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Management accounting systems

in Islamic and conventional
financial institutions in Malaysia
Siti Zaleha Abdul Rasid

MAS in
Malaysia

153

International Business School, Kuala Lumpur, Malaysia

Abdul Rahim Abdul Rahman

Department of Accounting, Kuliyyah of Economy and Management Science,
International Islamic University, Malaysia, Kuala Lumpur, Malaysia, and

Wan Khairuzzaman Wan Ismail

International Business School, Kuala Lumpur, Malaysia
Abstract
Purpose The purpose of this paper is to explore whether there is any difference in the management
accounting systems (MAS) of conventional and Islamic Financial Institutions (IFIs) in Malaysia.
Design/methodology/approach The paper was based on a survey of 45 conventional and IFIs
listed on the Malaysian Central Banks web site. The respondents were the chief financial officers
(CFO). Post-survey semi-structured interviews were also conducted with eight respondents to gain
further insights into the survey findings.
Findings The survey results indicate that IFIs use MAS information that is broader in scope, more
timely, more integrated and more aggregated than conventional financial institutions. The post-survey
interviews provide deeper and contextualised insights into this issue. The interview findings illustrate
that IFIs normally develop and adopt an integrated accounting and enterprise system. Within this
comprehensive enterprise system, the management accounting function is integrated with other
functions of the organization.
Research limitations/implications Since this study was conducted in the context of Malaysian
financial institutions, the results may not be generalizable to other organizations. The findings of this
study highlight the importance for IFIs to have integrated enterprise systems. Besides assisting in
complying with Shariah and regulatory requirements, the integrated systems also support better
decision making.
Originality/value The paper fills a gap in the literature, as very few studies have examined the
issue of management accounting in financial institutions. The paper is also one of the limited studies
that explore the issue of MAS in IFIs.
Keywords Malaysia, Islam, Financial institutions, Accounting systems,
Management accounting systems, Shariah
Paper type Research paper

1. Introduction
Management accounting systems (MAS) refers to the systematic use of management
accounting techniques to achieve organizational goals. The International Federation of
Accountants (IFAC, 1998) defines management accounting as the process of
identification, measurement, accumulation, analysis, preparation, interpretation, and
communication of information (financial and operational) used for the planning, control
and effective use of resources by an institutions management. Thus, management

Journal of Islamic Accounting and

Business Research
Vol. 2 No. 2, 2011
pp. 153-176
q Emerald Group Publishing Limited
1759-0817
DOI 10.1108/17590811111170557

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accounting becomes an integral part of the management process in an organization

providing information essential for:
.
controlling the current activities of an organization;
.
planning its future strategies, tactics and operations;
.
optimizing the use of its resources;
.
measuring and evaluating performance;
.
reducing subjectivity in the decision-making process; and
.
improving internal and external communication (IFAC, 1998).
In short, the use of MAS can be expected to satisfy a managers information needs
(Govindarajan, 1984; Mia and Chenhall, 1994).
In the past, financial services were highly regulated with many of the
products offered and the rates charged controlled. There were also strict regulation
and control of geographic expansion. In a highly regulated industry, there was less need
of management accounting information for performing day-to-day and longer term
tasks. However, deregulation, rapidly advancing technology, competitive forces and
globalization have all put an end to this complacent approach (Kafafian, 2001).
In addition, emphasis on financial innovation and shareholder value as well as mergers
and acquisitions activities between insurers, banks and asset management companies,
have resulted in the emergence of financial conglomerates that further exacerbates the
competitive environment, especially for stand-alone entities. To function effectively in a
dynamic environment undergoing rapid transformation, financial institutions have to
enhance their competitive advantage. A managers ability to make informed decisions is
closely linked to the quality of management accounting information available (Kafafian,
2001; Rezaee, 2005). A good management accounting programme serves as an important
tool for providing good decision-making information (Cole, 1988) and this is particularly
important in the case of financial institutions as their collapse would affect the stability
of the whole economy. Hence, it is critical for all financial institutions to have efficient
MAS for internal decision making, planning and control (Siti Zaleha and Abdul Rahim,
2009) in order to maintain their stability.
The Malaysian financial system is based on the dual banking system in which
the conventional financial system operates alongside the Islamic financial system.
The development of the Islamic Financial Institutions (IFIs) has contributed to the
strengthening of Malaysia as an International Islamic Financial Centre (MIFC). IFIs
are different from conventional financial institutions as their objectives, operations,
principles and practices must conform to the principles of Islamic Shariah
( Jurisprudence) and Islamic ethics as enunciated by Shariah. The IFIs have to adhere
to the Shariah compliance framework and they are also exposed to certain risks that are
specific only to them. The complex nature of the IFIs requires a governance structure
that is more comprehensive. Besides adhering to Shariah, they are also required to
remain competitive in order to survive in the changing business environment. MAS,
which has a wider scope covering internal, external, past, future, financial and
non-financial information and able to be provided in an integrated, aggregated and
timely manner, are ideal for providing the necessary information to aid decision making,
planning and control. However, MAS for IFIs has received limited attention as most
prior literature on accounting for IFIs focuses mainly on financial accounting related

