The supply of accountants in the United States is in serious decline due to the American Institute of Certified Public Accountants’ decision in 1988 to raise entry requirements. Ray Ball argues that the rule change did not improve the quality or productivity of newly licensed accountants, but instead reflected the incentives of the Institute’s members to reduce entry to increase their own salaries.
The accounting industry is central to the operation of a market economy. Accountants produce reports that are used by managers, boards, shareholders, borrowers and lenders, analysts, suppliers, customers, consultants, investment bankers, competitors, taxing authorities, and (in the case of listed companies) the public at large. The widely reported decline in accounting majors in colleges—and the resulting decline in new entrants to the profession—therefore is a major concern. A report from the American Institute of Certified Public Accountants (AICPA) found a 33% decline in first-time candidates taking the national certified public accountant (CPA) exam from 2016 to 2021. There is a growing shortage of certified public accountants and the profession is aging, with 75% at retirement age.
AICPA establishes requirements for entry to the profession. Among other things, it administers the CPA exam that determines who obtains a license to practice. The Institute rightly is concerned by its declining membership and has a new report on the issue due this May. Let’s hope they’ve learned some basic economics along the way.
A prime contributor to the shortage is the 150-hour Rule. It received its name when in 1988 the AICPA membership voted overwhelmingly to increase the educational requirement for entry to the profession from four years (120 hours) at an accredited university or college to five years (150 hours). The stated grounds? Improving the ability of accountants to function in a complex, modern economy.
The Rule increased the cost of educating an accountant by approximately one quarter, including an extra year of college fees and an extra year of foregone earnings. In college, the accounting discipline competes for students with other majors. It doesn’t help that accounting firms pay new graduates low initial salaries: $54,000 on average. They do promise substantial rewards to those who will make it to partner, but deferred compensation has less appeal to the current generation. Computer science ($105,000), business management consulting ($75,000-$100,000 base at most major consultancies), and investment banking ($100,000-$125,000 base) for example pay more from the get-go. Recruits in those areas also aren’t required to spend an extra year in college or to take the CPA exam (remarkably, only 10-15% pass all exam sections on the first attempt).
Accounting firms reportedly have been offering rookies better packages, including higher entry salaries, sign-on bonuses, and promises of more job responsibility, but much of that has been playing catch-up or adjusting for inflation. It has neither compensated for the costs of an extra year in college nor stemmed the decline in accounting majors.
States adopted the Rule between 1983 and 2015. A career in public accounting takes time to lose some of its luster among potential students, their families and friends, school counselors, and other influencers. In the parlance of economics, elasticities (adjustments to change) are greater in the long run than in the short run. Only now have the full effects of the Rule emerged—and can be studied.
Two especially thorough studies were published recently in the Journal of Accounting Research. They reach troubling conclusions. John Barrios (2022) shows that the Rule reduced the number of first-time candidates for the CPA exam by 15%, had no discernible effect on their written communication skills, and had no discernible effect on the retention of CPAs in public accounting. Andrew Sutherland, Matthias Uckert and Felix Vetter (2024) show that the Rule caused a 14% decline in non-minorities obtaining their CPA licenses and a significantly greater 26% decline in licensing of minorities. They trace the latter result to family income and financial aid availability, so the cost of an extra year of college and a year of lost earnings fell differentially by race. Based on CPA exam results and professional misconduct frequencies, they identify no change or perhaps a decline in CPA quality after Rule adoption.
Supply shortages occur when for some reason prices are constrained from increasing sufficiently to clear the market. So why have they occurred in accounting? Why did price (the wages and other conditions offered new entrants) not rise sufficiently to attract the number of entrants sought by firms? The research indicates the Rule did not materially improve the productivity of new recruits. This makes sense. Despite the Rule’s avowed aim of preparing accountants for an increasingly complex commercial world, many states did not even require the extra year in college to be spent studying accounting or business-related subjects. Jacqueline Burke and Ralph Polimeni (2023) note sardonically: “the extra 30 hours can generally consist of any credits, including basket weaving, ceramics, archery, and astronomy courses.” With the extra year in college providing no substantial boost to the productivity of new recruits, many accounting firms are unable to offer recruits large enough wage increases to offset the cost of an extra year in college. College students thus choose other majors. Hence the shortage.
Why would accountants voluntarily increase the cost of producing their largest input (CPAs) when the additional cost could not be passed on to clients? Economists have long been skeptical of occupational licensing. Adam Smith’s long discussion of apprenticeships concludes, among other things, that lengthening the required duration of apprenticeship increases the earnings of incumbents, denies the rights of those who now cannot enter, and provides no assurance of increased work quality. Echoing this, Milton Friedman observes that occupational licensing typically is advocated by producers, not consumers, on the alleged grounds of public and not personal interest. It is important to note that the AICPA vote to require an extra year of college for entry to the profession was conducted among its incumbent members (i.e., currently licensed accountants), and not among CPA firms (their employers). The Rule does look more like incumbent accountants voting to restrict entry than to enforce quality. It has reduced entry to the profession to a level that does not satisfy demand. And it has fallen more heavily on minorities.
There are some upsides. A shortage of domestic accountants is causing CPA firms to consider outsourcing work to lower-cost economies. It is encouraging them to leverage their CPAs with more support staff and to invest more in labor-saving technologies such as artificial intelligence. These recourses boost accountants’ productivity but could have been done without requiring recruits to spend another year in college.
No doubt there are other reasons for the shortage. The number of college-age students has been declining, so other professions have been affected also, if not so drastically. In my opinion, a large part of the blame for declining college enrollments in accounting lies with accounting professors. Curricula are loaded with complex, boring accounting rules, but students learn little about the purposes that accounting serves. The academic literature on which their professors were raised contains voluminous interesting and not-so-interesting results, but almost nothing on the contribution of accounting to aggregate economic welfare. There is little in all of this that appeals to the idealism of the current generation. While there are other reasons for the current crisis in accounting, the 1988 rule is primarily responsible, and it needs to be reversed.
The AICPA’s report on the shortage is due soon. Let’s hope the Institute gets it right this time. Accounting is too important.
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