Literature Review of Marketing of Professional Services

Introduction

This paper aims to prepare the literature review portion of the dissertation with a view of the theoretical framework that would answer the question: “What are the determinants of auditor/account selection in MARKET?”

The following are the main articles to discuss and analyze in relation to each other and the theoretical framework described in the question above and for the purpose of generating the possible research questions: (1) A Market Solution to the Enron Accounting Crisis by Daniel B. Thornton (2002); (2) Barriers to Marketing within Professional Service Firms by Geraldine Cohen (2006); (3) Marketing Professional Service; Journal of Marketing by Kotler and Connor, Jr. (1977); (4) How do CPA firms perceive marketing- A Hong Kong Experience by Yau and Wong (1989); (5) Research note: marketing accounting services – A cross-cultural comparison by Mangos, et. al (1995); (6) Marketing accounting services: an inter-country and ethical comparison by Mangos, et. al. (1997); (7) Determinants of Auditor Choice: Evidence from a Small Client Market, by Knechel, et. al (2005); (8) Determinants of market orientation in accounting firms by Ozer, et. al, (2006); (9) Services business markets: a further view of a new reality or a blurred landscape? by Tyler, et. al, (2007); Marketing Principles and Practice in Accounting Profession: A Review by O’ Donohoe, et al, (1991); (11) Marketing: is it still “just advertising”? The experiences of accounting firms for other professional service firms, by Barr and McNeilly (2003); (12) Relationship marketing: schools of thought and future research directions by Palmer, R. et. al (2005) and (13) Marketing Models of Service and Relationships by Rust and Chung (2005).

The above main articles will be supported by all relevant research articles and materials that will lead this paper in formulating the needed research questions for the attainment of the purpose of this literature review:

Correlating the first with the second article above admits the existence of a market for auditing and accounting services but tempered by the presence of barriers to marketing. The third article could thus make a good connection to the introduction of an issue created by the first and second articles. The seriousness of the concept of marketing for accounting and auditing services is first tested in the fourth article, hence creating an elucidation or clarification of the discussion of marketing theories about professional services. The issue as further explained in the fourth article is further clarified and explained by Mangos et. al in the fifth and subsequently in the sixth article thus into perspective inter-country differences in the adoption of the code of ethics of the profession. The seventh and the eighth article are more specific attempts to go into the deeper and more practical application of the concepts introduced by the earlier articles. The ninth, tenth and eleventh articles will further reveal more recent developments in research about the marketing of professional services. The twelfth and thirteenth articles will talk more about relationship marketing about the recent developments in the marketing of professional services.

Does a market exist for accounting and auditing services?

Using the title “A Market Solution to the Enron Accounting” to an article by Thornton (2002) could only be presumed recognition of a market for which must be governed by certain marketing principles. There are indeed buyers and sellers of accounting and auditing services, so what seems to the issue that is worth researching? There are however accepted barriers to the marketing of professional services as may be found in the article entitled “Barriers to Marketing within Professional Service Firms” by Geraldine Cohen. The two articles, therefore, create an issue that is worth resolving, hence it is worth starting with knowing why Thornton made use of the phrase “a market solution” in his article.

Thornton (2002) admitted stock markets having enriched many investors in recent years. The same stock markets surprising have brought also the case of Enron and the so-called accounting crisis. In his attempt to make a lesson from the paradoxical turn of events, Thornton (2002) believes that even those who so totally rely on competitive markets for their enrichment are failing to notice a natural solution for the crisis, that is, “well-functioning markets for public accounting services, audit committee expertise, and accounting standards.” Thornton (2002) cited a former U.S. Securities and Exchange Commission Chief Accountant that had figure out that Enron’s failure, alone, destroyed $60-70 billion of market capitalization in a few months, while surprisingly the annual audit fees U.S. industrial public companies numbering about more 15,000 amounted only to $8 billion (Schuetze, 2002). He explained that although one can question the accuracy and connotations of the estimates, the situation could powerfully suggest that researchers should examine the proposition of whether auditing is indeed an underestimated or underrated good. Prompted with the question: How much would investors be prepared to pay for improved or higher-level auditing that could put off just one Enron per year or a decade?, Thornton (2002) answered by saying that “only well-functioning markets can answer those questions.”

To argue that the value of the natural solution for the crisis include a well-functioning market is the bring about the economic theory of price and quality that the better quality normally demands better price or that better prices would only indicate a value of the good or service that may not just be decided by the customer who wants the product or service but also the producers who evaluates also on how much they are ready to produce and what level of quality they could be capable of giving. May it argued then that: “well-functioning markets for public accounting services, audit committee expertise, and accounting standards”. The value of services however has a cost since it is asserted that auditing is an undervalued good as what happened in the case of Enron that if companies would like to want reliable information, they must be willing to pay for higher-cost “to pay for better auditing that could prevent just one Enron per year?” The value of services economically speaking should be as perceived by customers where prices could not be too high as would cause other clients to change auditors. This latter observation may be supported by a result of research by Beattie and Fearnley (1995) where they found that two-thirds of companies had recently considered changing auditors using as the main reasons cited being audit fee level, dissatisfaction with audit quality, and changes in top management.

Thornton, (2002) emphasized voluntary incurrence of costs by companies for the issuance of audited financial statements long before they were required by law to do could only speak to the existence of a market for financial reporting (Benston, G.,1969; Watts, R. and J. Zimmerman.1983; Macintosh, N., et. al. 2000). Thornton (2002) intended his work to briefly outline the market forces that influence financial reporting quality (Thornton, D. 1992) by first describing recent research findings relating to quality determinants and the influence of financial reporting quality on the cost of equity capital and have concluded that financial reporting quality is best determined in the private sector.

It is very clear how Thornton (2002) argued for the existence of the market of financial reporting. What the author is of course trying to convey is that users for to benefits from the information they must pray for it. His conclusion also that financial reporting quality is best determined in the private sector could only connote the sellers of accounting and auditing services for existing markets would have to decide based on existing competition to set their prices in a way that would not only help the accounting and auditing firms recover their costs but also in a way that would give their reasonable profit which is at least above their cost of capital. So the more challenging question is: How would the seller-players have to sell their services?

It also implied that since price must be paid by the market, it is the participants that must ultimately pay for the quality they desire, in dollars and cents. The author conviction’s of the strength of his thesis is strengthened by his identification of the eight market forces as discussed next:

Thornton’s Eight Market Forces

Thornton (2002) identified the first market force as: “Accountants are motivated to adhere to high ethical standards so that they develop reputations for trustworthiness and confidentiality. Only by so doing can they earn the trust of current clients and attract new clients.” He explained this force by his observation that as developments happen in transportation, communication, and literacy and as businesses grew, he found the need of owner-managers of these companies to deal at neutral terms with external investors. Thus he noted the strong incentives of owner-managers “to voluntarily pay accountants to attest to the credibility of information in their financial reports for one overriding reason.” The price of service provided by accounting and auditing firms depends on the evaluation of the customer or clients as to what could give the client the needed credibility in the financial statement.

That overriding reason referred to earlier is of course equivalent to Thornton’s second’s Market Force which is: “In well-functioning capital markets, investors price-protect themselves.” (Jensen, M. and W. Meckling,1976; and Wilson, R., 1983). Thornton, (2002) explained about investors’ demand for “higher expected rates of return from companies whose financial statements are less credible.” In noting the idea that price protection is not unique to capital markets, he cited the case of bartenders having to voluntarily pay for the quantities of liquor in their bottles audited and reconciled with cash register receipts. He thus made the analogy that bartenders submit to audits command for higher fees, thus “companies can lower their cost of capital by paying for high-quality governance that enhances the credibility of the information they disclose.” There is, therefore, a direct relationship with quality of service and price but of course, there are limits to what clients could pay in the same way that there are limits to return of investments because of limited choices and resources of players.

Thornton (2002) noted that there are at least two aspects of governance: internal governance and attestation. As to internal governance Thornton, (2002) has his third Market Force which is: “It is in the interest of firms’ current owners to establish governance systems, and to have the systems examined by public accountants.”