to measurement and reporting issues (Abdul Rahim, 2003; Abdel Karem, 1990; Talib,
2000). Hence, the purpose of this paper is to explore whether there is any difference in the
MAS of conventional and IFIs in Malaysia. The current study is intended to fill the void
in the literature on management accounting in IFIs.
The remainder of the paper is structured as follows. The next section reviews the
relevant literature and develops the hypotheses, followed by the research method in
Section 3. Results and discussion are presented in Section 4 and finally, Section 5
presents the conclusions.
2. Literature review
A well-designed MAS will assist managers to be more effective in decision making.
Traditionally, management accounting information has been delineated in financial
terms, but recently it has been expanded to include non-financial (operational or
physical) information, including quality and process times, as well as more subjective
measurements such as customer satisfaction, employee capabilities and new product
performance (Atkinson et al., 2001). The enhanced role of MAS to assist managers in
attention directing and problem solving has resulted in the evolution of MAS to
incorporate external and non-financial data focusing on marketing concerns, product
innovation, strategic planning and predictive information related to these areas (Mia
and Chenhall, 1994). Hence, MAS are now viewed in a broader aspect (Mia, 2000;
Hussain, 2000). Besides fulfilling the traditional function of providing quantitative and
financial information, MAS have expanded to include information relevant for
innovation, marketing and organizational design. In fact, there is little difference today
between the information provided by MAS and that provided by a management
information system (MIS) (Mia, 2000).
The challenge faced by financial institutions is in sustaining their competitive edge
by being cost efficient without compromising the quality of their services. In fact,
financial problems and failures in financial institutions are no longer considered unique
(Hussain, 2000). The key to survival is to have an internal management reporting system
that can signal problem areas and allow management to react swiftly and assuredly.
Following the deregulation of the financial sector and the rapid advances in technology,
information on pricing, product mix and market share strategies have become more
important to the financial services sector (Rezaee, 2005; Kafafian, 2001) and such
information will be available through the MAS within an organization.
The current pace of technological and economic innovation in the financial
markets illustrates the critical need for information as an aid to sound decision making by
financial institutions (Hussain, 2000). By providing financial and non-financial
information, MAS facilitates the decision-making process, as the scope has expanded
to include effectiveness, control, market analysis, quality assessment, customer
satisfaction, empowerment and competitive status management (Ostinelli and Toscano,
1994 as cited in Hussain, 2000). MAS in a financial institution can play an important role
by providing information on the effectiveness of a sales promotion programme, revenue
by business units, product lines and customer category (Rezaee, 2005; Kafafian, 2001; Mia
and Patiar, 2001). By having MAS as an internal information system, the investments
required for a programme and their outcomes can be monitored closely. Managers can
use MAS information to benchmark the organizations performance against competitors
to determine whether they are offering products and service attributes to customers

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at a competitive price. This is possible since MAS provides information on performance

of each business unit, each product and even each customer. With an integrated system,
performance can be monitored to every possible detail, as performance management is
seen as the main task of the management accounting function (Otley, 2001).
The management of financial institutions depends on concise and relevant
information to help them carry out their daily duties. Well-managed firms should have
good information structures and MAS can be seen as a tool for managing resources,
measuring performance, warning of risks, aiding decisions, and providing data for
planning. Cole (1988) specifically argues that a good MAS does the following:
.
tells the cost and profitability of doing business by organization, product, and
major customers;
.
avoids surprises;
.
allows all managers to explain their performance as it is reported;
.
allows everyone to participate in planning via plan-to-actual reporting used as a
management tool;
.
provides timely, accurate, relevant, and understandable reporting;
.
ensures that only one set of numbers is circulating within the organization; and
.
reduces or eliminates complaints about information non-availability.
Some financial institutions have turned to activity-based costing (ABC) as a way to
measure accurately the consumption of shared resources by a particular customer or
product (Max, 2004; McDonald, 2004; Robinson and Chappelear, 2002; Kafafian, 2001).
In fact, Max (2004) asserts that the application of ABC in the financial services sector
today identifies new and unique ways to leverage cost and profitability information,
including:
.
activity-based pricing, particularly for business-to-business services;
.
linking ABC information to performance management scorecards and processes;
.
providing information on a process view of costs, both to support cost
improvement needs and to enable ongoing accountability for management by the
business process; and
.
information on the profitability of discrete customer relationships.
As financial organizations continue to consolidate, diversify, and become more
competitive, the management accounting and information functions need to also grow
rapidly and become more important. Table I presents a summary by Kafafian (2001) of
the types of management information that is currently utilized by the financial industry
to meet new challenges.
Table I shows that in the planning process, strategic planning and budgeting
information are used. In addition, financial institutions also utilize Asset/Liability
Management (ALM) information, responsibility reporting and profitability analysis.
Furthermore, financial institutions also have a number of support functions that provide
various information to aid management decision making, planning and control.
The information needs of MAS can be considered in terms of its general information
characteristics scope, timeliness, integration and aggregation (Chenhall and Morris,
1986; Chia, 1995; Lal and Hassle, 1998; Bouwens and Abernethy, 2000;

The planning process

ALM
Responsibility reporting
Profitability analysis

Support functions

Strategic planning
Budgeting
Line of business
Organizational
Branch
Product
Customer/relationship
Market segment
Opportunity
Funds transfer pricing
Item costing/activity-based-costing/
performance measurement
Data warehousing
Marketing customer information file
Data mining/data mapping

Source: Kafafian (2001)

Moores and Yuen, 2001; Tillema, 2005; Agbejule, 2005). MAS is considered sophisticated
when it produces information that is broad in scope, timely, integrated and aggregated.
The balance scorecard (BSC) is an example of a MAS tool having all the four
information characteristics (Tillema, 2005) while ABC systems provide information that
is only integrated and aggregated (Choe, 2004). Owing to the challenges of deregulation,
diversification and competition, the financial services sector needs to use sophisticated
MAS. The development of management accounting and information functions should
move in tandem with the changing environment of the financial services sector.
2.1 Relevance of MAS to IFIs
The management of IFIs needs management accounting information as an organizational
control mechanism. Since all IFIs activities should comply with the norms of Shariah and
Islamic ethics, they need more management information for decision making, planning
and control activities to meet both business and religious objectives. The process of
product innovation in IFIs is more tedious and more stringent to ensure that the contracts
associated with the transactions are not in violation of Shariah. In fact, the presence of the
Shariah Supervisory Board (SSB) requires MAS to be more sophisticated as this board
has the power to examine all information related to Islamic bank transactions to
determine whether religious objectives are met (Islam et al., 2000).
The need of MAS can also be argued from the sources of funds perspective. Unlike
conventional banking systems where customers are entitled a guaranteed return, the
return on investment for Islamic bank investment holders is uncertain since they share
the profit or loss incurred by the bank (Haron and Shanmugam, 2001; Errico and
Farahbaksh, 1998; Mannan and Fazlul Hoque, 2006). In fact, they are also exposed to
the risk of losing all of their initial investment. Therefore, their decision to invest will
depend on their evaluation of the banks ability to realize acceptable rates of return
and to maintain its capital at a level sufficient for solvency purposes (Noraini, 2005).
Potential investment account holders will normally refer to the annual reports,
web sites and brochures before making their decisions. For this reason, transparency

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Table I.
Types of management
information utilized by
financial institutions

