Occupational Licensing and Accountant Quality: Evidence from the 150‐Hour Rule

• Published date: 01 March 2022
• Author: JOHN M. BARRIOS
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/1475-679X.12408

DOI: 10.1111/1475-679X.12408

Journal of Accounting Research

Vol. 60 No. 1 March 2022

Printed in U.S.A.

Occupational Licensing and

Accountant Quality: Evidence from

the 150-Hour Rule

JOHN M. BARRIOS∗

Received 25 February 2019; accepted 6 August 2021

ABSTRACT

I examine the effects of occupational licensing on the quality of certified pub-

lic accountants (CPAs). I exploit the staggered adoption of the 150-hour rule,

which increases the educational requirements for a CPA license. The analysis

shows that the rule decreases the number of entrants into the profession,

reducing both low- and high-quality candidates. Labor market proxies for

quality find no difference between 150-hour rule CPAs and the rest. More-

over, rule CPAs exit public accounting at similar rates and have comparable

writing quality to their nonrule counterparts. Overall, these findings are con-

sistent with the theoretical argument that increases in licensing requirements

∗Washington University in St Louis Olin School of Business & NBER

Accepted by Regina Wittenberg Moerman. This paper is based on my dissertation at the

University of Miami, School of Business Administration. I am grateful for the invaluable com-

ments and suggestions provided by my cochairs Dhananjay Nanda and Andrew Leone as well

as fellow committee members Peter Wysocki and Laura Giuliano. I would also like to express

gratitude to Philip Berger, Micheal Gibbs, Yael Hochberg, Christian Leuz, Micheal Minnis,

Miguel Minnuti-Meza, Valerie Nikolaev, Abbie Smith, Luigi Zingales, and to seminar partici-

pants at Duke, MIT, Temple, University of Alberta, UCLA, University of Chicago Booth, Uni-

versity of Miami, University of Rochester, University of Texas Dallas, AEA Chicago, and Stan-

ford SITE. Any errors in the paper are my own. Previously titled “Accountant Quality” and

“Occupational Licensing and Accountant Quality: Evidence from LinkedIn.” An online ap-

pendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal-

of-accounting-research/online- supplements.

3

© 2021 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business

4j. m. barrios

restrict the supply of entrants and do little to improve quality in the labor

market.

JEL codes: D45, I21, J2, K2, L51, M4

Keywords: CPA licensure; hazard rate model; human capital; labor market

outcomes; occupational licensure; screening; the 150-hour rule

1. Introduction

Certified public accountants (CPAs) play a central role in assuring the ac-

curacy and completeness of public companies’ financial reports. For this

reason, understanding how the audit profession can attract and select high-

quality CPA candidates is essential (DeFond and Zhang [2014]). Licensing

requirements, which typically require some minimum years of education,

are a commonly used method for enhancing quality in a profession (Leland

[1979], Kleiner [2000]). Thus, the emergence of occupational licensing re-

quirements (e.g., the CPA exam and educational and experience require-

ments) for auditors is not surprising.1This approach, however, has been

harshly criticized by Friedman [1962], who viewed licensing standards as

a way for professions to restrict entry and extract rents, with little to no

improvement in quality. In this study, I use a change in the educational

requirement for the licensing of CPAs to examine these two alternative

theories.

Historically, the minimum educational requirement for CPA licensure

was 120 semester hours of college coursework, usually completed in four

years. Approximately four decades ago, the accounting profession began

considering a requirement of 150 semester hours (the rule) under the as-

sumption that this change would enhance CPAs’ training and attract better

candidates (Elam [1996]).2The first state to mandate the 150-hour require-

ment was Florida in 1983. By 2016, all 54 U.S. jurisdictions had done so. The

staggered nature of the rule’s introduction provides a unique opportunity

to study the effect of increased educational requirements on the supply of

CPAs and individuals’ labor market outcomes.

I use an extensive panel data set of first-time CPA test-takers at the

university level from the National Association of State Boards of Ac-

countancy (NASBA) to conduct the supply analysis. In a difference-

in-differences specification, I find that the rule leads to a 15% re-

duction in the number of first-time candidates taking the exam. The

1The licensing of CPAs is justified, in part, as protecting investors, who must rely on the

accuracy of financial information produced and verified by accountants, who are neither se-

lected by nor accountable to investors. Licensing is meant to help avoid negative third-party

effects that may result from incompetent practitioners.

2The AICPA asserted that the requirement was meant to “improve the overall quality of

work performed by CPAs” and “ensure the quality of future audits” by improving the quality

of audit staff and those entering the profession (AICPA [2003]).

occupational licensing and accountant quality 5

reduction in supply is consistent with prior studies that have solely ex-

amined the supply effects at the state level (Boone and Coe [2002],

Raghunandan, Read, and Brown [2003], Jacob and Murray [2006], Briggs

and He [2011]).

However, the postrule decrease in supply does not necessarily signal a

quality improvement. For instance, reducing the number of low-type can-

didates (those who fail all four sections of the exam in a sitting) would

not necessarily increase the overall quality in the labor market. To begin

with, low-type individuals would have failed the exam even before the rule

and would thus not have entered the market. By contrast, a reduction in

the number of high-type candidates (those who pass all four sections in

a sitting) would mean fewer high-quality individuals are entering the pro-

fession. Indeed, when I examine the compositional change in the types of

test-takers, I find that the decrease in test-takers does not come solely from

a reduction in the number of low-ability candidates, but also a reduction in

the number of high-ability candidates.3The fact that the reduction comes

from both groups of candidates renders inference on quality that relies

solely on pass rates inconclusive.4

To overcome the ambiguity of the supply test results, I turn to two sets

of individuals’ long-run outcomes. First, motivated by the labor literature

I focus on two labor market outcomes (time to promotion and tenure at

the firm) that are of interest from a policy evaluation perspective. Addi-

tionally, these measures flow naturally from the human capital arguments

used by those that promoted the rule.5Second, outcomes tied explicitly to

the stated motives for the rule’s enactment as argued by advocates (time in

public accounting and communication skills). These two sets of outcomes

allow for a comprehensive evaluation of the rule’s quality effect on the

profession.6

To empirically assess these two sets of outcomes, I construct a unique

and new comprehensive panel data set of career paths for more than

23,000 CPAs from 11 states who post their résumés on a major professional

networking Website. The sample spans the past four decades and provides

3The extra year of education appears to also be costly for high-ability candidates, potentially

because of their higher opportunity cost of time, which leads to fewer of them taking the exam.

4Like every previous study that uses NASBA data, I am not able to observe exam scores but

rather whether individuals passed the 70% requirement on each of the four sections of the

exam. If I had exam scores, this would help tease out the quality of the passers before and

after the rule’s implementation.

5Proponents of the rule referenced the Commission on Professional Accounting Education

(CPAE) report in 1983, which stated that postbaccalaureate education would “attract higher-

caliber students … enhance their professional awareness and contribute to their commitment

to the profession,” with results including improvement in staff retention, and staff advance-

ment (CPAE, p. 25).

6Although it may seem natural to use audit outcomes to directly measure the rule’s quality

effects, these audit measures capture various attributes related to the firms’ operating environ-

ments, managerial incentives, and legal liability,all of which may prevent them from capturing

changes in the individual auditor’s quality and therefore the rule’s effect.