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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,
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 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.
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.
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.
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