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in reporting plays an important role (Noraini, 2005). Reporting can be more transparent
if external reporting is supported by the internal reporting functions supplied by the
MAS because it serves as an organizational control mechanism facilitating control via
reporting and creating visibility in the action and performance of its members (Chia,
1995). Thus, the implications of the Shariah compliance framework on the use of MAS
information need to be explored.
The research on this issue is still scant, with the only study available to date being one
by Islam et al. (2000). Islam et al. (2000) studied the information adequacy of MAS in the
banks in Bangladesh. They argue that the adoption of a profit-sharing system of
mudarabah and musharakah by Islamic banks in their financing activities requires a
different set of MAS information in terms of scope and integration. In mudarabah
activities, where banks share the profit and bear the losses of their business, the
managers need a relatively broad scope of information about the day-to-day business
operations and prospects of their clients. A broad scope of information is also required in
musharakah activities as they involve direct participation of the banks. In contrast,
non-Islamic bank managers place more emphasis on securing collateral from business
clients instead of entering into venture capital with their clients, and consequently they
require a narrower scope of information (Islam et al., 2000).
The results of Islam et al. (2000) show that managers of Islamic banks in Bangladesh, in
contrast to those in non-Islamic banks, believe that they have better designed MAS in
terms of scope and integration. Their findings support the argument that profit-sharing
systems in the financing activities of mudarabah and musharakah in Islamic banks require
broad scoped and integrated MAS information (Islam et al., 2000). However, more research
is needed to confirm their conclusion as the study only considers the profit-loss sharing
mode of financing, which is not widely practiced by Islamic banks. This issue should be
argued from a broader Shariah compliance perspective that includes information required
in managing the various types of products that need a variety of contracts. In addition,
similar issues should be considered for other IFIs, such as Islamic insurance organizations.
2.2 Development of hypotheses
The scope of an information system consists of three sub-dimensions, which are focus,
quantification and time horizon (Gordon and Miller, 1976; Gordon and Narayanan,
1984; Chenhall and Morris, 1986). A broad scope MAS provides information which is
externally focused (e.g. economic conditions, etc.), non-financial (e.g. customer
preferences, etc.) and future oriented (e.g. probabilistic) (Chenhall and Morris, 1986;
Gul and Chia, 1994; Choe, 1998; Bouwens and Abernethy, 2000).
The main difference between IFIs and conventional financial institutions is that
their objectives and operations, as well as principles and practices, must conform to the
principles of Islamic Shariah ( Jurisprudence) and Islamic ethics as enunciated by
Shariah. The principles are:
(1) prohibition of riba (interest);
(2) application of al-bay (trade and commerce);
(3) avoidance of gharar (ambiguities) in contractual agreements; prohibition of
maisir (gambling); and
(4) prohibition of conducting business involving prohibited commodities (Saiful
Azhar, 2005).

Transactions in IFIs involve different Islamic contractual relationships in which various

underlying Shariah principles have been used. In the Islamic banking sector for
example, the relationship between investment account holders and the banks and the
relationship between the banks and their customers (borrowers) are different from
conventional banking systems. In conventional banking system, all deposits are treated
as liabilities. In Islamic banks, savings are categorized into Al-Wadiah (safe custody)
and Al-Mudarabah (profit sharing) saving accounts. Under Al-Wadiah, banks act as a
trustee for its customers (Alam, 2000; Razali, 1999) while under Al-Mudarabah, banks
act as a manager for the funds of its customers. The deposits will be invested and profits
and losses will be shared with the account holders based on mutual agreement (Alam,
2000; Razali, 1999). Looking at the asset side of the balance sheet, in conventional
banking systems, the banks are the lenders and customers are the borrowers and all
transactions are subject to interest payment. Hence, IFIs require a broader scope of
information to comply with the various Shariah principles.
Although equity-based financing (mudarabah and musharakah) is not widely used at
the moment, some arguments related to MAS information may still be considered.
Equity-based financing is risky since there is no fixed assured return to the banks
(Taylor, 2003; Sarker, 1999). It takes into consideration risk-sharing, thus the capital
involved in trade might grow or decrease over time (Haron and Shanmugam, 2001;
Mannan and Fazlul Hoque, 2006; Hassan and Ahmed, 2002). In the case of mudarabah
for example, profits are to be shared according to an agreed proportion but losses will be
borne by the bank (Taylor, 2003; Alam, 2000; Dar and Presley, 2000). Therefore, Islamic
banks have to carefully scrutinize the feasibility and projections provided by the
customers and at the same time undertake stringent credit analysis and risk assessment
(Taylor, 2003). In short, they have to be selective in choosing clients to finance under
equity-based financing modes (Sarker, 1999). Islam et al. (2000) argue that the adoption
of this equity-based form of financing requires a different set of MAS information in
terms of scope and integration. A relatively broad scope of information is required to
assess the prospects of their clients and to carry out day-to-day business operations.
Thus, we offer the following proposition:
H1. There is a significant difference regarding the scope of MAS between IFIs and
conventional financial institutions.
Timeliness of information refers to the provision of information on request and the
frequency of reporting collected information. Timeliness influences the managers
ability in responding quickly to events. MAS, together with timely information, is able to
report upon the most recent events and provide rapid feedback on decisions (Chenhall
and Morris, 1986; Bouwens and Abernethy, 2000). In Islamic banks, the profit rate for
their financing are fixed. However, the return on the deposits fluctuates depending on
market conditions. Therefore, to prevent mismatch between assets and liabilities, timely
information is required by IFIs in calculating their profit distribution. At the same time,
IFIs take a partnership position in their equity-based financing, and timely information
is required so that decision making, planning and control can be made effectively since
the IFIs themselves become a stakeholder in the businesses to which they provide
financing (Greuning and Iqbal, 2007). By being partners with their customers, it is
critical for IFIs to have reliable and timely information (Greuning and Iqbal, 2007). Based
on the arguments above, the following proposition is proposed:

