Accounting Ethics Essay Example For Students

Accounting Ethics Essay 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 society 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 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 resembles 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 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 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 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 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. 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 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 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 have, at their disposal, a much larger profit level; therefore advertising expense is easily included only marginally affecting bottom line. Listening Essay Previously, firms worked mostly with longstanding clients 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.199) implications regarding the motives and integrity of these firms must be explored. 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. Unfortunately 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 boat, 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.