AN OVERVIEW OF ACCOUNTING

Unlike economics, the concepts and principles underlying accounting cannot
generally be proved as a matter of natural law or empirical evidence. Instead,
accounting has evolved from a mixture of ideas, judgments, policies, practices,
and methods over centuries. Accounting, though established largely by the
accounting profession, derives its authority primarily from its general acceptability
in the marketplace.

What is Accounting?

The Committee on terminology of the American Institute of Accountants (now the
American Institute of Certified Public Accountants or AICPA) proposed in 1941 that
"accounting" be defined as "the art of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions and events which are, in
part at least, of a financial character, and interpreting the results thereof."  
Accounting’s traditional primary goal has been the facilitation of the administration,
control and reporting of economic activity.  Interestingly enough, the AICPA saw
accounting as an art. That said, accounting has been traditionally broken down into
three major classifications:  (1) public accounting, (2) governmental accounting, and
(3) managerial accounting. While managerial and governmental accounting are
immensely important,  Western society traditionally emphasizes public or financial
accounting.  The same need not be the case for other, less developed nations,
where governmental accounting, should take on a more significant role.  

When Did Accounting Practices Begin?

Although some evidence of accounting practices can be traced back to Babylonian
times, the prevalent method of accounting known as "double entry accounting" has
been attributed to, and is believed to have begun, during the Crusades.  It became
necessary when the various kingdoms of Europe garnered their resources from
every corner to mount their offensives to “free” Jerusalem from what they viewed as
Islaamic occupation.  Massive contributions of wealth, resources, arms, equipment
and men were accounted for by preparing separate contribution accounts for each
kingdom, nobleman, etc.  Thereafter, the accounting format was refined during the
years of European mercantilism in the late 1400s (CE).  The journal format and the
double entry system of debits and credits was formalized in the 30 year work by the
Franciscan monk Luca Pacioli, of Venice, Italy, entitled Summa de Arithmetica
Geometria, Proportioni et Proportionalita or Review of Arithmetic Geometry and
Proportions.

Interestingly enough, the concept of proportional mathematics (the underlying
formulation for double-entry accounting), is in essence algebra.  It is generally
accepted today that algebra was first developed and used by non-European, North
African Muslims.  Moreover, research has been presented that refutes Western
claims of being the genesis of modern accounting.  See Omar Abdullah Zaid, The
Appointment Qualifications of Muslim Accountants in the Middle Ages, Accounting
Education 9 (4), 330 (2000).  Zaid’s research, though clearly noting that the terms
“accountant” and “accounting” were not used in the early and middle stages of the
Islaamic history, also shows that early Islaamic society utilized comparable terms
for accountant and accounting records.  This research also shows that accounting
was “practiced and organized as a profession” in the early stages of Islaam in
Madinah, Arabia.  Terms such as Al-Amel, Mubasher, and Al-Kateb were used.
Moreover, the Muslim Holy Book, the Quran, contains the following:  Oh you who
believe, when you contract a debt for a fixed period, write it down.  Let a scribe
(kaatibu) write it down in justice between you…”  Zaid’s research further indicates
that the term Kateb or Kaatib became the dominant title used in Islaamic society for
“any person who is assigned the responsibility of writing and recording information
whether of a financial or non-financial nature.”

The most significant advances in modern accounting were undoubtedly made in the
United States.  Although the Institute of Chartered Accountants was established in
the UK a few years (1883) before the American Association of Public Accountants
(1887), the profession of accounting found fertile ground in the new territories of the
US. American accounting practices were transplanted from European accounting
practices, which is said to have first taken root in Scotland in the mid-1800s, and
further developed as large-scale exploitation of natural resources in various regions
of the world occurred.  In America’s early years the primary source of capital
investment came from England and Scotland.  Hence, British and Scottish
accountants and accounting practices where transplanted to America.  

What is GAAP?

The term GAAP (Generally Accepted Accounting Principles) is used throughout
accounting literature; yet it is not a monolithic set of rules.  The formation of GAAP
was influenced by pronouncements from existing and predecessor standard setting
authorities, industry practices, accounting literature, textbooks and regulatory
standards promulgated by security commissions.  There is American GAAP; British
GAAP; and Japanese GAAP; just to name a few.  There is even an emerging Islamic
GAAP developed by the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI).  Practices and standard setting is not uniform as between the
various venues.  Japanese GAAP, for example, is promulgated by the BADC or
Business Accounting Deliberation Council, which is an advisory body to the Minster
of Finance.  Hence, in Japan, GAAP is in effect promulgated by its government. In the
US, on the other hand, GAAP is promulgated by the Financial Accounting Standards
Board (FASB) and the Securities and Exchange Commission (SEC), i.e. both a
private and a governmental standard setter.  

Recently, there is movement towards an international GAAP through the
International Accounting Standards Board (IASB).  As a result, more than 10
countries accept the IASB’s GAAP as supplements to their own national standards,
among them Kuwait, Malaysia, Oman, and Pakistan.  More than 14 other countries  
use them directly as national standards, including Albania, Bangladesh, Jordan and
Sudan.  Moreover, in order to facilitate the process of evaluating cross-border
security offerings and to attempt to standardize the reporting requirements, the SEC,
along with counterpart organizations around the world (including Malaysia’s
Securities Commission and Bahrain’s Stock Exchange) have formed the
International Organization of Securities Commissions (“IOSCO”), which is presently
based in Madrid, Spain

Why is Accounting Important?

High quality accounting standards, whether specific to a region or more
encompassing, are essential for sound and efficient capital market systems and
they further facilitate the day-to-day and periodic economic/financial transactions
between people and businesses.  Accounting standards reduce uncertainty,
increase overall efficiency and investor confidence and provide decision useful
business information that is relevant, reliable, comparable and transparent.  The
present day trend towards globalization of capital markets has resulted in a
proliferation of cross-border transactions. For example, globally, the Islamic bond
market has topped the $200 billion mark. Malaysia comprises more than 25% of
that amount.  In a June 2002 placement, the Malaysian government booked a $1.1
billion bond placement.  In terms of geography, that deal drew from all over the world
with the Middle East accounting for about 50% of the paper placed, followed by Asia
at 30%, 16% in Europe and 4% in the United States.  Islamic “banks” played a major
intermediation role in that transaction, booking about 75% of the paper, while asset
managers took the remaining 25%.  Notwithstanding the fact that the bonds issued
by Malaysia were “Islamic bonds,” it is illustrative to note that the accounting
standards in most of the world are different in some way, shape or form from those
used in the US.

In closing, good accounting is essential to any properly run business and some
level of government oversight is needed to impose rules relating to comparability
and penalties for failure to do so.  It follows then, that the best accounting is done by
those accountants that are properly trained and certified by the relevant licensing
authority.  In California, that authority is the Board of Accountancy (BOA) and
accountants licensed by the BOA are referred to as certified public accountants or
CPAs.


For more info on US based accounting standards go to:  www.fasb.com, www.sec.gov, or www.
aicpa.org.  For more info on international accounting standards go to:  www.iasb.com.
For more info on the Islamic GAAP, go to www.aaoifi.com.  For more info on the Malaysian
securities market, go to:  www.sc.com.my and key Islamic Capital Market Review into the search
browser on the home page for info on Malaysia’s growing Islamic Capital Market.