The idea of price protection is not a monopoly of capital markets. Since bartenders who voluntarily pay to have the quantities of liquor in their bottles audited and reconciled with cash register receipts, command higher fees than those who don’t, there is the basis to say that companies or clients as audited can lower their cost of capital by paying for high-quality governance that improves the trustworthiness of the information they disclose. (Thornton, 2002). Lowering the cost of capital in simple terms means greater probabilities for more wealth. Having therefore enhanced service would assure outside investors that the owners are not subverting the firms’ resources to personal uses, by lowering the cost of capital. To illustrate this latter analysis, it would be a difficult scheme for managers who are not owners or stockholders to say that their cost of capital is this or that much if financial reports are verifiable by other independent users.

As to attestation, Thornton, (2002) gives the fourth Market Force which: “It is in the current owners’ interest to pay public accountants to ensure financial information, in the sense that the accountants have something to lose, should the information prove to be false or misleading. This also contributes to a lower cost of capital.”

He explained this by arguing that public accountants feel a corresponding market force, hence Thornton’s fifth Market Force: “Public accountants are motivated to “put money on the table,” to signal that they have something to lose if information with which they are associated turns out to be false or misleading.”

Thornton (2002) provided as an example the way public accountants put money on the table by buying professional liability insurance, and this is a cost to them that accountants must recover from fees charged from clients. Realizing also that these auditors are knowingly exposing themselves to the risk of litigation by aggrieved investors who may base their decision on the financial statement information that may turn out to be not true and these risks as those met by financial investors are costly to auditors so even unsuccessful charges will still damage their valuable standings. (Brumfield, C., R. Elliott, and P. Jacobson, 1983; Elliott, R. and P. Jacobson,1987). Thus, it is from this view that Thornton (2002) notice the nice circularity argument about other market forces mentioned earlier: 1) Auditors doing a superior job will be less likely to issue clients’ unreliable financial statements and consequently will have less probability of being sued. Longer time not being sued means stronger reputations which will mean higher fees for these auditors. Thus it could be logically deduced that auditors will value competence and integrity in their work because those will enhance value. Thus performing superbly is closely related to the first market force thus giving rise to Thornton’s sixth Market Force: “Auditors with superior reputations have incentives to continue doing superior audit work. Therefore, reputation is a valid signal for auditor quality, and it commands a fee premium in the market.” This theory may be supported by what Carson, E. et. al (2003) found that consistent with the earlier research there is evidence. This apparent presence of segmentation of the market may be further supported by what Deltas, G. & Doogar, R. (2004) found about the significant associations between client industry characteristics and observable auditor attributes such as size and leverage (but not the extent of non-audit services).

After the fifth and the sixth market forces, one could appreciate the most essential part of the industry, which is reputation. To say that reputation is everything is not an overstatement in the business because what is sold is not an ordinary service but a unique one. Many now will understand what happened with Andersen Consulting since Being part of Big Five is now just a memory simply because of the loss of reputation which is essential in the industry.

Thornton (2002) continued with the other two market forces. The next market force is therefore related to the fact of investors price-protecting themselves (Benston, G., 1969; Watts, R. and J. Zimmerman, 1983), thus Thornton’s seventh market states: “Companies voluntarily submit to rules called “generally accepted accounting principles” (GAAP) and have independent accountants certify that their financial reports comply with those principles.”

In this context that auditors go for the universality of values but they just termed it “generally accepted accounting principles”. It may be observed that the alternative of not going universal is separate rules for each company and which of course defeats the purpose of rules in promotion uniformity and applicability among companies. If uniformity is attained then it could be easier to have well-functioning capital markets, which is characterized by outside investors price-protecting themselves, hence resulting in the companies bearing the costs of this, not the investors.

Thornton (2002) further explained that accountants submitting to GAAP allow another measurement of the value of public accountants’ services. He argued that the most efficient way to deliver GAAP to the public is to set up a central institution, whose task is to ensure that GAAP is responsive to financial statement readers’ information needs but stable and predictable enough to provide a reliable basis for contracting. This need was also used as the basis for the establishment of The International Accounting Standards Board (IASB), where both accountants and business leaders saw the process as an efficient way to disseminate GAAP. (Thornton, 2002).

Thornton (2002) observed that as technology developed, owners had to delegate decision-making to skilled managers, which necessarily introduced conflicts of interest among incumbent owners, outside investors, and managers. This also subjected managers to the same kinds of price-protection pressures as owner-managers as the market for managers become competitive (Fama, E.,1980). Thus Thornton (2002) gives birth to the eighth market force: “It is in managers’ best interest to be audited, to signal to outsiders that they are not neglecting their duties or misappropriating resources. Managers increase the value of their skills and abilities when they support their companies paying for higher audit quality.”

Thornton (2002) concluded that Enron’s experience has sent to users a clear message that has been there long ago in the accounting literature but somehow forgotten, that it, “Quality financial reporting requires expertise and integrity along the chain.” The author maintained the position that that unregulated market forces can push the expert resources toward their efficient uses, but this is subject to market participants understanding what they pay for.

This is the best basis of the need for expertise and integrity which are the most valued characteristics of auditors.

Thornton (2002) explained the universality of the need for GAAP no matter is the level of technology. Thus with auditors, accountants, audit committee members, and accounting standard setters possibly losing their direction in the recent dot-com era, Thornton (2002) suggested that this can be remedied by doing back to the old literature as outline in his article or paper and putting it to work. He attributed therefore value to the Enron affair for having reminded the companies and investors of the value of high-quality financial reporting and he believes that this eventually restores accountants’ confidence in themselves. This again will emphasize the value of standard in attaining the purpose of accounting and the worth of accountants.

At this point, there is a need to relate what was analyzed with “Barriers To Marketing Within Professional Service Firms: A Study of the Understanding and Application of Marketing within Accountancy and Law Firms” by Cohen, G. (2006). Are there barriers to marketing acceptance and implementation as a management tool?

The partnership structure of most professional firms is believed to be the root of the resistance to marketing.

Cohen, (2006) made attribution to the partnership structure of most professional firms to be the root of the resistance to marketing where partners universally make out marketing as a not unnecessary activity. From her interviews, she cited the case of a partnership that considered marketing to be unnecessary in good times for the simple reason that it is expenditure straight out of the partners’ profits and the perception that marketing is not seen as bringing any benefits worth spending (TC, 15). Cohen (2006) found however fact that the measurement of marketing results is not done. She cited the Marketing Executive at Anderson Strathern to have acknowledged the existence of a “massive divide” between the fee-earner and the support service performed by marketing, which is explained by the former being a profit maker and the latter, a profit user. Hence, she exposed separation as the main reason for the low perceptions of marketing as experienced by partnerships and that will continue to exist so long as partnership-form management structure exists.

Cohen (2006) further strengthened his position that the partnership structure has an impact on the professional culture, because of the requirement of consensus in all matters, and it’s having developed the need for peer approval. She is basing of course her inference from the result of her interview which is quoted “…the other thing with the professional culture is there is a lot of cohesion and a need to belong and a need to build consensus and the trouble is if you have an organization like that, then inevitably it’s quite hard to make change because the change is not just one person, it’s the whole lot” (TL, 559).

In seeing also the difficulty in implementing change within partnerships, which operate based on consensus, versus incorporated organizations where change can be implemented from the top, Cohen (2006) quoted the Group Marketing Director of Numerica having recognized the failings of the partnership model saying, “… the partnership model, we think, is very restrictive and outdated, you forget about succession planning and you tie up the capital and you are stuck with dead wood and you don’t reward those that perhaps deserve it” (TN1, 44).

Further seeing the need to implement changes under a different organizational structure, Cohen (2006) cited Grant Thornton, saying, “…this is now a managed business, it happens to be structured as a partnership but you simply can’t have 250 Partners deciding what’s going to happen, you have to run it as if it were an incorporated business” (TGT, 68).

