CASE 8.5
SHARI’A
Synopsis
This case examines a unique feature of the accounting and financial reporting function in
Islamic countries, namely, Shari’a audits. Islamic businesses are prohibited from engaging in any
economic ventures, contracts, or transactions that violate Shari’a, that is, Islamic religious law. To
ensure that they have complied with Shari’a, Islamic businesses must have their operations subjected
to a Shari’a compliance audit each year.
This case focuses on Shari’a auditing within the Islamic economy’s largest and fastest growing
sector, namely, banking. Presently, there is a wide range of audit “models” that are used by large
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Shari’a—Key Facts
1. The Middle East “oil boom” over the past several decades has created a vibrant and rapidly
growing “Islamic economy.”
3. Devout Muslims are prohibited by Shari’a or Islamic religious law from having investments in,
4. Islamic companies, including Islamic banks, must also have their operations “audited” each year
to ensure that they are Shari’a-compliant.
6. In some cases, Islamic companies include a separate Shari’a audit report in their annual
7. A key weakness of the Shari’a compliance function in the Islamic economy is that the religious
8. An Islamic academic has suggested that a new “breed” of Islamic accountants and auditors with
expertise in both Shari’a and “Western” accounting and auditing methods needs to be developed.
10. In 2007, Ernst & Young became the first Big Four firm to begin offering Shari’a audit services.
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Instructional Objectives
1. To demonstrate how cultural norms and values can impact the development and evolution of a
nation’s or geographic region’s financial reporting system, accounting profession, and independent
audit function.
Suggestions for Use
Several topics are generally taboo in accounting courses. One that comes to mind is religion.
However, that topic is relevant when it has a pervasive impact on a nation’s or geographic region’s
accounting profession.
In the Islamic world—approximately one-fourth of the world’s population is Muslim—Shari’a
or Islamic religious law permeates every facet of everyday life and society including financial
reporting, accounting, and independent auditing. Although many instructors may be uncomfortable
covering this case, I believe that we do our students a great service by introducing them to cultural
differences and nuances that are impacting the increasingly global profession that they will be
joining. In the current day and age, it seems particularly imperative to acquaint U.S. students with
Suggested Solutions to Case Questions
1. I believe the best way to approach this question is to simply walk through the “Ten
Commandments” of auditing, that is, the ten generally accepted auditing standards that are included
in the PCAOB’s Interim Standards. Some of these standards, of course, would be more relevant than
others to Shari’a audits.
General Standards:
a. Adequate training and proficiency in auditing: This standard would certainly be applicable
404 Case 8.5 Shari’a
Field Work Standards:
a. Planning and supervision: Any type of examination, such as a financial statement audit or
a Shari’a compliance audit, should be thoroughly planned and any relatively inexperienced
subordinates should be properly supervised.
Reporting Standards:
a. Accordance with GAAP: Not relevant—a Shari’a report indicates whether a given
company complied with Shari’a and any relevant Fatwa issued by its SSB.
b. Consistency: Again, this general concept applies to Shari’a audits. Shari’a principles or
concepts should be applied consistently throughout the period in question.
2. As suggested in the case, the key problem with implementing that proposal presently is that no
one possesses the dual qualifications necessary to complete joint Shari’a–financial statement audits.
Shari’a scholars do not have relevant audit training, while independent auditors do not have the
necessary qualifications to analyze compliance with Shari’a. Even if the “new breed” of Islamic
accountants and auditors referred to in the case was developed, it is unclear whether those
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3. The quote “accounting can lead to perceptions of reality” included in the case was made by an
Islamic accounting scholar. There seems to be little doubt that statement is accurate. In fact, isn’t
that the purpose of accounting rules in the first place? Hopefully, accounting standards provide an
accurate perception of the economic realities facing reporting entities. What the scholar was actually
suggesting—which was apparent from the remaining portion of that quote—is that accounting can
induce financial statement users to engage in inappropriate behavior, that is, behavior inconsistent
with the Islamic religion.
4. There is no denying that there is a certain level of distrust between the “Anglo” world and the
Islamic world. The Anglo Big Four firms must overcome that distrust if they are to make major
inroads into the financial services market within the Islamic banking industry. A related challenge
faced by the Big Four firms is obtaining a thorough knowledge of the cultural norms and nuances
unique to the Islamic world. Aggressive client development activities that produce results, that is, a
client base in the Islamic world, will be meaningless if the Big Four firms cannot establish a strong
rapport and mutual understanding with their new Islamic clients.