What to do about the accountant shortage?

Don't fall into a nostalgia trap. Before reversing course try to remember why changes were made. Maybe the incentives, and implementation, were skewed, not the new rules.

Update: I’ve updated this post to reflect the paper forthcoming in Journal of Accounting Research, “Occupational Licensing and Minority Participation in Professional Labor Markets.” It is critical to understanding the debate in the accounting world surrounding licensing requirements.

In the sunset of dissolution, everything is illuminated by the aura of nostalgia. “The Unbearable Lightness of Being,” Milan Kundera.

In 2002 Jaroslaw Anders wrote in the LA Times regarding Milan Kundera's new novel, “Ignorance”:

Nostalgia, writes Kundera, is a self-sufficient sentiment, “fully absorbed ... by its suffering and nothing else.” In other words, it is a form of not knowing, and it rarely survives a confrontation with reality.

I am asked quite often these days to give an opinion, and suggested solutions, to the perceived shortage of accountants, the downward trend in those taking the CPA exam, and the growing reluctance of graduate accountants to work as auditors in the largest global public accounting firms. Fewer are even choosing to major in accounting in the first place.

Stephen Foley, the wonderful Financial Times Accountancy reporter in the U.S., took a turn at opinion recently and cites these statistics:

About three-quarters of CPAs are now at or near retirement age, and the pipeline looks threadbare. Fewer US university students are taking accounting courses, and under current rules they need the equivalent of a whole extra year of study before they can qualify as a CPA — a costly deterrent, especially for those from diverse backgrounds.

Foley's solution: "It needs to be cheaper and easier to become an accountant."

I disagree.

Some may discount my opinion. After all, I've spent the last twenty years criticizing the largest global audit firms, criticizing the profession including its trade associations, and criticizing the audit and accounting regulators worldwide.

But, before I started writing in 2006 on my legacy blog, retheauditors.com, I used an undergraduate accounting degree from Purdue University and the passage of the CPA exam in Illinois to pursue a hybrid career that has taken advantage of my accounting education at every turn. None of my jobs were in external auditing.

Here comes the nostalgia.

Joshua Foust, an academic and former nonprofit communications director, writer, journalist, author, editor, consultant, and intelligence analyst, writes on his blog this week about nostalgia in service to right-wing fascist propaganda:

...nostalgia is a form of both remembering and not remembering: choosing to focus on a happier version of the past, even if it is unreliable and non-factual.

According to neuroscientist Richard Sima at The Washington Post, this is actually good for us.

Psychologists are finding that nostalgia is not only universal, but also associated with better mental well-being. It can serve as an important psychological asset in our present — and future.

...The Post story only quotes studies of the personal type of nostalgia, and hints that, most of the time, it is either healthy or harmless. But this is a judgment that assumes a lot about what a person is using nostalgia for. 

Foust cites Barbara Stern, who in her 1992 study of nostalgia in advertising argued that advertisers, for example, “draw on personal nostalgia (fond memories of one’s own past) and historical nostalgia (yearning for an earlier time, even one you never experienced) to evoke feelings in their audiences.”

While it’s convenient to create an artificial taxonomy that distinguishes the two, people really do not use one in isolation. Fond autobiographical memories are inseparable from our perceptions of and reaction to history filtered through those memories.

I do not have particularly positive nostalgia for my study of accounting as an undergraduate. I found it boring then and the classes fraught with cliquishness that alienated this first generation college student. I was neither in the top 10% of my class nor a professors' pet so I was only granted an interview with one Big 4 firm and that firm quickly and soundly rejected me.

I do have very fond memories of my accomplishment in passing the CPA exam in two tries. That’s when anyone who passed could call themselves CPAs and it was a very proud moment for my parents, despite them not having any idea what it really meant in terms of a job. I was able to say I was a CPA based on what I learned in the 120-hour undergraduate degree, three years after going to work for Continental Illinois National Bank. This prominent money center bank had also provided me with an internship for three years during college and my above- average but not outstanding grades did not stand in the way of selection for its rotational training program for accounting, computer science, and general management graduates. 

What happened to all the bank and industrial rotational training programs for undergraduate business majors, including accountants?

My post-training program placement in the bank was on the personal trust internal audit team then as a financial analyst to lawyers who helped local CEOs minimize taxes on stock option exercises the bank helped them fund and then invest. After I left the bank I used my degree as an accounting manager and then a controller in two industrial distribution companies. I savored the hands-on experience managing all of the accounting functions — general ledger, payroll, accounts receivable, accounts payable, and management reporting — for a public company and then a family-owned firm.

