Accounting Ethics
Accounting EthicsAccounting 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 s ociety 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 compet ition. 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 o f
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 serve s 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 d
ifferentiation,
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 pri ces
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 o f 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, unwarran ted
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 price s 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 ha ve, 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.
Consequ ently,
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 a byproduct of the adverti sing era.
Smaller firms
only hope is to emphasize "personalized service" in tax and
full service
areas in hope that audit services can result. The major
drawback is small
firms are offered little room for growth because of the
expense involved.
Adverti sing in public accounting causes perspective clients
to become
bottom line oriented meaning the firms with the most
available revenue to
dump into advertising, coupled with the resources to offer
lowest fees are
the ones which grow. These resources are h eld by Big Six
firms and large
regional firms. As a result these firms will grow while
small firms
struggle.
The second inference drawn from the model of perfect
competition
is some smaller firms being forced to specialize. In order
to
differentiate themselves some smaller regionally operated
firms have
chosen to specialize. In the March 1990 issue of the CPA
Journal Arvid Mostad, CPA published an article in which he
set up "Seven
Marketing Guidelines." His first guideline was "Create your
own special
niche." (Mostad p.54) He goes on to encourage small firms to
establish an
area of expertise. (Mostad p.54)
This develops significant implications regarding firm
longevity in a
capitalistic market of industry upswings and downturns. An
example of
this is the construction industry in the
Baltimore-Washington corridor.
The industry experienced phenomenal growt h in the Eighties
followed by a
near halt. The result? many small to medium size firms
following the
advice of specialization went belly up along with their
clients. This
uncertainty exists with any firms who specialize. !
Firm specialization clearly is n
The final implication of the new competitive market is
client
turnover. Gone are the days when firms could guarantee
retaining a client
by providing a quality service at a fair price. New market
pressures
require firms to constantly evaluate pricing st rategies,
and, in some
cases bid on jobs yearly. This creates high levels of
client turnover.
The result is firms must always actively seek new clients.
Several
drawbacks of this are increased overhead costs to firms,
less stability,
and greater servic e cost. Firms overhead costs increase
because the
expenses of replacing clients must be absorbed. This
expense comes from
both marketing tools used to attract clients, and costs of
preparing a bid
to perform a service. Firms which previously served a
client base from
year to year must face the uncertainty of retention of their
client base
now. The cost of providing a service to a new client
greatly exceeds that
of providing the same service to an existing client. When !
providing a service to a new clie
Now that the difference in the competition aspect of public
accounting is established emphasis is changed to examine the
ethical
implications derived as a result. In the area of ethics one
must examine
differences in independence, and integrity, and eva luate
the changes in
quality of service resulting from these areas.
When examining independence one must maintain an emphasis
on the
competitive structure of the market and new pressures in the
area of
client retention. Independence, one may argue, never
existed before;
however an assumption is made that independence, t o some
extent,
historically exists. With the competitive structure now
present the
process of gaining a new, and retaining an existing, client
has become
increasingly costly and time consuming. One may then infer
that once a
client is obtained, a firm would wish to do business with
that client for
an extended number of years, in order to realize the benefit
of expenses
incurred. Put simply, a firm would not look kindly toward a
partner who
lost a new client. This, inherently, decreases auditor
indep endence
during the first several years of the engagement. The
partner overseeing
the audit must always concern himself with the consequences
of losing the
engagement. Previously, firms worked mostly with
longstanding clien!
ts and the relationship developed
The second major area of ethical effect is that of
integrity.
Competition has resulted in some firms damaging the
integrity of the
profession. This damage has occurred mainly through pricing
practices.
Two deviant practices have become commonplace in today's
market. These
are below cost pricing, and discount pricing. Many firms
have adopted
policies of below cost pricing as a tool of market
penetration,
(Formichella p.199) implications regarding the motives and
integrity of
these firms must be explo red. Is it reasonable to assume
that a firm
would be willing to absorb a loss from an engagement, or
would a more
practical assumption state that firms which lowball would
seek means to
cut service costs at the expense of quality? It is not
possible to answer
this question; however its mere existence creates a damaging
effect on the
integrity, or at least perceived integrity, of the
profession.
The second pricing strategy which is cut-rate pricing
provokes
similar questions. In his commentary Mario Formichella
states the
following:
It is no longer unusual to find firms willing to
take on work at substantial discounts from
standard
fee levels. While there may be justifications for
performing services at reduced rates during
off-peak
periods in special situations such as for
non-profit
institutions or similar organizations, the extent
to
which this practice has grown cannot be justified
on any logical or professional basis. (Formichella
p. 81)
The distaste shown by Mr. Formichella in the area of
cut-rate pricing
shows it as an issue of concern and one which damages
integrity. Mr.
Formichella goes on to call for the implementation of
professional
standards to prohibit actions such as this which
are damaging to the image and integrity of the profession.
One would
have to agree with his statement; however difficulties
arise, in the area
of monopolistic activity when guidelines are established
regarding pricing
strategies across an industry. Unf ortunately the
profession must rely on
the integrity of individual firms to guard against this
strategy. As a
result, this is a practice likely to continue, albeit
damaging to the
profession and those which rely on the statements made by
the profession.
The existence of advertising in public accounting creates a
new
environment to which firms are still adapting. This new
environment is
largely the result of increased competition and a clientele
which is
increasingly more bottom line oriented. In order
to compete firms must place more emphasis on marketing and
accept it as a
cost of doing business. The result of this will be more
difficult
penetration and an increasingly limited number of small
firms in the
business. Market pressures also are forcing
creating situations where ethical issues such as
independence and
integrity are questioned making it imperative that the AICPA
create
guidelines from which the evolving profession must base
itself. In the
age of deregulation accounting jumped on the boa t, now it
is becomin