Cohen (2006) argued about partners as owners of the firm where decisions are made consensually and the reality that the marketer in charge might feel accountable to all the partners, which simply could be intolerable. She cited Grant Thornton’s Director of International Marketing Communications explanation that the issue is perhaps best expressed by the phrase ‘Hearts, heads and wallets’. What she meant is that there must first be an acceptance in the hearts of the partners that the proposed change or proposed decision might be a ‘good thing’. But she warned that until the realization reaches the heads of the partners that the change means doing things differently, there is a seeming “reluctance strengthened by the knowledge that the activity is paid for directly out of the individual partner’s wallet” (Director of IMC, 1993, p.4).

One could just see the difficulty of operating a partnership which could be compared to a husband and wife where one of them could just find it difficult to decide when every major decision is put on the table and which must have with the consent of both. Imagine more than two people as partners could be more and one could multiply the difficulty in the decision-making process.

Cohen (2006) explained from one of her interviews about marketers in similar positions in professional service firms experienced when doubts “whether they are welcome and probably also doubt whether what they are doing is marketing in the sense of the word as they know it.” Cohen (2006) saw the feeling of being isolated and professionally lonely for these marketers if they are approved by the other partners (Director of IMC, 1993, p.4).

Indeed the feeling of possible isolation and professional loneliness could come upon a partner marketer who would just risk making a marketing decision that may not be approved by the other partners and many will agree that it is not easy to live unhappily with groups.

Selling job internally than externally

Selling jobs internally rather than externally is more challenging in the sale of accounting or auditing services. Selling a job internally requires interpersonal skills more than marketing competence. Cohen does report the resistance felt by early marketers which were open and unambiguous according to Thornton, the latter first joined Grant Thornton.

In aiming for a different structure, Cohen (2006) is suggesting a modification of the decision-making process within a partnership which she found simply to be consensual and is inherently cumbersome.

Cohen (2006) saw that partners, who are also owners and managers, are creating a conflict of interest. Compared from a corporation where separation of the two functions are present, she took the suggestion from her interviews to change the existing structure for audit firms since under the corporate set up, “management can, in a quite unhindered way, come up with the best strategy, the best solutions going forwards and in their mind, because they’re not the institutional shareholders as well, they can think in a slightly less encumbered way” (TL, 556). There be, however, a possible problem with this since the Code of Ethics in the profession may not allow the change because of the unique need of service being sold in addition to the rules on confidentiality and the fiduciary nature of the relationship among the partners.

Resolving the problem on structure to influence application of marketing in accounting and auditing services

It may be noted the professional services for accounting and auditing are operating within the legal environment as there is a requirement for the service. Research confirmed the value of a strong legal environment in the type of auditors hire and even in the setting of fees. Choi and Wong (2002) did found support to the complementary effect hypothesis that the strength of the national legal environment has a net positive effect on the choice of Big Five auditors.

The government in almost all parts of the world appeared to have allowed the practice of these CPAs through such professional partnerships. There is no evidence yet that would convert these partnerships into corporation-style management. But given the possible conflict of interest in the organization, there is the basis to believe about the universality or principles applied to the professional partnerships. In the resolution of conflicts Arruñada, B. (2004) might have relevantly explained that professional services are characterized by information asymmetries, economies of scope, and externalities. It is the view of the authors that to resolve conflicts of interest, they require special organizational formulas, based on deferred and variable compensation, self-selection, and, when positive externalities are necessary, competitive restraints. They explained in principle, that “a set of criteria and organizational design patterns could be used for assessing, managing and regulating all types of a professional organization, whether public or private, competitive or monopolistic.”

Marketing thinking and practice has been gradually moving into service industries

Kotler and Connor, Jr. (1977) mentioned a specific program for managers of professional services firms as they observed that marketing thinking and practice has been gradually moving into service industries. They found that the role of marketing in service industries is still limited, however, but the authors saw it having achieved some utilization in banks and airlines, to a lesser degree in insurance, brokerage, and public transportation. A less role of marketing was also found by them in law, accounting, management consulting, medicine, architecture, and engineering. Kotler and Connor, Jr. (1977) therefore have observed that even marketing research firms and advertising agencies are inclined to under-apply marketing concepts to the marketing of their services.

The above indicates the less than normal application of marketing in accounting, management consulting, medicine, architecture, and engineering. This finding seems to be not surprising, with special consideration as to the time when they are made since these may refer to the practice of the profession and hence the under- application of marketing concepts because of the prohibition to use advertising which is a necessary ingredient of marketing concepts. What is surprising to hear is for marketing research firms and advertising agencies to also under-apply marketing. Is this admission that marketing is not inapplicable or not universal?

Many professional practitioners in these industries deny a role to marketing

Kotler and Connor, Jr. (1977) observed many professional practitioners in these industries having denied a role in marketing or, if these professional practitioners do accept it, they have a very inadequate idea of its content and how it can be implemented in a firm. The authors despite what they have observed about the limited practice of marketing in professional service posit that far from being a minor negligible function in managing a professional services firm, marketing is “one of the most important functions for helping such firms meet the unprecedented challenges they are facing.”

Comment: The commentary of the authors admit the limited role of marketing in professional practice but at the same time they are positing that it “is one of the most important functions for helping such firms meet the unprecedented challenges they are facing.” They must be saying something about the application of marketing in professional service. They wanted the readers to realize that there are market forces which are simply cannot be avoided even by engaged in providing professional services.

Forces to Cope With

Kotler and Connor, Jr. (1977) talked about professional practitioners’ need to cope with three increasingly significant forces. First is the assault on Professional Codes of Ethics where the authors quoted the U.S. Supreme Court has recently ruled that minimum fee schedules violate anti-trust laws and stated: “… Federal law requiring price competition applies to legal services.” They also quote Justice Douglas having opined that “for meaningful price competition the fees must be made known” rather than suppressed by rules against advertising.

What the authors are trying to drive is the lifting of the traditional ban against advertising. Advertising is a known part of marketing concepts that enables companies in a given industry to make known their products, services, and prices to customers. With this ruling by the US Supreme, it is now possible the traditional ban on advertising would seem to contradict the basic principles of management of organizations. The relevant question here is whether this ruling will have an effect on rules against advertising in the practice of accountancy.

The second force to cope with according to Kotler and Connor, Jr. (1977) is the changing expectations of clients, which the authors explained that fewer clients today are in awe of the professional’s credentials. The authors were arguing that client executives are becoming more sophisticated in selecting, using, and, increasingly, replacing firms. as these client executives are insisting on “client-centered” performance in contrast to “technical-centered” service.

The third force to cope with according to Kotler and Connor, Jr. (1977) is the fact of increased competition, there the authors explained that under present uncertain economy, the cases of having as many as six to eight firms submitting proposals for new work have become usual and that some firms even are “willing to “buy-in” to obtain off-season work and a few firms are known to engage in questionable solicitation practices.”

Barriers to Marketing

Kotler and Connor, Jr. (1977) also explained the fact that simultaneously most professional services firms are generally ill-equipped to cope with these forces, because of three barriers to marketing. One the force they are referring is Disdain of Commercialism, which they explained by the fact that there are only a few professionals like to think of themselves as businessmen as many of these professional show hostility to any suggestion that they are motivated by money rather than service to their clients, thereby making discussion of fees to be usually distasteful to them.

Another barrier which the authors have seen is the Association Codes of Ethics, where they told that “Professional associations have erected stringent rules against commercial behavior. In three professions accounting, actuarial, and law-an an absolute prohibition has existed against anything resembling selling activity.” They explained that “Advertising, direct solicitation, and referral commissions have been banned. Other professional firms do tend to adhere to certain “standards of good practice” which tend to limit the use of effective marketing and sales techniques.”