When I joined KPMG, ten years after graduating, it was in the state and local consulting business. I was hired to use my functional accounting experience, and management skills, to implement proprietary accounting and reporting software in state and local governments. I became a very good project manager, enough so that I later worked in Latin America as the Director for JPMorgan's Y2K effort in Brazil, Mexico, and Argentina.

I learned enough about how a professional services firm was managed at the P&L level that I was tasked with supporting the spin-off of consulting from audit for those same LatAm KPMG offices into BearingPoint.

That professional services business model experience led to a leadership position for the Manpower subsidiary that was responding to the business opportunity of Sarbanes-Oxley, and then to returning to Latin American with my own consulting firm, and then to PwC as a director in its "PwC the Client" firm-focused internal audit team.

It was at PwC, in 2005-2006 not long after the firms were forced to accept the independent regulation of the PCAOB, that my interest and aptitude for auditor independence issues and for the role of a firm's National Office grew. I started the blog, retheauditors.com in October 2006 after leaving PwC and never looked back.

It was when I started writing about accounting and audit that I started to love accounting and audit.

It was on the eve of the financial crisis, July 2008, that the Pre-Certification Education Executive Committee (PcEEC) of the Association of International Certified Professional Accountants, or AICPA, "told authors of a paper promoting increased educational requirements for accountants that it was time to put in place even higher hurdles to joining the profession."[1]

The accounting profession needs strong not weak requirements for licensure and high quality accounting education and auditing standards.

That’s what the AICPA’s PcEEC commented when faced with the draft paper prepared by the National Association of State Boards of Accountancy, “Education and Licensure Requirements for Certified Public Accountants: A Discussion Regarding Degreed Candidates Sitting for the Uniform CPA Examination with a Minimum of 120 Credit Hours (120-Hour Candidate) and becoming eligible for Licensure with a Minimum of 150 Credit Hours (150-Hour Candidate)”.  

You can earn an undergraduate or graduate accounting degree, and pass the CPA exam, but whether you become licensed is up to the states and territories, all 54 of them. The first state to mandate the 150-hour requirement was Florida in 1987. By 2016, all U.S. jurisdictions had done so. The 150-hour requirement was intended to better prepare students for the profession and enhance the profession’s image, according to a recent CPA Journal article. I would argue that the authors of the 2008 paper mentioned above believed that the extra 30 hours would also include a lot more ethics courses. 

But the extra 30 hours can generally consist of any credits, including basket weaving, ceramics, archery, and astronomy courses that can be taken at community colleges, four-year colleges, graduate programs, or certificate programs. Furthermore, many would argue that the additional 30 credit requirement has not helped students acquire stronger critical thinking skills and has not positively impacted the image of accounting. 

My Routledge chapter — Chapter 21 of The Routledge Handbook of Accounting Ethics, Edited By Eileen Z. Taylor, Paul F. Williams — would argue that the extra 30 hours has not improved ethics, either. Instead:

The drive to increase educational requirements for licensure has effectively made the graduate degree in accounting the minimum requirement for entry into the profession in the United States and licensure as a public accountant.

Am I for or against the extra 30 hours?

I am nostalgic for a time when you could become a CPA with an undergraduate degree. It was a huge benefit to me as a first generation student, one who had to work throughout college and had to get a job right away to pay off loans when I graduated. I did not go to law school as I originally planned, and I could not afford to go to graduate school, at the University of Chicago, until I was in my 50's.

Critics have noted that the extra year of school creates a structural barrier for attracting students from a diverse socioeconomic background, in particular racial and ethnic background. Fortune Magazine:

AICPA leaders have described the rule as a “purposeful hurdle” intended to elevate the profession. Instead, it has become a structural barrier that many believe, and recent research supports, makes it difficult to attract skilled talent.

It is important to recognize that the rule was implemented in a period that lacked a comprehensive equity perspective or adequate consideration for the probable unintended consequences of higher educational expenses and time commitments on communities facing disproportionate student loan burdens and an increased urgency to earn.

The sobering reality is that only 2% of CPAs are Black–and this number has remained stagnant for the past 25 years since the profession first started measuring the racial and ethnic demographics of CPAs.

Guylaine Saint Juste, CEO of the National Association for Black Accountants Inc. in Bloomberg Tax:

Today, the dwindling talent pipeline in accounting compels us to reevaluate and adapt our strategies. A significant disparity exists in bachelor’s degree attainment among Black individuals, with economic burdens as the primary contributor to this gap.

