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 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