Another barrier which the authors have seen is Equating Marketing with Selling, which the authors explained that “Because of the bars or bans against selling, professional services firms show little interest in the subject of marketing, having made the error of equating marketing with selling. Marketing is a much larger idea than selling. By remaining ignorant of the concepts and practices that make up modern marketing, these firms are without the skill to adapt smoothly to a rapidly changing environment and to grow to their potential. Their professionalism is a blind spot that keeps them from acting to achieve their goals. Their position grows more precarious as a few of their competitors begin to learn and apply modern marketing techniques. It is unfortunate not to understand marketing in a strong market when no one else does; it can be fatal in a down market when competitors do.

Given the above background, Kotler and Connor, Jr. (1977) explained that their work is written to explicate the role of marketing in professional services firms. As a preliminary step, the authors intended to offer the following definition of professional services marketing:

“Professional services marketing consists of organized activities and programs by professional services firms that are designed to retain present clients and attract new clients by sensing, serving, and satisfying their needs through delivery of appropriate services on a paid basis in a manner consistent with creditable professional goals and norms.”

In responding to the question: “What Styles of Marketing are Possible for a Professional Firm?”, Kotler and Connor, Jr. (1977) argued that “professional firms, like other business firms, have three major objectives: sufficient demand, sustained growth, and profitable volume. They must turn to some form of marketing to achieve these objectives.”

Three different styles of marketing

Minimal Marketing

Kotler and Connor, Jr. (1977) admitted the fact of a large number of professional firms practicing minimal marketing. The authors found firms avoiding or minimizing conscious development of a marketing program since their firms feel that they will attain their objectives by rendering the best quality service to existing clients. The authors noted that the justification for a high quality of service will lead to satisfied clients, who will place their new business with the firm and that satisfied clients will further recommend the firm to others, thus leading to a substantial inflow of new clients. They also noted that the logic of professionals is appealing and allows the firm to feel it is adhering to the spirit of the ethical canons prohibiting direct selling activity. Kotler and Connor, Jr. (1977) disagreed by saying that unfortunately, minimal marketing is a decreasingly defensible philosophy for professional firms on the following grounds:

1. It places too much confidence in the assumption that quality speaks for itself. In marketing circles, this is known as the “better mousetrap fallacy.
2. It assumes that the firm will deliver distinctively better quality services than competitors. But several firms are usually pursuing the same philosophy, and thus no firm may strike the client as particularly exceptional in this respect.
3. It assumes that competitors are not practicing the stronger forms of marketing. But an increasing number of firms are, and it is questionable that a firm doing minimal marketing can compete effectively;
4. It is a reactive rather than a proactive approach to marketing opportunities. The firm does little to shape its future clients or services.

The authors explained that “minimal marketing means that the clients choose the firm, rather than the firm choosing its clients.” The explanation would seem to argue that it should not be the case since customers or clients must precede firms. This policy may indeed be true because of the inevitability of the need for auditing services that clients could not make a further business without because of the legal requirement.

Hard-Sell Marketing

Kotler and Connor, Jr. (1977) discussed a few professional services firms that practice hard-sell marketing, where firms engage in the glad-handing, wining-and-dining, sharp pricing and discounting, slick brochures, partner bonuses for new clients, some discreet badmouthing of competitors, and even some direct solicitation and possible referral commissions.

The authors explained that this type of marketing reflects a sales orientation rather than a marketing orientation. It may do more damage than good for the firm and the profession.; hence it may violate the professions’ code of ethics and the authors identified two major faults: not being a disciplined approach to identify and cultivate the market and making firms using this approach often to be get carried away with the problem of attracting new clients and are drawn into using more extreme techniques that violate the codes of ethics.

Professional Marketing

Kotler and Connor, Jr. (1977) defines professional marketing as an approach to the service market opportunities of the firm that is consonant with the profession’s canons of ethics and with the following major attributes:

1. Stating long-range marketing objectives and strategies.
2. Developing annual volume, growth, and profit objectives, and detailed plans and budgets are broken down into individual responsibilities.
3. Organizing regular training seminars to improve the professional person’s effectiveness at marketing and personal selling.
4. Assigning formal responsibility to one or a few people to organize, manage, and motivate the marketing activity.
5. Allocating time and budget to support the marketing activity.
6. Setting up a system of controls and rewards tied to individual and group performance in attaining marketing goals.
7. Ensuring that the quality of professional work does not suffer as marketing activity is increased.
8. Using only those marketing tools and procedures that are consonant with the industry’s code of professional ethics.

The definition of professional marketing is indeed customized for the sale of professional service by Kotler and Connor, Jr. hence it would indicate an attitude not to treat marketing of auditing and accounting as the ordinary sale of services.

The Most Effective Marketing Strategies for a Professional Firm

The authors suggested six strategies that are available to the professional firm that is seeking disciplined growth and they include:

1. Expanding Service to Existing Clients;
2. Identifying and Cultivating High Potential Prospective Clients;
3. Widening and Deepening Personal Referral Sources;
4. Favorable Awareness Programs;
5. Service and Market Specialization;
6. Replacing Clients.

One would argue that theories suggested by the authors are not inconsistent with the present practice of profession hence it should not be a big surprise if many other firms are doing it without the practitioners not recognizing them.

A Hong Kong Experience found different perceptions on marketing and advertising.

About what Kotler and Connor, Jr (1977) have said on the marketing of professional services Yau and Wong (1989) in their research on Do CPA Firms Perceive Marketing and Advertising? A Hong Kong Experience found different conclusions based on the information supplied by the CPA firms in their study:

1. Most CPA firms in Hong Kong do not agree to the relaxation of the restriction on advertising and promotion.
2. Most CPA firms have a deep concern for service quality and “company image”
3. Most CPA firms understand the importance of pricing their services. However, it seems that because they are self-referenced, they tend not to be too sensitive to the competitive environment and the possible preference of customers for price over quality.
4. Despite the increasing importance of a variety of services beyond traditional statutory auditing, it seems that many CPA firms are not market-oriented. Their concern for company image appears deeper than their concern for customers. Findings indicate that there is a contradictory view on serving customers. On the one hand, they indicate that they tailor their services according to the needs of their clients. They would try their best to give satisfaction when complaints arise. On the other hand, they disagree “that customers are always right”. It seems that they do not understand the importance of the marketing concept where the needs and wants of the client should be put first.

Over, it seems that CPA firms in Hong Kong, unlike their counterparts in Australia, UK, and the US, do not see a relaxation of the restrictions on advertising and promotion.

It is therefore interesting to note the differences since without knowing the differences with what is being experienced by the major countries would lead marketing strategies to adopt local ones without looking at the bigger picture.

Yau and Wong (1989) give the possible reasons to explain the differences in experiences of countries as follows:

1. First, most CPA firms are operated by Chinese who tend to be more conservative than English and Americans (Yau, 1988). It seems that the attitude towards advertising and marketing will not be changed within the short term.
2. Second, Hong Kong has been lacking the necessary catalyst to facilitate changes of attitude towards advertising and marketing among CPA firms and accountants. As previously mentioned, stagflation and government pressure are two major external forces that have made professional accounting bodies relax advertising and promotional rules. Unfortunately, HKSA has not yet received any pressure from the Government, the Consumer Council, or the public. Nor have the accounting firms suffered greatly from stagflation in the 1970s. The growing economy of Hong Kong had made CPA firms there complacent with their present situation. Furthermore, CPA firms, especially the big eight have been enjoying a steadily flourishing business since the People’s Republic of China opened its doors in 1078. These big firms do not need to cannibalize market share from small CPA firms to maintain their huge operating expenses.
3. Third, it seems that the business of large CPA firms has not been affected by competitors such as banks, financial companies, and other management consulting firms, which offered many of the services traditionally provided by CPA firms. This may be due to the rapidly expanding market potential as a result of the economic growth in Hong Kong and China. Hence there has been no pressure for a change of the advertising and promotional rules.

Yau and Wong (1989) concluded that seemingly, “most CPA firms in Hong Kong do not agree to the need to change the advertising and promotion rules” which they attribute to “a buoyant economic environment, absence of government pressure, absence of competition from other non-accounting companies, and/or the attitudes of Chinese accountants towards marketing in Hong Kong.”