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H2. There is a significant difference in the use of timely MAS between IFIs and
conventional financial institutions.
Coordination of the various segments within a sub-unit is an important aspect of
organizational control. Integrated MAS characteristics that may assist coordination
include information about the activities of other departments within the firm and
information on the impact that decisions in one department have on the performance of
another. The information may relate to input, output, operating processes and the
technology employed by other departments (Bouwens and Abernethy, 2000; Chenhall
and Morris, 1986).
In the Islamic banking system, different products require different contracts, which
lead to different kinds of relationship. For example, unlike financing in conventional
banking where the bank is the lender and the customer is the borrower, in murabahah
(deferred sale) financing, the customer is the buyer and the bank is the agent who buys
and sells the product to the buyer. Therefore, it is a trading contract which is permissible
by Shariah. In ensuring compliance with Shariah, a regulatory body called the SSB is
set up (Abdul Rahim, 2006; AAOIFI, 2001; Haron and Shanmugam, 2001). The Islamic
insurance operators are also answerable to their SSBs. They are only allowed to invest
their funds in Shariah-approved avenues. In order to comply with Shariah, the extent
and nature of MAS information needed by IFI managers for day-to-day monitoring and
decision making will be more complex than that required by managers in conventional
financial institutions (Islam et al., 2000). The presence of SSB requires MAS to be more
integrated since this board has the power to examine all information about an IFIs
transactions to ensure adherence to Shariah principles (Islam et al., 2000). The study by
Islam et al. (2000) found evidence that the extent of integration of information is greater
in Islamic banks than in non-Islamic banks. Hence, it is proposed that:
H3. There is a significant difference in the use of integrated MAS between IFIs
and conventional financial institutions.
Information aggregation deals with a variety of ways to collect and summarize the data
within periods of time or area of interest, such as responsibility centers or functional
areas (Choe, 1998). Aggregate information represents summarized information that
covers periods of time or diverse management area while disaggregated information
represents excessively detailed information that may include only one period or one
functional area (Choe, 1998). Owing to the unique nature of the IFIs, they are also
exposed to specific risks in addition to the normal credit, market and operational risks
faced by conventional FIs. These specific risks include equity investment risks,
displacement risks, liquidity risks and Shariah risks. Contrary to conventional FIs, IFIs
invest on the basis of equity-based assets (including partnership based Mudarabah and
Musharakah investments) that expose the IFIs to volatility in earnings due to liquidity,
credit and market risks associated with equity holdings (Iqbal and Mirakhor, 2007). Loss
of capital is also possible in Mudarabah and Musharakah contracts despite proper
monitoring. Therefore, aggregated information by product is required by IFIs to
determine the capital charge for each type of product. Thus, we offer the following
proposition:
H4. There is a significant difference in the use of aggregated MAS between IFIs
and conventional financial institutions.

3. Research method
Data were collected using postal questionnaires and semi-structured interviews. This
study considered the whole population of finance and insurance companies listed on the
Malaysian Central Bank web site. The population was 106 financial institutions with
45 FIs randomly selected for this study. The choice of single industry will minimize
environmental heterogeneity (Moores and Yuen, 2001). The environment is further
controlled by selecting institutions that provide banking and insurance services only.
Although restricting the sample will limit the ability to generalize the results, it is
believed that specific industry analysis will substantially raise the internal validity over
a multi-industry analysis (Ittner et al., 2003).
3.1 Development of questionnaire
A questionnaire was developed to measure the extent of use of information provided by
the MAS in the surveyed organizations for decision making, planning and control.
The characteristics of the information were divided into four main dimensions, namely,
scope, timeliness, levels of integration and levels of aggregation. The characteristics of
the MAS information were measured based on Bouwens and Abernethy (2000), Chong
and Chong (1997) and Chenhall and Morris (1986). The measurement developed by
Chenhall and Morris (1986) has been shown to be robust across a variety of settings
(Chenhall, 2003). The extent of use of these MAS information characteristics were also
used by other studies (Mia and Chenhall, 1994; Chong and Chong, 1997; Agbejule, 2005).
The dimensions of scope (six items), timeliness (four items), integration (four items) and
aggregation (six items) were measured based on Bouwens and Abernethy (2000) and
Chenhall and Morriss (1986). Following Bouwens and Abernethy (2000), the wording of the
items were changed slightly to ensure that the instrument was applicable to the context of
this study. Likert scales of 1 (not at all) to 5 (to a very great extent) were used for this section.
The questionnaire was first pre-tested on seven academics from the local universities.
They were either experts in management accounting and financial systems or experts in
research methodology. Pilot testing is important to ensure validity and reliability of
research instruments (Sekaran, 2000). Pilot testing was also conducted with two senior
finance managers and six managers from the financial institutions. A revised version of
the questionnaire was prepared accordingly.
3.2 Administration of questionnaire
The questionnaire was mailed to the chief financial officer (or the most senior position in
the Finance Department) of each financial institution. They were chosen because they
were the ones responsible for management accounting in the organizations. According
to Rodeghier (1996), in using the survey research, contacts are very important and there
should be at least three contacts with the sample, each slightly different in tone and
content, to ensure a high return. Thus, one week after the survey packets were sent,
phone calls were made to ensure that the organizations had received the packets. Five
weeks after the first mailing, another set of questionnaires was sent to non-respondents.
Follow-ups were made again through email and telephone calls after the second mailing.
3.3 Profiles of respondents and financial institutions
As shown in Table II, the largest category of respondents was head of finance/general
manager finance/vice president finance (35.6 per cent), followed by finance manager

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Background variable

Categories

Job designation

CFO/director of finance
Head of finance/GM finance/vice
president finance
Senior manager finance/
assistant VP finance
Finance manager
Others
Between 1 and 3 years
Between 3 and 10 years
Between 10 and 20 years
More than 20 years
No information provided

