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Accounting Ethics

Essay by 24  •  September 12, 2010  •  1,850 Words (8 Pages)  •  1,622 Views

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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?

...

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