The Center for Audit Quality recently found that around 46% of Black undergraduate business students had considered accounting but opted out—the time and cost of the 150 credit-hour requirement was the greatest reason cited for them not choosing accounting as a major.

And now there’s data.

The Journal of Accounting Research, will soon publish, “Occupational Licensing and Minority Participation in Professional Labor Markets,” by Andrew Sutherland of Massachusetts Institute of Technology, Matthias Uckert, University of Amsterdam, and Felix Vetter, of the University of Mannheim. When the 150-hour rule increased the educational requirement CPA licensing from 120 to 150 credit hours, effectively adding a fifth year of study, it created a “socio-economic status channel” that explains significantly different declines in entry to the profession.

Our primary objective is to evaluate the effect of the 150-hour rule on minority CPA entry. Our main tests model the number of individuals obtaining their CPA license each state-year in a generalized difference-in-differences design that controls for state and year fixed effects and statespecific trends.

While we find an overall decline in entry, the decline is uneven across groups. Specifically, there is a 26% decline for minority CPAs versus a significantly smaller 14% decline for non-minority CPAs.

We then repeat our main tests within state-year, such that we compare the change in entry by minority and nonminority groups within the same state and year. Doing so abstracts away from the motives behind adoption and controls for time-varying common shocks affecting entry into the CPA profession in the state that year. We find a 13% greater drop in minority than non-minority entry following enactment.

Overall, the evidence suggests that “licensing requirements can lead to lower minority participation in professional occupations and impede income mobility and employers’ efforts to diversify their workforces.”

I do support the desire to further professionalize the accounting profession and to raise the educational bar. However, the way those shared goals were realized by universities in service to the Big 4 was by, for the most part, turning it into a master's degree minimum requirement. That, as the researchers point out, left a lot of people behind and outside.

Why were the Big 4 so keen on this way of further "professionalizing" the profession? Because of the national class action overtime lawsuits they once faced. From my Routledge Chapter 21:

The nationwide implementation of the 150-hour rule emboldened the Big Four firms to begin to insist that university accounting programs develop and implement graduate degree programs as a condition of recruitment of the students. Requiring all entry-level auditors to take a “course of specialized study” made public accounting more like law or medicine, “learned” professions that are often automatically considered exempt from overtime (McKenna 2011b).

Requiring a master’s of accounting (MAcc) graduate degree for entry-level positions gives the Big Four a much better chance of meeting the legal requirement for overtime exemption for unlicensed associates.

The AICPA’s website says students do not necessarily have to get a master’s degree to meet the 150-hour requirements. “They can meet the requirement at the undergraduate level or get a bachelor’s degree and take some courses at the graduate level,” the website says. However, “in most cases, the additional academic work needed to acquire the technical competence and develop the skills required by today’s CPA is best obtained at the graduate level” (AICPA n.d.a “150 Hour Requirement”).

I definitely support the need to improve the professional outlook with more education in ethics, technology, writing, and critical thinking. Rather than abandoning the 150-hour requirement altogether, or diluting the standards even more by promoting apprenticeships and other opportunities for students all the way down to high school to replace credentialed professionals why not make sure the time and money is spent — before and after a degree — on education that will improve ethics and audit quality as well as career opportunities? It's what we owe those who choose the public interest vocation of accounting.

I wrote in the Routledge Chapter 21:

In economics, licensing schemes are driven by a desire to increase regulatory capture and the private-interest motive. That would suggest that changes in licensing requirements, especially those making them more stringent, are introduced by current members of the profession to limit the supply of new entrants and extract monopoly rents (Friedman 1962; Stigler 1971; Maurizi 1974).

 Jacqueline A. Burke, PhD, CPA and Ralph S. Polimeni, PhD, CPA write in the CPA Journal:

John Barrios, in “Occupational Licensing and Accountant Quality: Evidence from the 150-Hour Rule,” (Journal of Accounting Research, vol. 60, no. 1, 2022), reported the results of a study that found no differences in the quality of accountants with 150 hours of education and those without the 30 additional hours.

The study finds that the 150-hour requirement deters people from entering the profession and does not result in a difference in performance quality between those with 150 hours and those without. The study also finds that the writing skills are the same for those with and without the 150 hours.

I concluded in my Routledge chapter that this is directly a result of allowing any number of ways to meet the 30-credit-hour requirement, rendering it ineffective in filtering out low-quality candidates. In addition, the higher opportunity cost of one more year of study may dissuade high-quality candidates from pursuing the more demanding certification (Akerlof 1970; Barrios 2019).