162

Length of time holding

current position
Table II.
Profile of respondents

Conventional
Islamic
(n 27)
(n 18)
Freq.
% Freq. %

Total
(n 45)
Freq. %

4
10

14.8
37

3
6

16.7
33.3

7
16

15.6
35.6

11.1

27.8

17.8

7
3
13
10
1
2
1

25.9
11.1
48.1
37.0
3.7
7.4
3.7

4
0
12
4
1
0
1

22.2
0
66.7
22.2
5.6
0
1

11
3
25
14
2
2
2

24.4
6.7
55.6
31.1
4.4
4.4
4.4

(24.4 per cent), senior manager finance/assistant vice president finance (17.8 per cent),
CFO/Director of Finance (15.6 per cent), and others (6.7 per cent). A total of
25 (55.6 per cent) respondents have been holding their current position between one and
three years, 14 (31.1 per cent) between three and ten years, and 4 (8.9 per cent) for more
than ten years.
Table III summarizes the profile of the organizations involved in the survey. About
27 (60 per cent) organizations offer only conventional financial services, while
18 (40 per cent) offer only Islamic financial services. The majority of the organizations
(conventional 85.1 per cent and Islamic 55.7 per cent) had more than 100 employees. This
indicates that the majority of the organizations involved in this survey may be
considered large in size. In terms of total annual revenue, 70.3 per cent of the
conventional FIs and 44.5 per cent of the IFIs had a total annual revenue of more than
RM100 million. In terms of total assets, 51.8 per cent of the conventional FIs and
61.2 per cent of the IFIs had more than RM1 billion worth which further suggest that
most of the firms surveyed were large in size. The majority of the conventional FIs
(71.1 per cent) had been in operation for more than five years. However, most of the IFIs
(66.7 per cent) had been in operation for less than five years. It has been only in the last
five years that the growth of IFIs has contributed to the strengthening of Malaysia as an
International Islamic Financial Center (MIFC). Most of the IFIs (88.9 per cent) were
locally owned while only 51.9 per cent of the conventional FIs were locally owned.
3.4 Post-survey semi-structured interviews
Semi-structured interviews were conducted to gain in-depth understanding of the issues
surveyed. The respondents who were involved in the questionnaire survey provided the
basis for the sample selection for the interviews. Eight interviews were conducted with
respondents with similar backgrounds: they were in senior position and experienced
enough to represent their organization as almost all of them were in the top management
team, with an average age of 44 years, and had on average served the company for
11 years and had on average held their current position for four years. All the eight
interviewees were from IFIs (Table IV).

Background variable

Category

Number of employees Less than 100

100-499
500-999
1,000-1,499
1,500-1,999
Above 2,000
No information
Annual revenue
Less than RM100 million
RM100 million to RM499 million
RM500 million to RM999 million
More than RM1 billion
No information
Annual total assets
Less than RM500 million
RM500 million to RM999 million
RM1billion to RM4.99 billion
RM5 billion to RM9.99 billion
More than RM10 billion
No information
Firms age
Less than 5 years
5-10 years
11-20 years
21-30 years
31-40 years
41-50 years
More than 50 years
Ownership structure Local
Foreign
Joint venture

Conventional
(n 27)
Freq.
%
3
13
8
2
0
0
1
5
11
5
3
3
3
6
11
1
2
4
1
4
1
6
5
3
7
14
12
1

11.1
48.1
29.6
7.4
0
0
3.7
18.5
40.7
18.5
11.1
11.1
11.1
22.2
40.7
3.7
7.4
14.8
3.7
14.8
3.7
22.2
18.5
11.1
25.9
51.9
44.4
3.7

Islamic
(n 18)
Freq. %
8
5
1
1
1
2
0
6
3
4
1
4
3
1
5
3
3
3
12
2
2
1
0
0
1
16
2
0

44.4
27.8
5.6
5.6
5.6
11.1
0
33.3
16.7
22.2
5.6
22.2
16.7
5.6
27.8
16.7
16.7
16.7
66.7
11.1
11.1
5.6
0
0
5.6
88.9
11.1
0

Total
(n 45)
Freq. %
11
18
9
3
1
2
1
11
14
9
4
7
6
7
16
4
5
7
13
6
3
7
5
3
8
30
14
1

24.4
40.0
20.0
6.7
2.2
4.4
2.2
24.4
31.1
20.0
8.8
15.6
13.3
15.6
35.6
8.9
11.1
15.6
28.9
13.3
6.7
15.6
11.1
6.7
17.8
66.7
31.1
2.2

4. Results and discussion

This study has investigated whether there is any difference in the MAS of conventional
and IFIs. Since IFIs have to meet both business and religious objectives, they are
expected to have a broader scope, more timely, highly integrated and highly aggregated
MAS information than conventional FIs. Table V presents the descriptive statistics for
each MAS item for IFIs and conventional FIs. As can be seen, the mean scores of each
item for IFIs are higher than those for conventional FIs.
The hypothesis was then tested by comparing the mean scores for use of MAS by
IFIs and conventional financial institutions using an independent-samples t-test.
Table VI presents the results of the t-test. The data in Table VI indicate that the mean
scores for scope, timeliness, integration and aggregation for IFIs were higher than the
mean scores for conventional financial institutions.
The observed significance level for all the MAS dimensions is evidently lower than
the 0.05 confidence level, thus supporting the hypothesis that there is a significant
difference between the use of MAS between IFIs and conventional financial
institutions. The results suggest that in order to meet religious as well as business

MAS in
Malaysia

163

Table III.
Profile of sample firms

JIABR
2,2
Interviewee Position

164

1
2
3
4
5

Length of time in
current position
(years)

23
17
2
14
17

10
4
2
2
2

Male
Male
Male
Male
Male

47
53
37
38
39

12
3

4
3

Male
Male

38
50

Male

46

Head of finance
Senior manager finance
Head of finance
Senior manager finance
Assistant general manager
finance
Manager financea
Senior vice president/
company secretary finance
and administration
Chief financial controller

6
7
Table IV.
Background of the
interviewees

Length of service in
the company
(years)

8
a

Note: Representing the head of finance

IFIs

Table V.
Descriptive statistics
of MAS items

Gender Age

Scope
Information relates to future events
Quantification of the likelihood of future events
Non-economic information
Broad factors external to organization
Non-financial relates to productivity
Non-financial relates to market information
Timeliness
Immediately upon request
Given automatically
Provided frequently
Reported without delay
Integration
Precise targets activities of all departments
Impact on different departments decision
Cost and price information of the departments
Impact of your decision and influence of others
Aggregation
Different sections or functional areas
Effect of events on particular time periods
Influence of events on different functions
Effect of different departments activities
Input into decision models
What-if analysis

Conventional FIs
Mean
SD

Mean

SD

3.89
3.94
3.89
3.94
3.67
3.89

1.183
1.110
0.832
0.802
0.767
0.832

2.85
2.52
2.59
2.93
2.63
3.19

1.099
0.893
1.047
1.107
0.967
0.962

3.89
3.89
4.28
4.00

0.900
0.758
0.575
0.907

3.52
3.26
4.04
3.44

0.935
0.944
0.808
0.751

3.89
3.72
3.67
3.78

0.758
0.895
0.840
0.647

3.26
3.11
3.11
2.93

0.859
0.892
0.934
0.917

3.83
4.11
3.61
3.83
3.61
3.67

0.924
0.758
0.916
0.985
0.850
0.840

3.44
3.74
3.00
3.56
2.74
2.85

0.801
0.764
0.832
0.801
0.903
0.864

objectives, IFIs use MAS information that is broader in scope, more timely, more
integrated and more aggregated than conventional financial institutions. The results
can be summarized as follows (Table VII).
Interviews were conducted with eight interviewees from IFIs to further examine the
possible reasons for IFIs to use more sophisticated MAS than their conventional

counterparts. Four interviews were conducted with Islamic banks, one interview with a
bank that offers Islamic financial services only and three with Islamic insurance companies.
Most of the interviewees stated that there was not much difference in the overall
financial accounting systems for recording and reporting purposes between IFIs and
conventional FIs, as both are subject to the Malaysian Accounting Standards Board
(MASB) and International Accounting Standards (IAS). However, since IFIs and
conventional business transactions are based on totally different concepts they have to
do a great deal of customization to the support or the application systems (i.e. the
system used to process the transaction inputs into outputs). In expressing his views,
the Head of Finance for a local Islamic bank said:

MAS in
Malaysia

165

We ride on the parents accounting system. They create a separate GL book [. . .]. so funds are
managed separately. But the terms are all based on the conventional system and we have to
make some adjustments [. . .]. We try to modify the system to suit the Islamic products,
but there will still be some problems because it was not designed for Islamic products. Islamic
and conventional system is totally different. Recording and reporting is not an issue [. . .] the
major issue is actually the support system.

Similarly, the Senior Finance Manager of another Islamic bank said:

The present conventional accounting system is sufficient. However, adjustments have to be
made for Islamic products. A simple example is the fixed rate for BBA house. The current
conventional application system does not recognize selling price and purchase price. When
the application system does not recognize both prices, the same will occur in the GL system
because of the interface between GL and application systems [. . .]. So at the end we have to do
further enhancement to both systems.

MAS dimensions

Services

Mean

t-value

Sig. (two-tailed)

Scope

Conventional
Islamic
Conventional
Islamic
Conventional
Islamic
Conventional
Islamic

27
18
27
18
27
18
27
18

2.7840
3.8704
3.5648
4.0139
3.1019
3.7639
3.2222
3.7778

24.518

0.000

22.346

0.023

23.00

0.004

22.800

0.008

Timeliness
Integration
Aggregation

Hypotheses
H1. There is a significant difference in the
conventional financial institutions
H2. There is a significant difference in the
conventional financial institutions
H3. There is a significant difference in the
conventional financial institutions
H4. There is a significant difference in the
conventional financial institutions

Table VI.
Results of t-test
on use of MAS

Results
use of broad scope MAS between IFIs and

Supported

use of timely MAS between IFIs and

Supported

use of integrated MAS between IFIs and

Supported

use of aggregated MAS between IFIs and

Supported
Table VII.

JIABR
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166

The interviews above reveal that although there is little difference in terms of overall
financial accounting system, additional fields or features of the systems are required to
cope with the various Islamic products that require different contracts and different
relationships. Thus, to address the issues of Shariah, IFIs require more information
than conventional FIs.
4.1 Scope
The empirical evidence from this study suggests that in order to be Shariah compliant,
IFIs use a broader scope of MAS information than conventional FIs. In a related
interview, the Senior Finance Manager for an Islamic bank reflected on the need for
non-financial information in decision making:
Last time, when we were windows [1], the environment was different; we were just a side
business. Now we are an entity by itself. We have to work on the bottom-line but at the same
time we have to ensure that all the Shariah compliance issues are addressed.

Besides looking at business operations, other aspects of the organization also have to
be Shariah compliant. For instance, the Senior Vice President Finance and
Administration of an Islamic Insurance Company said:
We have four Shariah committee members from outside and we have a Shariah compliance
department. They liaise with the Shariah committee. We need their approvals from the
introduction of the products to the delivery of the products and other things related to
Shariah have to be endorsed by the Shariah committee [. . .]. Our Shariah compliance
department looks at Shariah compliance for the company as a whole. Not just on the
products, but also looks at the ethics of the staff.

The findings from the survey (Table VI) and the interviews are consistent with Islam et al.
(2000) who find that managers of Islamic banks need a relatively broader scope of
information about their business operations and the prospects of their clients. IFIs require
more non-financial information especially those related to the issue of Shariah compliance.
As managers of customer funds, IFIs have to make sure that the funds are managed in
accordance with the principles of Shariah. Hence, more non-financial information related
to Shariah compliance is required by them. For example, IFIs have to make sure that
revenues come from activities permitted by Shariah. Cleansing activities will be carried
out if there is any doubt as to the source of the income. To do this, IFIs have to check the
sources of the income. For instance, the Head of Finance for an Islamic bank stated:
We closely monitor our source of income. Normally we will quantify the non-halal income and
we will not record it as income in our income statement. It will be recorded in one account to
become a special fund to be distributed to the public under maslahah ummah [. . .]. Example
would be the interest received that was not contracted before, and this normally happens
when we deal with non-muslim or conventional banks.

In addition, in conventional commercial banking systems, there is a lender and borrower

relationship where each transaction is subjected to interest payments. However, in the
Islamic banking system, a different relationship exists depending on the nature
of the product. For example, murabahah financing is a trading contract, while mudarabah
and musharakah involve participatory contracts that are founded on equity-based
financing contracts. Thus, to ensure that the contracts associated with the transactions
are not against Shariah, the process of product innovation in IFIs is more rigorous.

Various underlying Shariah principles are used. This again requires a huge amount of
non-financial information related to Shariah issues. IFIs have to go through more
processes than conventional in order to get approval for product introduction. In expressing
his view related to product innovation, a senior finance manager for an Islamic bank said:
Whenever we want to introduce a new product we cannot just show one piece of paper to the
Shariah committee saying this and that with modus operandi that is very skeleton [. . .].
Now it is going to be a thick document, to the extent that the operation manual also has to be
vetted through by the Shariah committee.

In equity-based financing, Islamic banks need to be selective in choosing their clients

as the returns are not guaranteed. In dealing with mudarabah financing, the Head of
Finance for an Islamic bank stated:
We analyze documents closely at the application stage [. . .]. Once financing is approved, we
review their business performance yearly [. . .]. It is purely business and indirectly on
Shariah [. . .]. When non-compliance issue arise, then we will report.