The methods used for marketing accounting services and associated ethical codes

Mangos, et. al. (1997) in making an inter-country and ethical comparison of marketing of accounting services classified the methods used for marketing these services and associated them with the prevailing accounting ethical codes, thus providing a means of identifying similarities and differences in marketing services arising from those ethical codes.’ They added that various states using these methods also provide a basis for inter-country comparison. They then concluded that professional ethical standards have an impact on marketing strategies and this is not reflected clearly in the literature on the marketing of services.

UK relies on advertising more than Australia and Hong Kong

Mangos, et. al. (1997) found in their studies to “indicate that UK accounting firms were more reliant on advertising than their Australian counterparts, while in Hong Kong the ethical restriction on advertising created a bias towards indirect promotion via sponsoring academic exhibitions and personal contact. In Australia seminars, brochures and referrals were dominant and may reflect the more recent easing of advertising restrictions in Australia as compared to the UK.”

Mangos, et. al. (1997) found that each group of accounts have different perceptions of the most effective marketing tools with the Australian, and Hong Kong accountants preferring referrals and seminars above other methods while the British preferring press advertising. The commonality found between Australia and Hong Kong is being explained by the common heritage of their standards of conduct (British-based) and “the success of marketing using these approaches under conditions of restraint on advertising, despite current differences in advertising restrictions in their respective codes of professional conduct.” Mangos, et. al. (1997) found on the other hand, that “the earlier lifting of the advertising restrictions has led to a greater maturity in the use of this media in marketing in Britain and is reflected in accountants’ preference for its use.” They added that the difference in timing between countries in lifting the advertising restrictions (Hong Kong is still restricted) is observable also in the least effective marketing tools of the studies. They are of course referring to the more preferred use of advertising in Britain than referrals and the fact that Australians have echoed suspicion of the success of advertising. Their finding that the Hong Kong study disliked mass media which indicates the existence of an advertising ban, proved that professionals are just against having assertive and radical marketing tactics, Mangos, et. al. (1997) attributed the same to Chinese cultural preference for harmony. They also found the importance of image to be consistent between the three countries which were reflective of consistency between the standards of conduct as to the dignity of the profession.

If the origin of the Codes of ethics for Hong Kong and Australia is from Britain and if Britain subsequently removed the ban in advertising, it may be argued that Hong Kong and Australia would be experiencing what the UK had and therefore the lead to more use of advertising in Hong Kong, Australia and other parts of the world.

Marketing of accounting services differs from the marketing of other service industries in consequence of their professional standards of ethical conduct

Mangos, et. al. (1997) emphasized that marketing of accounting services differs from the marketing of other service industries as a result of the presence of professional standards of ethical conduct in the former. They, therefore, suggested that the provision of marketing advice to professionals including those of accounting professionals must take into account statements of ethical conduct and the period since the lifting of any restrictions. This is on the premise that the code of standards appears to affect considerably the preferences of the accounting professionals. To therefore consider only the service plan, pricing, promotion strategies, and the heterogeneity and intangibilities described by Evans and Berman (1990); Kotler and Bloom (1990); and Stanton et al., (1994), it to miss the materials difference of marketing of accounting and auditing services from other services.

Mangos, et. al. (1997) found other studies indicative of evidence “that accounting firms are beginning to adopt strategic marketing principles (Reed, 1992; Stanton, et al., 1994) in the development of their practice under a more and more competitive environment. They found that accounting firms have the tendency “to use readily quantifiable indicators of service performance, both in measuring the success of their marketing activities as well as measuring the success of their professional services.”(Mangos, et. al., 1997). They further argued that while efficiency measures provide valuable planning and control information, the same does not necessarily ensure that client expectations are being met.

Accounting firms can provide information during the pre-consumption decision making about the way in which the firm operates

Mangos, et. al. (1997) realized that accounting firms can ensure that clients’ pre-consumption, consumption, and post-consumption perceptions of the service are based on relevant criteria, by providing information during the pre-consumption decision-making stage about how the firm operates, and the type of service quality criteria used. They believed that this information may help clients make informed decisions about the most appropriate choice from the accounting firm’s range of services, and help ensure that they have realistic expectations of the services (Lovelock, 1991; Zeithaml et al., 1988). They added that accounting firms can use public relations and promotional activities to provide information to potential clients about their policies and operations, in addition to basic information about the range of services provided (Mangos, et. al., 1997).

The economic condition of a country can stimulate change in professional services marketing practices

Mangos, et. al. (1997) also found the effect of the economic condition of a country in stimulating change in professional services marketing practices. They argued that specific cultures provide the framework for implementing such changes, citing for example the cases of Australia and the UK which have experienced severe economic downturns in recent years. They explained that as a result, accounting firms in these countries have become increasingly competitive, and are learning how to manage their marketing strategies to provide quality service for competitive advantage (Mangos, et. al., 1997).

Hong Kong accounting firms under stable climate with respect to ethical pronouncements

Mangos, et. al. (1997) noted that Hong Kong accounting firms have experienced a very stable climate concerning ethical pronouncements which have required little change to their attitudes and practices in client-oriented marketing strategies. This situation may change with the handover to the Chinese Government shortly (1997). They noted that observations contained in their paper have drawn together several studies which appear to address similar matters concerning marketing strategies in Australia, the UK, and Hong Kong. They pointed out that although these studies have differing objectives and their results have been reflected against an analysis of the codes of professional conduct in each of the countries (Mangos, et. al., 1997).

Mangos, et. al. (1997) qualified their research by saying that the conclusions drawn from their paper may be considered as exploratory and require further testing, not only of the accounting profession but also other professions, to establish whether testable hypotheses can be developed. They did emphasize their conclusion on ethical standards are further intangibility that must be taken considered for marketing strategy purposes (Mangos, et. al., 1997). The view of intangibility as a characteristic of the sale of service must be view in the more recent view of researchers. Lovelock and Gummesson (2004) talked in particular about the applicability of IHIP (intangibility, heterogeneity, inseparability, and perishability) all services and for which the said authors claim that the claim that services are uniquely different from goods on the four specific IHIP characteristics is not supported by the evidence.

Firm size determines the choice of auditors

Knechel, et. al (2005) in a paper entitled “Determinants of Auditor Choice: Evidence from a Small Client Market” said that the benefits of acquiring an audit are multi-faceted and the value of these benefits is likely to vary with firm size. Their view from the narrowest sense is that the role of auditing is to improve the quality of financial statements as they believe that high-quality reporting can reduce information asymmetry problems between the firm and providers of financing. They thus saw a potential role of auditing in terms of reduction of the cost of capital as the latter improves the availability of capital.

They also found additional benefits that audits provide in terms of the internal needs to the company such as the reduction of internal agency problems that could lead to improvements in process effectiveness, and assist in regulatory compliance. The authors however warned that high-quality auditing and reporting can have potentially adverse effects by improving the quality of information that is disclosed to competitors.

A Study based survey samples of 2615 firms in Finland

The authors, therefore, built their papers using as a basis their analysis of the auditor choices for a sample of 2615 predominantly small and midsized Finnish firms. They posited that under Finland land, there is a requirement to audit virtually all commercial enterprises year-end financial statements, regardless of whether of public or private ownership, but the smallest firms can choose from four types of audit firms which include: First-tier international firms (Big 6), first-tier national firms (KHT auditors), second-tier local auditors (HTM auditors) and uncertified auditors.

Knechel, et. al,2005 found that among the smallest firms, the choice to hire a certified auditor has something to do with the level of organizational complexity measured in terms of size and extent of the workforce. For firms that are required to have a certified auditor, they found that the choice between a first-tier and second-tier firm has something to do with the extent of debt financing and concerns about the need to disclose proprietary information for fellow industry players. Furthermore, for firms that are required to have a top-tier firm, clients’ decision to hire the corresponding type of auditor has something to do with to need for equity financing and degree of competition in the industry. The authors found different segments of the market for audit services that are logically connected and may be susceptible to different aspects and benefits of the audit process. They also found evidence of consistency with evidence in prior market-based studies as far as the selection of high-quality auditors by large companies with extensive financing needs is concerned but found that smaller companies may be more reactive to the benefits they obtain from auditors on the improvement of internal operations and having access to expert advice as needed (Knechel, et. al, 2005).

