Accounting Ethics

When examining the effect of open marketing on the
profession of accounting it is important to view it from three
perspectives: the client's, the profession's, and society's.
Additionally, two key areas that are affected by marketing must
be addressed, these are concerning competition, and ethical
implications. Marketing in public accounting is here to stay
therefore making an argument against its existence would be
fruitless; however, in order to achieve maximum benefit to the
firm, the client, and society more stringent guidelines must be
implemented at the firm level. The first, and most obvious, of
the effected areas is competition. Within competition several
points are discussed. First, the implications advertising has
on public accounting-- the model of perfect competition versus
the model of monopolistic competition. Secondly, the
relationship between firm size and advertising expenditures.
Thirdly, the effect of advertising on firm specialization, the
implications of client turnover on public accounting practice.
Before making the comparison, a brief explanation why the
two models are chosen is in order. Monopolistic competition has
been chosen for the pre-advertising era because it most closely
resembles the market structure in an extreme sense. The elements
of monopolistic competition are as follows: product
differentiation, the presence of large numbers of sellers, and
nonprice competition. Although accounting services between firms
offer very little service differentiation, the absence of
advertising serves as a replacement because clients are not
necessarily aware that other options are easily attainable. The
post-advertising era is explained through the model of perfect
competition for which the qualifications are as follows: very
little or no service differentation, many sellers, and price as
the only means of distinguishing one firms service from anothers.
In a perfectly competitive market the price of a particular
service is established solely by the interaction of market demand
and supply. (Thompson p.277) When market demand for accounting
services increases the resulting demand shifts right causing
prices to increase returning the market back to
equilibrium. However when supply increases, such is the
theoretical effect of adding advertisement to public accounting
practice, the supply curve shifts right causing prices to fall.
The model of monopolistic competition is also price
sensitive, however only at the firm level. For example, the CPA
firm of XYZ has an established clientele base and uses referrals
as its sole means of growth. They increase prices only as their
cost of providing the service increases and therefore are able to
maintain their client base. In this example a gently downsloping
demand curve exists (Thompson p.304) causing only drastic changes
in pricing to send their client base shopping for a new firm.
The result is XYZ can continue to grow by practicing fair pricing
and providing a reputable service. Cut rate pricing only
marginally effects their client base because there is little
means to make their pricing publicly known, and only drastic,
unwarranted increases sends clients packing. Conversely, in the
post-advertising era, XYZ must always be aware of market pricing
because the demand curve is steeper and more volatile. Therefore
the client base of XYZ is not stable as in the previous example
and measures must be taken to keep prices competitive with other
firms regardless of cost inferences. The result is the
necessity of a more aggressive policy regarding new client
recruiting and a higher turnover of existing clients.
Now that the differences are established, the resulting
issues in public accounting can be discussed. The first area
deserving discussion is the relationship between firm size and
advertising expenditures. A study made of CPA firms in Britain
in 1985 asserted "the most dramatic contrast between advertisers
and non-advertisers was their size." (O'Donohoe p.122) The
obvious reason for this anomaly is availability of resources.
Larger firms have, at their disposal, a much larger profit level;
therefore advertising expense is easily included only marginally
affecting bottom line. This implies larger firms to have gained
a great deal more from inclusion of advertising than small firms.
Consequently, small firms could be pushed out of the picture
entirely in the area of audit services.
Why? In the area of audit services, small firms have little
to offer to differentiate themselves from their larger
counterparts who can now freely move in and perform the service
at a lower price. This, unfortunately, will be