Furthermore, in musharakah financing, once a partnership has been established with

the client, Islamic banks have to participate directly in the business. Aside from the
constant monitoring conducted to ensure that business activities are in accordance
with Shariah, IFIs must ensure that the business activities provide the expected return
to both parties. In making business decisions both parties have to consider market,
economic and technological factors, which are all external information. Business
decisions are also made based on the forecasting of information.
As for the Islamic insurance business, management has to monitor funds collected
from customers and certify that they are invested in Shariah compliant businesses.
Thus, more external and future information is required to ensure that operation and
day-to-day activities of the IFIs are in accordance with Shariah. When talking about
investing their funds, the Senior Vice President for Finance and Administration for
an Islamic Insurance company stated:
If we want to invest in the stock market, we only invest in the Shariah approved counters.
Like in the money market, if we want to invest in banks, then we have to go to Islamic banks.
We cannot invest in the conventional banks. And for bonds, we have to buy sukuk.
Investments must be Shariah certified.

4.2 Timeliness
The empirical findings from the survey reveal that IFIs use more timely information
than their conventional counterparts. A possible explanation for this is quite possibly
that IFIs take a partnership position (Greuning and Iqbal, 2007). Furthermore, in
Islamic banks, deposits are not based on guaranteed return but based on profit sharing,
with a fixed amount on the asset side and a varied amount on the liability side.
If profits are overly distributed, then banks may have insufficient funds to meet their
obligations. Thus, calculation on profit distribution has to be prepared and submitted
monthly to the Central Bank. According to the Head of Finance for an Islamic bank:
We have to submit our profit distribution report to Bank Negara every month. This is the
biggest and the most comprehensive information that we have to gather but conventional
banks are not required to do this.

MAS in
Malaysia

167

JIABR
2,2

168

The same view was echoed by the Assistant General Manager Finance of a bank
offering Islamic financial products only:
Deposits are taken under murabahah and the rates are not fixed unlike the loan. So the
income side is fixed. What happens if next year there is an economic crisis? The rate of return
on deposits increases, but income is fixed. Then margin will be reduced. Thus, we must have
sophisticated information to simulate all these scenarios.

With timely information, decisions on profit distribution can be made effectively and the
possible mismatch of assets and liabilities can be monitored closely. Another possible
reason for this is the size of the IFIs themselves. The IFIs in this study are mostly smaller
than conventional FIs and in smaller organizations, bureaucracy can be expected to be
lower. With advances in information technology, information can be stored and
retrieved quite efficiently.
4.3 Integration
Consistent with Islam et al. (2000), the findings of this study suggest that IFIs use more
integrated information than conventional IFIs. IFIs use information about the activities
of the various departments within the firm alongside information on the impact of
decisions on them (Chang et al., 2003; Bouwens and Abernethy, 2000; Chia, 1995). The
issue of Shariah compliance in product innovation gives a possible explanation for
these findings. Product innovation requires the integrated effort of various departments;
including the SSB, product development, legal, marketing and finance. IFIs have to
make sure that the contracts associated with the new products conform to Shariah.
The need for more integrated MAS in IFIs is increased because all transactions are
monitored by SSB to ensure Shariah compliance (Islam et al., 2000). In fact, with Shariah
audit coming into practice, highly integrated MAS will be required so that compliance
throughout the value chain can be easily tracked. When describing their information
system, the Senior Vice President of a new Islamic insurance company remarked:
Ours is a full package system starting from the point of sale. We have the package which I think
other insurance companies do not have [. . .]. The advantage of our system is that when they
key-in at the front line, it will be updated automatically in the General Ledger system.

4.4 Aggregation
The findings of this study also suggest that IFIs use more aggregated information than
conventional FIs. The aggregation of information by product is required by IFIs in
calculating their capital charge for risk management. Under the capital adequacy ratio
(CAR) requirements, IFIs have to identify the Shariah concept of each product because
the weight ratio for each product varies according to whether the products have
collateral or not. In explaining this new development, the Senior Finance Manager for
an Islamic bank stated:
Our system must now have new features regarding our products. Previously we disregarded
the Shariah concept. We did not put any indication as whether it is BBA, murabahah, etc.
[. . .]. Now, if you have a housing loan under BBA and musharakah, you cannot join them
together because they are based on different concept.

For Islamic insurance operators, aggregated information is very important in

evaluating potential investment and also in monitoring the performance of the

companies where the funds are invested. On this issue, the Chief Financial Controller
for a foreign Islamic Insurance company noted:
When we invest, we have a system in place to monitor the performance of the investment.
If we go to the equity market, we have to make sure that we can manage them [. . .]. Now it is
very difficult to follow each company individually. So we make use of those indices available
such as the Dow Jones [. . .]. We also rely on the Securities Commissions lists of Shariah
approved counters.

The empirical findings from the survey was supported in the interviews, which revealed
that in order to be Shariah compliant, IFIs rely on a broader scope of information in
addition to the traditional financial and quantitative nature of accounting information.
The empirical findings from both the survey and the interviews also reveal that IFIs use
more integrated and aggregated information than conventional FIs. In addition, IFIs are
expected to be more transparent in reporting and consequently require more integrated
and aggregated information that covers a wider scope of information.
Realising that riding on the parents company conventional system may not be
sufficient for Islamic banks, one Islamic subsidiary converted their accounting system
into a new system called iMAL. According to the senior finance manager of this
company, iMAL will be more suitable for Shariah compliance objective and he claimed
that the company will be the first to use this system in Malaysia. Some of the big
Islamic banks in other countries like the Kuwait Finance House have also started using
the system. In explaining about this solution, he said:
The conventional system is not suitable for Islamic banks because many calculations such as
profit are different. The terms used are also different. Conventional FIs use the word loan
and interest, but Islamic banks call it financing and profit. The implementations are
also different.

In implementing this project, the bank gets advice from a group of experts. According
to the senior executive who handles the project:
There are two main characteristics of iMAL. First, it involves a real time posting, so when the
users key in the transactions they can see the result straight away [. . .]. The Islamic products
are already in the chart of accounts and the chart of accounts has been categorized into for
example murabahah, wakalah,, etc. It is suitable for Islamic banking system since the
Shariah concept is already in the chart of accounts.

The iMAL can be integrated into the customer information system and information
about the customers can be extracted easily. In fact, the iMAL system can be linked to
many other application systems to extract the information required for decision
making. He stressed that:
The integration will be more universal and comprehensive, where you can use the system for
budgeting, for employees attendance, for stock taking of stationery, time taken to serve a
customer, etc.

