Accounting Ethics Essay

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 a byproduct of
the advertising 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.
Advertising 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 held 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 growth 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
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 strategies, 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
service 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 clientele 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 evaluate 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,
to 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 independence 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 clients 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 explored. 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.
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. Unfortunately 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 boat, now it is becoming increasingly
fashionable to re-regulate, accounting, as a profession
must not miss that boat, lest they drown in the result–
government intervention.

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