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 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 becoming
increasingly fashionable to re-regulate, accounting, as a profession must
not miss that boat, lest they drown in the result-- government
intervention.