Besides having real-time posting, where information can be provided in a timely

manner, the second characteristic highlighted by the senior executive is the capability
of the system to navigate into detailed information. In explaining this, he stated:
The uniqueness of the system is that you can drill down. Lets say at 11.30 am you have
deposits amounting to RM1 million, and in the next 10 minutes the amount increases

MAS in
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169

JIABR
2,2

to RM2 million. Then the headquarters will know from which branch or customer the
increment originated. Posting and results are real time.

Owing to the high linkages and the real-time processing, aggregated or summarized
information by products, by branch or by time period can be obtained easily and in a
timely manner. Related to this, he added:

170

If the Central Bank wants a report, we just select a date, at a finger tip we have all the
information required.

Thus, this iMAL system is an example of a system that is able to capture a broader scope
of information. At the same time, it is built on Shariah rules and regulations. It can be
integrated or easily linked to other application systems, thus banks can easily obtain the
information required to support their operations. The integrated and real-time posting
enables summarized or aggregated information to be retrieved in a timely manner.
Hence, iMAL fits the criteria of a sophisticated MAS. Besides complying with the
Shariah and other regulatory requirements, the system can bring a competitive
advantage to the IFIs. The availability and use of sophisticated information allows
managers of the IFIs to make more effective decisions, which in turn improves
organizational performance.
The above findings are to be expected, as MAS is part of a wider MIS (Upchurch,
2002; Bouwens and Abernethy, 2000). MAS can also be viewed more broadly (Mia, 2000;
Hussain, 2000) and there is not much difference between the information provided
by a specific MAS and that provided by other MISs. With the advancement in IT,
many organizations are adopting strategic enterprise management systems in which
management information across all functions and disciplines is integrated into a
common database (Brignall and Ballantine, 2004). Hence, MAS has become part of the
enterprise management system. Thus, as found in this study, MAS may not be the only
major factor that contributes to the difference between the MAS of IFIs and those of
conventional financial institutions. The difference might be due to the difference in the
overall MIS of the organization. The MIS for IFIs might be broader in scope and more
integrated to cover Shariah compliance issues (Islam et al., 2000).
5. Conclusion
The aim of this study has been to determine whether there is any difference between
the MAS of conventional and IFIs. A survey on financial institutions in Malaysia was
conducted and semi-structured interviews were carried out to gain further insights into
the survey findings. The study shows that IFIs use MAS information that is broader in
scope, more timely, more integrated and more aggregated than conventional financial
institutions. In order to meet both religious and business objectives, IFIs require
sophisticated MAS information, which is available through the use of strategic
management accounting (SMA) tools and techniques such as the BSC and ABC. The
use of these techniques brings a competitive advantage to IFIs, as SMA places
customer needs at its top of priority. The study has illustrated that IFIs normally
develop and adopt an integrated accounting and overall enterprise system. With this
comprehensive enterprise system, the management accounting function is integrated
with other functions in the organization.
This study is subjected to the usual limitations associated with questionnaire-based
survey research. It is important to interpret the results in the light of the studys limitations.

This study covers only financial institutions in Malaysia, thus the findings cannot be
generalized to other enterprises or to other countries. As for the respondents, this study
involved top management as the sole respondents and representatives of their respective
organizations. Nonetheless, the information sought is not beyond their knowledge as top
management are normally well-versed in the diverse aspects of the organization. Future
research can consider collecting data from individuals at various levels of the organization.
This study has provided an avenue for further investigation on issues of MAS for
IFIs. A future focus might be on how MAS helps in strategic and operational decision
making by considering the need for Shariah compliance. Researchers might also focus
on the role of MAS in promoting transparency and accountability in IFIs. A case study
approach would be able to provide a deeper and richer understanding of this issue.
In addition, future studies might examine the significance of supporting activities
(departments) in the delivery of Islamic financial products. It is also worth including
for further study the need to explore value chain components in IFIs, and how they
help contribute to the value of the products they offer.
Note
1. Conventional bank that offers Islamic financial services under the interest-free banking system.

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Appendix
Please indicate the extent of use of the following information provided by your management
accounting systems (MAS) for decision making, planning and control by circling the appropriate
number.
MAS INFORMATION CHARACTERISTICS
(The information system should include: files, reports, documents, minutes, accounts, and notes,
available for decision making and provided within the organization)
Not at
All
SCOPE
(a) Information which relates to possible future events (e.g possible
changes in government regulations).
(b) Quantification of the likelihood of future events occurring (e.g.,
probability estimates).
(c) Non-economic information, such as customer preferences,
employee attitudes, labor relations, attitudes of government and
consumer bodies, competitive threats, etc.
(d) Information on broad factors external to your organization,
such as economic conditions, population growth, technological
developments, etc.
(e) Non-financial information that relates to the productivity
information such as hours of computer breakdowns, employee
absenteeism, customer services, etc.
(f) Non-financial information that relates to market information
such as market size, growth share, etc.

TIMELINESS
(a) Information that is provided immediately upon request.
(b)
(c)
(d)

Information that is given automatically upon its receipt into

information systems or as soon as processing is completed.
Reports that are provided frequently on a systematic, regular
basis such as daily reports, weekly reports, etc.
Relevant information that is reported without delay after
occurrence of certain event.

INTEGRATION
(a) Information on precise targets for the activities of all
departments within your organization.

To a very
great extent

Not at
All

To a very
great extent

Not at
All

To a very
great extent

(b)

Information that relates to the impact of different departments

decisions on performance of overall organization.

(c)

Cost and price information of the departments in your

organization.
Information on the impact of your decisions throughout your
organization, and the influence of other departments decisions
on your area of responsibility.

(d)

MAS in
Malaysia

175

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176

AGGREGATION

Not at
All

To a very
great extent

(a)

Information provided on the different sections or functional areas

in your organization, such as marketing and production, or sales,
cost, or profit centers.

(b)

Information on the effect of events on particular time periods (e.g.

monthly/ quarterly/annual summaries, trends, comparisons, etc.).

(c)

Information which has been processed to show the influence of

events on different functions, such as marketing or services
associated with particular activities or tasks.

(d)

Information on the effect of different departments activities on

summary reports such as profit, cost, revenue reports for the
overall organization.
Information in formats suitable for input into decision models
(such as discounted cash flow analysis, incremental or marginal
analysis and credit policy analysis)
Information in forms which enable you to conduct what-if
analysis.

(e)

(f)

Corresponding author
Siti Zaleha Abdul Rasid can be contacted at: szaleha@ic.utm.my

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