Thursday, December 13, 2018

Ethics in Accounting

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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


Cheap custom writing service can write essays on Ethics in Accounting


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.77) 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.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 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 185 asserted the most dramatic


contrast between advertisers and non-advertisers was their size.


(ODonohoe p.1) 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 10 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 todays 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.1) 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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