The Decline of the CPA (#354)
/The Decline of CPAs
According to the AICPA, almost three quarters of all CPAs met the retirement age in 2020. And on top of that, the number of CPA exam candidates has dropped from 50,000 taking the exam in 2010, to about 32,000 now. That’s what I call a problem.
So, why the drop off in CPAs, and why so few new ones? A big issue is that it takes five years of classwork to qualify for the CPA exam, as opposed to the usual four years for most other undergraduate degrees. Given the cost of a college education, that is a big consideration. Do students actually have the funds to pay for this? If not, they look at other career paths, because accounting just too expensive.
Another issue is that the yellow brick road in accounting goes straight through the Big Four audit firms. Everyone wants to go directly from undergrad into one of these four companies, because they’re considered prestigious. And they really are prestigious. If you can make it to audit manager at one of those four firms, you’ll have some very nice career prospects after that. But there’s just one problem, which is that a lot of people find auditing to be an annoying and uncomfortable profession, so the dropout rate is really high.
A common standard is that twenty percent of the first-year hires into a Big Four firm either quit or a forced out within their first year. And the attrition keeps going after that. So, combine the two issues. A college student is looking at investing in an extra year of college, and has a pretty good chance of being bounced out of the Big Four after that. Which makes the investment look pretty crappy.
Now, let’s back up and look at why you need five years of training to sit for the CPA exam. The basic problem is that the accounting standards are massive. You could probably become a halfway decent bookkeeper with one year of training that covers the bulk of the accounting issues that you’re ever likely to face.
But, if you need to learn about all of the generally accepted accounting principles and auditing standards, then you’re looking at source materials that are fifteen inches thick, and that’s on very thin paper – trust me, I just measured it. Which is an astounding amount of material.
The basic problem is that the folks who produce accounting standards keep churning out more and more material, without really thinking about whether there should be so many highly specific technical rules, or whether you could just set some general principles and give people a little room for interpretation. If you’re wondering what I’m talking about, just look at the international financial reporting standards, which focus on general principles, and which are only four and a half inches thick. And which you could easily learn in a four-year program, along with the auditing standards.
Dump GAAP in Favor of IFRS
So, one solution is to dump generally accepted accounting principles right now and switch over to the international standards instead. Will that happen? Probably not, since there are lots of people who make their livings from producing more GAAP standards all the time. This is not just the people at the AICPA. This is also the industry behind it, which is – to be honest – people like me, who create training classes. And the Big Four audit firms, which can charge high fees because the accounting standards are so detailed that no one can follow them. So in short – no, we’re probably stuck with GAAP.
Offer Four-Year Accounting Programs
What other solutions are there? One option is for the business schools to offer a four-year program that skips all auditing subjects, and just instructs in the basics that you need to be an accountant, and not an auditor. They could keep offering a five-year program that you’d have to take if you wanted to also learn about auditing, and then sit for the CPA exam. Will that happen? Maybe. Consider how business schools work.
The Big Four audit firms don’t recruit everywhere. They only recruit at the top schools, so they’ll be putting pressure on those schools to provide lots of graduates from a five-year program. So what about all the other schools, which don’t directly deal with the Big Four? They may have students who want to prep for the CPA exam, and so will demand the extra class hours, but they may also see a lot of pressure to provide a four-year program – so I think that’s a possibility with these lower-tier schools. If that happens, then there’ll be a stream of accountants entering the private sector, just not the CPA profession.
Does that relieve the problem with fewer people becoming CPAs? Of course not, it doesn’t do anything at all, because it’s just making things easier for everyone else. If anything, that will drain away more people who might have stuck it out for the full five years.
Reduce the Hours Required for the CPA Exam
So are there any other options? One is being explored by the Board of Accountancy of Minnesota, which is thinking about reducing the requirement for college classes down from the current 150 hours to 120 hours, which would make it possible for people to take the exam with just four years of college. I think that’s a great idea, because it puts the burden of training incoming accountants onto the Big Four.
But right there, you can see the problem. The Big Four make enormous profits, and part of that comes from putting the burden on students to pay for their own five years of college, rather than having to provide the training themselves. Don’t get me wrong, all four companies invest a lot of money in training already. But, since they’re under a lot of regulatory pressure to raise audit standards, the last thing they want is to support a reduction in the college training requirement.
And another concern is that the AICPA is going against Minnesota, and making noises about having the other state boards of accountancy not accept CPAs who were certified in that state. In other words, it’s pressuring Minnesota to get into line with the other states and support the requirement for the full 150 hours of college training.
My Prediction - More of the Same
So, having said all that, what do I think will actually happen? I think the five-year training standard will stay in place for a long time, which means that the number of CPAs in the United States will continue to decline. The Big Four will still do fine, because everyone wants to work there. The real problem will be outside of the Big Four, where the smaller audit firms will have to really jack up their pay and benefits to attract new auditors. Which will also make them less profitable, so I can see a fair amount of consolidation among the smaller audit firms.
And on top of that, the audit firms will have to keep shifting work onto unlicensed accountants, and also shifting work to low-cost outsourcing operations, probably in India. If that happens, then the risk of audit firms being sued for doing crappy audits will go up, since the staff quality has gone down. And that will drive more CPAs out of the auditing business, because they’ll be under more pressure to put in more hours.