Benefits that may accrue from audit

Knechel, et. al, (2005) posited that the reasons why an organization chooses a specific auditor may be complex and are likely to vary across organizations as the benefits of acquiring an audit are multi-faceted (Knechel 2002). They cited Wallace (1981) to have identified numerous benefits that may accrue from an audit. These may take the form of reducing information risk, improving operational efficiency and effectiveness, deterring management malfeasance, enhancing compliance with legal and regulatory requirements, and permission to undertake certain beneficial activities. Knechel, et. al. (2005) explained that with the multi-dimensional value of an audit, the most favorable mix of different benefits may be different across stakeholders and organizations. They cited as an example the management and shareholders in a public company, the major interest of which may be in the reduction of agency costs and the cost of capital that are connected with reliable financial reporting (DeFond 1992; Francis et al. 1999; Francis and Wilson 1988; Gul and Tsui 2001, Krishnan 2003).

If an audit reduces the cost of capital for reliable financial reporting then there is the basis to say that audit reduces financial risk and it if reduces risks its benefits are indeed very important to the business. But these are not given free since the business will have to pay for it; hence the real question is on how much cost is the cost for investors to have the desired level of the audit?

Value of the audit varies across organizations; hence, the selection of an auditor may vary depending on the client’s circumstances

Knechel, et. al, (2005) cited prior research benefits by public companies in terms of reduced information risk which made to suggest good reasons for further studies on nonpublic companies also (Ball and Shivakumar 2005, Chaney et al. 2004) and smaller nonpublic companies which they believe “may have little separation between ownership and management, hence an audit may be important for other reasons.” The reasons they are looking at in the latter type organizations good resolution of internal agency problems, possible improvement in process efficiency, as well improved or assured compliance with complex regulations. These made the authors conclude that the selection of an auditor depends on the client’s circumstances (Abdel-khalik, 1993) because the value of the audit varies across organizations (Knechel, et. al, 2005).

The relationship of need and choice would produce the inference that it is, therefore, a question of need on the part of the clients that will guide them in the use of audits and each client may be using audit services for different reasons and accounting firms must be aware in the design or marketing strategies.

Purpose of Knechel, et. al, (2005) in writing “Determinants of Auditor Choice: Evidence from a Small Client Market”

Knechel, et. al, (2005) have attempted to answer the research question of this paper by examining the determinants of auditor choice in a small company market. They represented to have used data from Finland because they believed that two key characteristics of the Finnish audit markets make Finland a unique setting in which to study the determinants of auditor choice and these are: “(1) there are no substitutes for ‘full’ financial statement audits and (2) there exist four distinct categories of audit firms from which an organization can choose providing a greater dispersion in auditor choices.”

They also explained that the demand side is characterized by a multitude of different players as all companies are required by law to publicly report audited results, regardless of size or capital structure.”

Need for Finland Companies to comply with the Directives of the European Commission

In describing the characteristics of their use of Finland firms, Knechel, et. al, (2005) explained that the regulation of auditing in Finland must comply with the Directives of the European Commission since Finland is a member state of the European Union. Compliance from directives includes subjecting all firms to the Fourth and Seventh Directives where there is a need to require an audit for a certified auditor with necessary skills and knowledge as defined in the Eighth Directive.

As qualified by the fact of differences in national legal systems that arise from cultural differences, the said audit requirement was also affected by the auditing environment (Margerison and Moizer 1996), at the national level for accounting and auditing. Knechel, et. al, (2005) however pointed that “the transactional differences may lie in the role of a statutory auditor, the process of becoming a certified auditor, and the position of the profession reflect which are extremely rooted in the political, historical, and economic differences among member states” (European Commission 1996, 1998, 2000; Baker et al. 2001).

It may thus be inferred that in the sale of auditing services, national and cultural differences must be taken into consideration as experienced in the case of Finland.”

Groupings of Auditors – the KHT and HTM Auditors

Knechel, et. al, (2005) pointed also a distinction that has been made between code law countries and common law countries (LaPorta et al. 1998). They argue that large audit clients are often privately held, auditors face low litigation risk, and the profession is government-regulated in code law countries. They also disclosed the structure of the market for auditing services in Finland that is based on a two-tier system of certification resembling other Nordic countries (Saarikivi 1999, Loft and Jeppesen 2001) and Germany (Baker et al. 2001).

The first ‘tier’ auditors are called KHT auditors “which need approval by the Central Chamber of Commerce and auditors before they become such must have the comply with prerequisites for taking the KHT exam which include three years of work experience under the supervision of a KHT auditor plus a suitable academic degree (e.g., a Master’s Degree in economics or business administration). On the other hand, the second-tier auditors, known as HTM auditors need approval by regional chambers of commerce, and its requirement for examination for this latter type of auditors includes three years of auditing experience and a suitable academic degree ( Bachelors Degree at the minimum). HTML exam is generally considered to be less demanding than the first tier. Knechel, et. al,2005).

This would indicate that there are companies that are big and they require the ‘first tier’ auditors and these are the companies that must be members of the Central Commerce and Industry while the second tiers belong to the companies that are part or members of the regional commerce and industry. Stricter requirements make is there applied to the first group of auditors since one cannot take the exam without a master’s degree while the second will just require a bachelor’s degree over that of a master’s degree.

The Finish Auditing Act

The Finnish Auditing Act requires almost all business enterprises in Finland to be audited even the firms not covered by EU Directives. Small companies however are allowed to employ non-certified auditors that do not possess the professional requirements of the Eight Directive. One could also see the lack of alternative assurance services such as reviews available for small firms in Finland, compels these companies to have a ‘full’ statutory financial statement audit under the Auditing Act by all auditors, whether certified or not. The only required for non-certified is that they “must have a sufficient level of skills and knowledge in accounting and auditing to effectively conduct the audit given its complexity.” (Knechel, et. al, (2005)

This is again another kind of uniqueness or cultural difference in the factors that would affect the sale of auditing and accounting services because of the requirements for certain laws. In the case of Finland, it would appear their national law which the Finland Auditing Act may require that those that are not covered by the EU rules are still required to be audited. Certain flexibility however was found because of the need to relax the requirement as to the type of auditor.

Two key characteristics of the Finnish audit markets

Knechel, et. al, (2005) described two key characteristics of the Finnish audit markets and these include: “(1) there are no substitutes for ‘full’ financial statement audits and (2) there exist a variety of different suppliers. For this paper, we will define four levels of the auditor.”

Prior Research under the agency theory

Knechel, et. al, (2005) discovered that theoretical and empirical research has generally established that an audit has economic value, even in the absence of a mandated audit requirement (Sundem et al 1996; Chow 1982), hence the complexity in the choices of switching to auditors and the selection of an audit firm. They added that prior research has used agency theory to partially explain auditor choice and auditor switches (DeFond 1992; Carey et al. 2000), hence they found that in the most narrow sense, the basic role of the audit is to improve the quality of financial statements and they did find from extensive literature has found that a high-quality audit reduces the incidence of earnings management (Becker et al. 1998; Francis et al. 1999).

Knechel, et. al, (2005) cited that earlier literature has suggested that demand for quality auditing is multifaceted and depends on more than just a cost of capital argument (Knechel 2001, 2002; Abdel-khalik 1993; Wallace 1981).

Old literature has upheld the demand for quality auditing which has multifaceted value.

The benefits of acquiring an audit are multi-faceted and the value of these benefits is likely to vary with firm size

It is worthy to note in the author’s conclusion that auditing has a great purpose as it serves a different purpose. The innumerable benefits are there including its role in the narrowest sense, of improving the quality of financial statements since high-quality reporting to reduce information asymmetry problems between the firm and providers of financing. Given therefore its potential role in reducing the cost of capital and improving the availability of capital (Blackwell et al. 1998; Pitman and Fortin 2004), auditing may be said to be an indispensable part of business decision making.

