It’s only been about a generation of CPAs or so subject to the national implementation of the 150-hour rule, which is now in effect for all 54 CPA exam jurisdictions. As all of you know, the 150-hour credit requirement has been touted as a way to ensure modern CPAs are equipped to handle an ever-changing world. Requiring extra education before licensure makes for more well-rounded, capable CPAs, or at least that’s how it’s supposed to work on paper.
According to the AICPA, requiring additional education on top of a four year degree is desirable for several reasons:
- Significant increases in official accounting and auditing pronouncements and the proliferation of new tax laws have expanded the knowledge base that professional practice in accounting requires.
- Business methods have become increasingly complex. The proliferation of regulations from federal, state, and local governments requires well-educated individuals to ensure compliance. Also, improvements in technology have had a major effect on information systems design, internal control procedures, and auditing methods.
- The staffing needs of accounting firms and other employers of CPAs are changing rapidly. With more sophisticated approaches to auditing now in use, and with the increase in business demands for a variety of highly technical accounting services and greater audit efficiency, the requirements for effective professional practice have increased sharply. The demand for a large quantity of people to perform many routine auditing tasks is rapidly diminishing.
So that’s all well and good on paper, but like so many good ideas put into practical application, creating future-proof CPAs isn’t that simple.
Back when I was in CPA review and students would ask how they could meet the 150-hour requirement, I straight up told them to take underwater basketweaving. Let’s be honest here, they weren’t asking me how to become The World’s Greatest CPA, they were simply asking how to meet the arbitrary requirement. Well there’s your answer. Do whatever the hell you want. Of course, I’d encourage them to take classes that would contribute toward their future career, but who gives a shit if you take Intro to Cat Psychology? If the AICPA wanted you to take accounting-specific courses to meet the 150-hour rule, then it should have explicitly required them.
Most people know the 150-hour rule doesn’t guarantee CPAs who are smarter, sharper, and more future-proof than the dinosaurs before them. John M. Barrios at University of Chicago Booth School of Business took this one step further from “man, this rule is bullshit” to “not only is it bullshit but here’s why” in his April 2018 paper Occupational Licensing and Accountant Quality: Evidence from the 150-Hour Rule, which I recently spotted via Cato Institute’s Research Briefs.
Let’s check out the abstract.
I examine the effects of mandatory occupational licensure on the quality of Certified Public Accountants (CPAs) using the staggered state-level adoption of the 150-hour Rule (the Rule). Although the Rule reduces the number of entrants into the profession, an analysis of labor market outcomes shows that accountants subject to the Rule are more likely to be employed at a Big 4 public accounting firm and specialize in taxation. However, accountants subject to the Rule have the same likelihood of promotion, the same duration until promotion, and exit public accounting at faster rates than their non-Rule counterparts. Moreover, Rule accountants earn a wage premium relative to non-Rule accountants. These findings suggest that restrictive licensing laws reduced the supply of new CPAs and increased rents to the profession without drastically improving quality in the labor market.
To study the effect staggered 150-hour rule implementation had on the profession, Barrios put together “a new, comprehensive panel data set of career paths for more than 10,000 CPAs from 11 states who post their resumes on a major professional networking website.” His sample spanned four decades.
I begin my analysis by using an extensive panel data set of first-time CPA test takers from NASBA for the years 1984–2004 to reexamine changes in the supply of CPA candidates. Using a difference-in-differences specification, I find a 15 percent reduction in the number of candidates taking the exam for the first time following the Rule’s enactment. Yet, I find that the decrease does not come solely from a reduction in the number of low-ability candidates (those who fail all four sections in a sitting) but also from a reduction in the number of high-ability candidates (those who pass all four sections in a sitting). The extra year of education appears to be costly for high-ability candidates, potentially due to their higher opportunity cost of time, which leads to fewer of them taking the exam. The reduction in both high- and low-ability candidates renders inferences regarding the quality of individuals inconclusive. Furthermore, it is not clear that reductions in the number of low-ability candidates taking the exam should be seen as increasing quality in the labor market, since these individuals fail the exam and do not enter the market in the first place.
In other words, when the AICPA is wringing its hands wondering why it isn’t meeting its new membership quotas, it need only engage in a bit of self-reflection to realize that it’s partially at fault for supporting this barrier to entry. And is that a bad thing?
In its early days, the 150-hour rule was responsible for 38% of the decline in accounting graduates. The Great Recession fixed that right up, however, and collegiate accounting programs have continued to see record numbers over subsequent years.
In his research, Barrios wonders out loud if the ambiguous nature of the 150-hour rule (see above, re: underwater basketweaving) makes it easier for so-called “low ability” candidates to enter the market, while the rule itself and the time investment required to meet it may deter high-value candidates from pursuing accounting at all.
Something to think about next time the accounting profession is in a panic about lack of qualified warm bodies to fill all those chairs.
