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Reducing a Barrier to Entry: The 120/150 CPA Licensing Rule

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Abstract

In the United States, one of the most common state-level occupational licensing requirements is education. Education requirements for certified public accountants (CPAs) in many states have increased over the past few decades, but recently a few states have reduced their educational requirement to sit for the CPA exam. Using data from 2006 to 2016, we separately examine the effects of relaxing or strengthening educational requirements on the number of first-time candidates sitting for the CPA exam and on candidate performance. Our results indicate that a reduction in the number of credit hours required to sit for the CPA exam increases the number of candidates, while an increase in the number of prerequisite hours reduces the number of candidates (the latter effect is sensitive to the inclusion of control variables). We also find no relationship between changes in CPA exam requirements and pass rates or scores. Hence, requiring 150 h instead of 120 acts as a barrier to entry for potential CPAs with no accompanying increase in candidate quality.

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Notes

  1. For more on the possible use of licensing as a way for incumbent providers to generate monopoly rents, see Friedman (1962) and Meehan and Benson (2015).

  2. Consider a simple example. Suppose initially there are ten candidates for the CPA exam, six of whom pass, two who do not pass but come close, and two who do not pass and do not come close to passing. The pass rate is 60%. Now suppose the additional educational requirement is added and the two people who think they are unlikely to pass the exam decide not to obtain the additional 30 h of education. In this case, the pass rate would increase to 75% even if the eight people who still take the exam are no better prepared for it after obtaining the additional 30 h of schooling.

  3. These data were collected from state-level statute and administrative codes, Jacob and Murray (2006), as well as from National Association of State Boards of Accountancy (NASBA) (2008) and Wisconsin Institute of Certified Public Accountants (WICPA) (2017).

  4. The dependent variable is specified in natural log form in order to obtain estimated coefficients that can be interpreted as percentage changes.

  5. States the reduced their requirement from 150/150 to 120/150 before 2006 are: Georgia, Hawaii, Iowa, Idaho, Montana, North Carolina, New Jersey, Pennsylvania, Rohde Island, and South Carolina. See Jacob and Murray (2006) for additional details.

  6. States that have a 150/150 requirement throughout the data period are: Alabama, Arkansas, Illinois, Indiana, Kansas, Louisiana, Missouri, Mississippi, North Dakota, Nebraska, Nevada, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington, and Wyoming. See Tables 11 and 12 in Appendix 1 for full list of states included in estimating Tables 4 and 5 results.

  7. Another issue with using the number of accounting degrees granted in year t as a control for the number of candidates sitting in year t is that many candidates do not sit for the CPA exam in their year of college graduation. Soileau et al. (2017) report the mean age of candidates for their dataset was 29.45.

  8. Although the theoretical basis for including Xit in (3) or (4) is weak, we estimated the models with Xit included. The results were nearly identical to those reported below and are available upon request.

  9. These pass rate synthetic control results for every treated state are omitted here for brevity, but are available by request from the authors.

  10. The estimation using multiple treated units was done using the synth_runner package (Galiani and Quistorff 2017), which advances on the single treated until setup to estimate effects for multiple treated units within the same estimation procedure.

  11. The estimation was performed for New York and California, but optimization procedures did not produce synthetic results for these states.

  12. The same is true of Virginia; those results appear in the appendix.

  13. Abadie et al. (2010) suggest using placebo units with pre-treatment RMSPE’s anywhere from 2 to 10 times the treated unit. We elect to use pre-treatment RMSPE’s at or below Florida and New Hampshire’s. When we use even the 2x threshold, the sample of placebos does not change for New Hampshire. These limited RMSPE placebo results are available upon request for treatments contained in the appendix.

  14. The authors searched the NASBA website that contained the New Hampshire pre-policy-change announcement but could not find a similar document for Delaware.

  15. These results are available on request from the authors.

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Acknowledgements

The authors thank participants from the 2018 Southern Economic Association conference, the 2018 and 2019 Association of Private Enterprise Education conferences, and the 2019 Center for the Study of Occupational Regulation conference at St. Francis University for useful comments and suggestions. The authors also thank the Center for Growth and Opportunity at Utah State University for valuable feedback and support of this project.

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Authors and Affiliations

  1. Berry College, Mt Berry, GA, USA

    Brian Meehan & E. Frank Stephenson

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  1. Brian Meehan
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  2. E. Frank Stephenson
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Correspondence to Brian Meehan.

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The authors have no potential conflicts of interest. This research did not require the informed consent of human participants, and no animals were used in this study. The data used is aggregate level, de-identified, and in the public domain.

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Appendices

Appendix 1 Full List of Treatment and Control States For Tables 4 and 5 Results

Table 11 States Included in Eqs. (1) & (3) Estimation
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Table 12 States Included in Estimation of Eqs. (2) & (4)
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Appendix 2 Additional Synthetic Control Results of Changing Requirement on First-Time Candidates Sitting for the CPA Exam

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Impact on Number of First-Time Candidates of Delaware Increasing Rule from 120/120 to 120/150

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Impact on Number of First-Time Candidates of Virginia Decreasing Rule from 150/150 to 120/150

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Fig. 11
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Impact on Number of First-Time Candidates of Maryland Decreasing Rule from 150/150 to 120/150

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Fig. 12
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Impact on Number of First-Time Candidates of Vermont Increasing Rule from 120/120 to 120/150

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Meehan, B., Stephenson, E.F. Reducing a Barrier to Entry: The 120/150 CPA Licensing Rule. J Labor Res 41, 382–402 (2020). https://doi.org/10.1007/s12122-020-09313-4

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