Essay About Accounting Services And Little Service Differentiation

Accounting Ethics
Accounting Ethics
When examining the effect of open marketing on the profession of accounting it is important to view it from three perspectives: the clients, the professions, and societys. 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.” (ODonohoe 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