by getting central banks to adopt them and partly by trying to persuade Islamic institution of their usefulness. The objective of the organization is to prepare and develop accounting, auditing, governance and ethical standards relating to the activities of Islamic financial institutions, taking into consideration international standards and practices and the need to comply with Shariah rules. In addition AAOIFI contributes significantly to the professional development for the industry. AAOIFI is supported by over 160 institutional members from around 40 countries. It has its corporate office in the Kingdom of Bahrain.
Objectives of AAOIFI
1. Develop accounting, auditing, governance and ethical thoughts relating to the activities of Islamic financial institutions, taking into consideration the international standards and practices which comply with Islamic Shariah rules.
2. Disseminate the accounting, auditing, governance and ethical thoughts relating to the activities of Islamic financial institutions and its application through training seminars, publication of periodical newsletters, preparation of reports, research and through other means.
3. Harmonize the accounting policies and procedures adopted by Islamic financial institutions through the preparation and issuance of accounting standards and the interpretations of the same to the said institutions.
4. Improve the quality and uniformity of auditing and governance practices relating to Islamic financial institutions.
5. Promote good ethical practices relating to Islamic financial institutions through the preparation and issuance of codes of ethics to these institutions.
6. Achieving conformity or similarity to extent possible in concepets and applications among the Shariah supervisory boards of Islamic financial institutions to avoid contradiction and inconsistency between the fatwas and the applications by these institutions, with a view to activating the role of the Shariah supervisory boards of Islamic financial institutions and central banks through the preparation, issuance and interpretations of Shariah standards and Shariah rules for investment, financing and insurance.
7. Approach the concerned regulatory bodies, Islamic financial institutions, other financial institutions that offer Islamic financial services and accounting and auditing firms in order to implement the standards as well as the statements guidelines that are published by AAOIFI.
AAOIFI Shariah Board
The Shariah board of AAOIFI is composed of not more than 15 members to appointed by the board of trustees for for a four year term from among : a) fiqh scholars who represent Shariah supervisory Boards in the Islamic financial institutions that are members of AAOIFI, and b) Shariah Supervisory Boards in central banks.
AAOIFI Standards Board
The standards boards of AAOIFI is composed