Aside of course from the benefits of external reporting, audits do provide to companies several internal benefits. It is not hard to appreciate the internal benefits of auditing in reducing internal agency problems, which will have a corollary effect in the improvements of process effectiveness, and which would assist in regulatory compliance. These internal benefits may be appreciated to benefits the profitability of the companies. Since this an imperfect world there is danger in providing a wide array of information for decision making, and it is the possibility of creating potentially adverse effects in terms of making the same quality information available disclosed to competitors. This warning would however seem to argue that there is a disadvantage of providing complete information. It may be counterargued however that in the field of medicine, the doctor may prescribe the most effective medicine yet it may have also the greatest side effects.

By the same token, management must not be bothered if doing so to produce the greatest advantages will also produce some disadvantages. Such is nature is the nature of decision; it may always have its downside since we are living in an imperfect world.

Summary of the results of the tests

In the summary of the results of tests, Knechel, et. al, (2005) found in their analysis of the auditor choice across four types of auditors and three different sizes of companies reveals some very interesting overall patterns. First, they declared that the choice of auditor by the smallest companies is driven most by issues of complexity and internal operations. Second, they noted that mid-size companies choose auditors based on a need for debt financing and with some consideration of the competitiveness of the market. Third and Final one, they discovered that the largest firms are also influenced by the leverage (particularly unsecured debt) and competition, but they found to the dominant driver of auditor choice is the public listing of equity securities.

They also concluded that in general, that these results are consistent with their expectations and empirical evidence in prior studies that examined these issues in isolation. They would like therefore to believe that contribution of their paper is to demonstrate that the auditor choice follows imagined patterns of behavior across a range of companies, auditors, and conditions. The researchers found therefore no something new about their findings.

Determinants of market orientation in accounting firms in Turkey

Ozer, et. al, (2006) realize that though market orientation has been studied extensively, in the context of goods and services, little is known of its practical application in professional services specifically. Thus they aimed in their study to develop and validate a market orientation scale relevant to accountancy firms. (Ozer, et. al, 2006).

Managers of accounting firms in Turkey responded 1,042 usable questionnaires completed by managers of accounting firms in Turkey

The study was well backed up by a big number of sample where a conceptual framework was built from first principles and the literature, and a research questionnaire was adapted from the widely used standard pattern. Data collected were from 1,042 usable questionnaires completed by managers of accounting firms in Turkey. These collected data were subjected to confirmatory factor analysis by the authors and they used the same to test the model and analyze approaches and applications in practice (Ozer, et. al, 2006).

Turkish accounting firms believe customer orientation to be the most significant construct within market orientation

Ozer, et. al (2006) found that Turkish accounting firms believe customer orientation to be the most significant construct within market orientation. They added that the market environment is also considered important, but there is no strong support for competitor orientation, conventionally the third plank of market orientation, mainly because of the unique characteristics of the profession. Their study however focused only on accounting firms and the measurement scale was adapted accordingly, thus the limited validity of conclusions that can be drawn for that particular sector of the professional service industry with due caution for service providers in general. They posited therefore that the Turkish setting limits international applicability, but it contains potentially transferable insights (Ozer, et. al, 2006).

The authors concluded that service-sector firms recognize the importance of customer orientation in the quest to perform effectively under the increasing pressure of competition. They found that in Turkey, accounting firms are nowadays, aware of the importance of marketing in general and customer relationships in particular, within the limits set by government regulation in the particular case of accountancy.

Ozer, et. al (2006) who devised a three-element model to measure how Turkish certified public accountants adopted and implemented the market orientation and used a questionnaire-based survey, in collecting data relating to nine scale items across the three elements, found that these accountants are well aware of the need to satisfy their customers and know that they must monitor the market to do so (the market environment element). They however found that surveyed accountants do not consider the customer orientation element of market orientation to be as important.

Ozer, et. al (2006) argued that since accounting firms are thus strongly focused on customers, “external factors affecting consumer needs and preferences have priority in strategies for meeting customer requirements.” They added that these accounting firms monitor changes in the market environment, and seek to understand how those might influence customers (Ozer, et. al,2006).

Professional service firms adapt their version of market orientation to the unique characteristics of professional service

Ozer, et. al, (2006) found that “professional service firms adapt their version of market orientation to the unique characteristics of professional service and the profession itself.” The argument by taking the particular case of accountancy, where industry-level regulations, restrictions, and conditions related to the industry are accorded great importance, resulting which resulted in specialized approaches to market orientation.

They argued that because of restrictions on advertising and various other marketing applications, they believe that these accounting firms may be expected to have a special perspective on marketing operations. They cited the international trend towards the advertising of accountancy services, and the fact regulations are subject to debate in Turkey as elsewhere. The cited Mangos et al. (1995) asserted that “younger” accounting firms tend to be more positive towards the role of advertising. (Ozer, et. al,2006)

Corporate image, based on professional status and reputation, could be a major competitive tool in maintaining clients or acquiring new ones

Ozer, et. al, (2006) argued that corporate image, based on professional status and reputation, could be a major competitive tool in maintaining clients or acquiring new ones (Mangos et al., 1995), and relationships with customers are therefore important for creating and conveying it effectively. The results of their study confirm the importance of customers in market orientation, so customers should be the starting point of any such marketing initiative by an accounting firm. They explained that customer-focused marketing provides a means for small firms to compete effectively with larger ones, which at present achieve higher levels of customer satisfaction, according to Mangos et al. (1995).

Since they believe the advantage probably stems from the corporate image that the larger firms have already established in the marketplace, they argued that responding to change in the market is, therefore, a strategic imperative because, as customer satisfaction increases, so expectations may also rise. They explained that Turkish accounting firms should cope by offering counseling rather than bookkeeping.

Turkey’s Accounting firms need a clearer understanding of where they stand in relation to competitors

“Accounting firms in Turkey need a clearer understanding of where they stand about competitors, what are the unique characteristics they have, and what can afford them a greater competitive advantage. In addition, according to many authors, the most important success factor for service firms is the effective employment of human resources. This is important both for customer relationships and for understanding the market environment. Since effective customer relationship management by the people who work in the firms is the main determinant of service quality, monitoring change and responding to the market requires appropriate and effective marketing training of accounting professionals.” (Ozer, et. al,2006)

Service quality dominates the marketing approach of accounting firms, with a strong focus on customer satisfaction

Ozer, et. al, (2006) stated that “service quality dominates the marketing approach of accounting firms, with a strong focus on customer satisfaction.” They explained that “this is acquired by monitoring satisfaction levels and taking corrective action as necessary, to better satisfy the needs of customers. In finding that customer relationship is crucial, Ozer, et. al, (2006) argued that firms should however seek to differentiate their offerings. They also found that while routine work is relatively undifferentiated across firms, they reported that image provides the opportunity to be seen as different. They further found from the e-market orientation point of view, that their marketing objectives could be achieved by effective customer relationship, status, and reputation.

Thus, they confirmed that this may be the most important dimension of market orientation that firms can bring into play against the competition, yet most accounting firms seem unaware of its potential and suggested that managers should believe that marketing is not just for them but also their customers. (Ozer, et. al,2006).

The Turkish accounting system has started to require adaptation to globally accepted accounting standards

Ozer, et. al, (2006) asserted that the Turkish accounting system has started adapting to globally accepted accounting standards. They believed that this tendency will probably extend to marketing, especially in legal matters, meaning that firms may in the future find wider scope for advertising and other presently restricted marketing initiatives (Simga-Mugan and Hosal-Akman, 2005). Like Mangos et al. (1995), they also observe that economic and cultural conditions in a country can pose distinctive challenges for accounting firms. They brought out the fact that such developed countries such as Australia, the USA, and the UK, have become increasingly competitive and generally learned how to use marketing strategies for competitive advantage.

