Are Advertising Efforts by Accounting Firms Related to Accounting Service Market Structure?

• In Event: Accounting Firm Services

Abstract

Regulators, academics, and practitioners have long debated the merits of allowing public accounting firms to engage in formal marketing activities such as advertising. Critics of accounting firm advertising contend that it is inherently unprofessional and will enable low quality service providers to overstate the value of their services thus failing to increase competition within the market for audit services. Proponents assert that advertising can convey credible information and that advertising will reduce the search costs to accounting service clients thus increasing competition and lowering prices. Prior research on the impact of advertising initiatives within accounting has been limited, however, due to a lack of available data. I address this gap in the literature by testing whether advertising spending by the nine largest public accounting firms in the U.S. is related to the market structure and pricing of audit services. I find that advertising is positively related to future market share at the national, but not local, level. In additional analysis, I document that local advertising is negatively related to the audit firm’s average audit fee at the local level consistent with a competitive market.

Author

• Will Ciconte, University of Florida