The Shariah Financial Accounting Standards: How they Prevent Fraud in Islamic Banking

Abstract

1. Introduction The rapid development of Islamic/Shariah banking in Indonesia has a positive implication for the Indonesian banking industry. Shariah banking is an alternative choice for muslims to save money. They feel more secure as Shariah banking provides a particular service different from the services of conventional banking, which is the assurance of banking operation which meets Islamic law and does not break the Shariah principles. In order to maintain customers' trust, especially with regard to the facilities of Islamic banks, the banks need to keep their operational systems from violating the principles of Shariah . Islamic banking is set in Shariah Financial Accounting Standard, which contains detailed rules and components of Shariah -based banking. With the standard, financial statements are expected to provide relevant and credible information. This accounting standard is also used by users of financial statements, such as investors, creditors, governments, and public as a reference for understanding and analyzing financial statements, so as to enable them to make the right decisions. Islamic banks as an alternative financial institution for saving fund has a special section called the Shariah Supervisory Board (Dewan Pengawas Shariah / DPS). DPS is a unit which is only owned by companies/organizations run in accordance with the Islamic law. Standard for Islamic Financial Institutions (ASIFI) has set a standard to provide guidance on the definition, designation, composition, and the report of the Shariah supervisory board to ensure that the operations, transactions, business of financial institutions are carried out in accordance with the principles of Islamic / Shariah (Harahap, 2002). Found several measures to be taken to ensure Shariah harmonization efforts in Indonesia such as deep understanding on the fatawa brought into practices and strict monitoring on the Islamic banks in applying the financial reporting standards that imply practicing the fatawa, both de jure and de facto. The role of various actors involved in the financial reporting standardization may impede Shariah h harmonization to take place (Mukhlisin Muniarti and Hudaib dan Azid Toseef, 2015). The main task of this Shariah supervisory board is to oversee the implementation of banks' operations and their products so as not to deviate from the rules of Shariah (Antonio, 1999). Another important thing in the Islamic banking industry is the availability of competent Shariah auditors. Auditor Shariah has the function, among others, to detect fraud occurring within the company or commonly known as the fraud auditing, to uphold ethics profession is not expected to occur Fraud Auditing among public accountants, so as to give the auditor's opinion is totally consistent with the reports finance presented by the client and can avoid fraud (Suryanto, 2016). Fraud reflects dishonesty. It refers to deviant behaviors related to legal consequences, such as fraud, theft by deception, financial reporting fraud, corruption, collusion, nepotism, bribery, abuse of authority and many others (The Development Finance Comptroller (BPKP), Centre of Education 2008). Much research on the prevention of fraud in conventional banks has been conducted, by Rahardjo (2001) who investigated the burglary of Bank Central Asia, Bank Bali and Bank Lippo done by Indonesian crackers in 2000. The study demonstrates the failure of risk controls in the use of information technology (Rahardjo, 2001). This case indicates that the technology applied in enterprises, especially those engaged in high-level transactions, such as banks, is still less sophisticated than that of the running/practiced fraud. Biestaker, et al. (2006) conducted a survey involving 86 accountants, internal auditors and certified accountant investigators responsible for identifying fraud actions. This study indicates that 34 methods of detection and prevention of fraud were perceived to be effective by the respondents. …