Ozer, et. al, (2006) are anticipating changes in Turkey’s domestic economic and political situation which will present the same kind of opportunities (as well as threats) as Mangos et al. (1995) anticipate for Hong Kong. They explained this can be expected to be an especially relevant consideration as Turkey’s case for admission to the European Union proceeds. Thus the authors are suggesting the desirability for accounting firms to adopt a market orientation and embrace marketing management as an important component of their total professional performance (Ozer, et. al,2006)

Landscape for Services business markets has become a blurred landscape

Tyler, et. al (2006) found that the landscape for SBMs has become blurred due to deregulation, globalisation and information technology, particularly the internet and e-commerce. The complexity and diversity of the literature reflects this new, blurred reality.

Removal of, “ethical prohibitions” on promotion in the accounting profession

O’ Donohoe, et al (1991) saw the dramatic increase in the literature on marketing as a result of the recent interest in, and removal of, “ethical prohibitions” on promotion in the accounting profession. They cited the proliferation of articles offering reflections, arguments, advice, and to a lesser extent, empirical research on the subject for which they intended to have their article in order allow them “to assess what is known, and to clarify the areas which still require attention from researchers.”

The importance of referrals, personal communication and good working relationships with clients are stressed

O’ Donohoe, et al (1991) explained that overall, it is encouraging to note that much of the marketing advice offered to accountants is consistent with priorities indicated by clients in empirical research. They cited the importance of referrals, personal communication, and good working relationships with clients which is suggestive of the fact that some marketers are at least showing changes indicative of understanding the specific conditions under which accountants are operating.

O’ Donohoe, et al (1991) argued that the need to tailor to particular circumstances by the relative lack of importance attributed by accountant’s clients to pricing and advertising. They found in surveys of client priorities, that fees emerged almost as a non-issue.

Consistency between certain aspects of marketing practice within the accounting profession and the concerns expressed by clients

Thus, O’ Donohoe, et al (1991) are encouraged to “note the consistency between certain aspects of marketing practice within the accounting profession and the concerns expressed by clients.” They cited as an example, in terms of promotion, where accountants place the greatest emphasis on good personal relations and communication with clients. They argued that “such methods are also favored by clients should be a welcome news to small accounting practices in particular; although they may not have the resources to use promotional tools, advise the literature in their professional journals should assist them in using personal communications effectively.” They were not surprises to find that “the larger accounting firms were found to enjoy considerable advantages in the use of mass communication methods.” These advantages include having access to greater financial resources and the likelihood that “they were more likely to employ marketing expertise, in the form of public relations consultants or advertising agencies.” (O’ Donohoe, et al,1991).

Promotion is only one element in the marketing mix, and there is little empirical evidence regarding accountant’s use of other elements

O’ Donohoe, et al (1991) found that promotion is only one element in the marketing mix, and there is little empirical evidence regarding accountant’s use of other elements. Furthermore, the evidence to date suggests that marketing is still embryonic an activity and philosophy within the profession…. Relatively little market research to have been conducted, those responsible for marketing do not possess sufficient authority to implement it effectively, and the primary focus appears to be on the service quality rather than client satisfaction. …It is the development of internal marketing rather than the refinement of external promotional tools that the profession will best adapt to environmental pressures.”

The need for more strategic, proactive marketing program is found obvious in accounting and auditing services

Barr and McNeilly (2003) found that there is still resistance to marketing hence they expressed the need for a more strategic, proactive marketing program is obvious in this environment, for all professional service organizations, including accounting firms.

Barr and McNeilly (2003) found the need for a more strategic, proactive marketing program which is obvious in this environment, for all professional service organizations, including accounting firms. They however discovered that there is still resistance to marketing. They suggested that the more successful accounting programs take a new view where there is not a need to involve all members of an organization’s professional staff, from partner to staff accountant /attorney/physician, and potentially every member of staff…The new view will become a strategic link to developing and maintaining that client/patient relationship as far as the practice of the profession is concerned.

There is evidence that accounting firms are beginning to adopt strategic marketing principles

Mangos, et al, (1995) explained that while they are aware of the economic and cultural differences that affect accounting professional practice in the countries examined, they asserted that fact that there is evidence that accounting firms are beginning to adopt strategic marketing principles (Cravens, 1987; Reed, 1992; Stanton et al., 1994) to their practice development in an increasingly competitive environment. They added that accounting firms “lend to use readily quantifiable indicators of service performance, in measuring the success of their marketing activities as well as that of their professional services.” They explained that while efficiency measures provide valuable planning and control information, the same measures may not necessarily ensure that client expectations are being met.

Accounting firms can provide information during the pre-consumption decision-making stage about the way in which the firm operates

Mangos, et al. (1995) found that accounting firms can make certain that clients’ pre-consumption, consumption, and post-consumption perceptions of the service are based on relevant criteria by providing information during the pre-consumption decision-making stage about how the firm operates, and the type of service quality criteria used. They explained that said information may help clients make informed decisions about the most appropriate choice from the accounting firm’s range of services, and help ensure that they have realistic expectations of the services (Lovelock, 1991; Zeithaml et al., 1988). Thus, the authors saw the fact that accounting firms can make use public relations and promotional activities to provide information to potential clients about their policies and operations, in addition to basic information about the range of services provided.

The economic condition of a country can stimulate change in marketing practices

Mangos, et al. (1995) concluded that the economic condition of a country can stimulate change in professional services marketing practices. They asserted that “specific cultures provide the framework for implementing such changes” citing as example the cases of Australia, the USA and the UK which have experienced severe economic downturns in recent years. They argued that as a result, accounting firms in these countries have become increasingly competitive, and are learning how to manage their marketing strategies to provide quality service for competitive advantage. They added that while there appeared to be little external economic or cultural incentive for accounting firms in Hong Kong to change their attitudes and practices in client-oriented marketing strategies up until 1990, this situation may be changing in anticipation of Hong Kong’s future political situation. They explained that in the international arena, except Hong Kong, the expect that accounting firms will intensify their competitiveness and adopt increasingly proactive marketing strategies. They argued that some of the inherent tensions between traditional conservatism in the accounting profession and services marketing strategies may be addressed by further consideration of the service quality principles.

Is relationship Marketing applicable to the auditing and accounting services industry?

Palmer, R. et. al (2005) found that the practice of relationship marketing can be understood from several perspectives. The authors, therefore, concluded that that practice is not as clear-cut as the body of largely conceptual work would imply.

This would therefore mean that the application of relationship marketing to and industry could be a wide field for research where the present trend now in the marketing of accounting and auditing service is internal that is the need for more interpersonal skills not only among auditors and clients but also among the staffs of accounting and auditing firms about the broader clientele of even the public.

Rust and Chung (2005) in writing ‘Marketing Models of Service and Relationships’ found that unchangeable technological forces make service and relationships more important over time in every developed economy. Thus the authors the importance of this subject area of service and relationships particularly significant and timely one for marketing scientists.

Linking the literature review to possible research questions

Given the results of the literature review, it was found that there is indeed a marketing solution for the sale of accounting and auditing services, and the economic value of auditors and CPA are laid down as evidence in the case of Enron and as discussed by the different marketing experts and authors. The presence of a code of ethics will always be there still and the structure of partnership which seems to be the legally allowed structure of accounting firms will remain a big challenge for auditing firms.

But given the marketing theories detailing the existence of the need to be satisfied through professional services marketing after customizing the concept, the lifting of restrictions of advertising in the UK, and the eventual lifting of same in Australia and Hong Kong, accounting and auditing firms are expected to adopt marketing strategies if there are to survive the fast-evolving industry as it opens its doors to technological changes.

The results of recent researches in Finland and Turkey where are identified determinants of markets of said services, created a situation to customize as well the strategies applicable to accounting and auditing firms. Other researches are pointing to the directions where the industry is leading to more practice of marketing strategies for the players in the industry

In the context of what was derived from this literature review and in the context of the market the audit/accounting firms that are restricted from using most marketing tools, this paper attempts to answer the following research questions?

1. How do companies select their auditors / CPAs?
2. What is the relative rank of the factors used in their marketing effort?

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