Burke and Plimeni also note that at the 2023 PricewaterhouseCoopers Annual Accounting and Tax Symposium, low pay is one of the factors contributing to the declining accounting pipeline.

·       The 150-hour requirement is seen as a barrier to entry.

·       Accounting is perceived as boring.

·       Compensation is lower than for other majors such as finance and technology.

·       A lack of diversity seems apparent.

·       The accounting major is perceived as too specialized.

·       The cost of education is too high.

·       Enrollments in higher education are declining.

In September, for Labor Day, I wrote about how salaries for accounting graduates had not increased since the last time I looked at the numbers in 2008, despite the increased educational requirements.

This defies economic principles. 

Increasing licensing requirements that theoretically raise standards creates new barriers to entry — which everyone agrees happened but many believe is positive — and should reduce supply — which everyone agrees has happened but some are inexplicably shocked by.

Barriers to entry that create a smaller supply for a growing industry should cause salaries to increase. That's basic supply and demand. But it hasn't and still doesn't.

That's because the public accounting industry at the elite level, where the global Big 4 firms — Deloitte, EY, KPMG, and PwC — control the shape of the supply via significant influence over faculty at pipeline academic institutions and control and perhaps collude to limit salaries offered to entry level recruits, is also a monopsony.

Live from the archives: Thoughts on competition between the largest global audit firms

In February, The Board of Directors of the National Association of State Boards of Accountancy (NASBA), the national body for state boards of accountancy that maintain authority for licensing CPAs, reaffirmed its support of the 150-hour standard by a unanimous vote.

"Should any state or jurisdiction lower the licensure requirement to 120 hours, their CPAs would no longer be automatically substantially equivalent and would no longer enjoy the mobility and reciprocal practice privileges they currently are afforded," NASBA President and CEO Ken Bishop said in an interview with the JofA.

"Lowering the bar to 120 hours is only one of the alternatives we have heard that has been discussed and considered. Others, including lowering the cut score for passing the CPA Exam, have the potential and risk of creating the perception of dumbing down the profession. No one is talking about, for example, lowering the bar to become an attorney, and they're also suffering from lack of entry."

But the real pressure is on the U.S. trade association, the American Institute of Certified Public Accountants. Stephen Foley in the FT said it has seen its membership fall from 430,000 in 2017 to 415,000 last year. It has missed membership targets in four of the past five years.

What is the role of the AICPA in all this?

Here’s what Rob Hahn, writing on his newsletter, The Notorious R.O.B., said about the currently under disruptive siege real estate brokerage industry and its notoriously influential trade association, the National Association of Realtors.

My blog is filled with example after example of a stubborn refusal to raise the bar on the profession in any real way. What could be the reason why a trade association founded on the principle of increasing professionalism would fight raising the bar?

It is difficult to escape certain conclusions if you just follow the money. If there was a smoke-filled room, if there was a conspiracy to keep commissions high, to keep mandatory compensation in place… that conspiracy was not created or maintained by brokers. It was not maintained for the benefit of consumers, of brokers or of agents.

Any time a professional association is incentivized by growing the number of members and an industry is motivated by profits that do not trickle down to individual professionals, it will resist barriers to entry that reduce supply by raising standards intended to raise professionalism. It will also likely conspire to mitigate proposals that should naturally raise the compensation of individuals.

The challenge for the accounting industry is how to maintain the barriers to entry and educational requirements that saved the Big 4 from overtime class actions, while also maintaining the pipeline of recruits required to supply the manpower intense business model of the audit industry while also keeping a lid on salaries.

Don't forget, using technology or AI or another shiny object to make the audit process more cost effective or, god-forbid, 100% fraud foolproof eliminates the easy out when the auditors miss the fraudy buggers and lean on "reasonable assurance" and less than 100% sampling to limit their legal liability.

In conclusion, follow the economic incentives — those of the largest, most powerful auditing firms and the trade association it controls — to predict how this latest crisis is eventually addressed.

The challenge for the accounting profession, and universities, is to attract a variety of people with interests and aptitudes able to serve a smorgasbord of possible careers taking advantage of an accounting education. It does not have to be one kind of employer that drives the possibilities. If we focus on the knowledge and all the ways we can apply with the highest quality, we can support more professionals who want to produce financial information with integrity that serves investors, markets, customers, employees, citizens, all stakeholders.

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[1] Chapter 21 of The Routledge Handbook of Accounting Ethics, "Have advanced degrees increased ethical professionalism for auditors?", Francine McKenna.

© Francine McKenna, The Digging Company LLC, 2024