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 society more stringent guidelines must be implemented at the firm level.
The first, and most obvious, of he 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 competition. 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 esembles the market structure in an extreme sense. The elements of 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 serves 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 differentation, many sellers, and price as he 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 prices 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 ensitive, 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 of providing the service increases and therefore are able to maintain their client base.
In this example a gently downsloping demand curve exists (Thompson p. 04) 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 eans 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 prices 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 ssues 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 have, 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. Consequently, 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 advertising 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. Advertising 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 held 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 990 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. 4)
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 growth in the Eighties followed by a near halt. The result? many small to medium size firms ollowing 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 strategies, 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 ervice 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 clientele Now that the difference in the competition aspect of public accounting is established mphasis 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 evaluate 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, to some extent, historically exists. With the competitive structure now present the process of gaining a new, and retaining n 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 independence 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 clients and the relationship developed.