We studied the 150-hour rule for CPA licensure, which requires the equivalent of a fifth year of general education at an accredited college or university. Every US state has adopted this rule at some point over the past 35 years. Our research finds an overall decline in CPA entry between 1986 and 2019, but this decline is uneven across groups. Specifically, there was a 26 percent decline for minority CPAs compared with a 14 percent decline for nonminority CPAs. Our research also compares the change in entry by minority and nonminority groups within the same state and year to account for the effects of local labor market conditions. These analyses suggest that the 150-hour rule caused minority entry to fall 13 percent more than nonminority entry.
We then investigated the explanations behind the differential entry decline. Our evidence best supports explanations rooted in socioeconomic differences between demographic groups. First, we found no entry decline for Asians, whose average income and wealth are comparatively high. Second, whenever the rule was adopted, the educational background of CPAs tended to change, and they increasingly came from universities whose students had high parental income. Third, entry declines were concentrated in states offering the least financial aid. The effects of parental income and financial aid are evident for both minority and nonminority individuals. However, given the nature of income and wealth inequality in the United States, the effects of low parental income and financial aid disproportionately reduce minority individuals’ ability to afford a fifth year of higher education. Finally, our exhaustive review of media coverage of the rule and licensing restrictions in general reveals a recurring dialogue involving socioeconomic barriers and few references to other explanations for the disproportionate decline in minority entry.
We investigated the potential benefits of the 150-hour rule by examining the quality and labor market perceptions of licensed CPAs. Proponents often justify licensing on the grounds that it improves professional quality, but thorough research on this topic is scarce. Our research uses data on CPA exam performance to study how the 150-hour rule affects the quality of the CPA pool. Exam pass rates are quite low—below one-third in recent years—so we were interested in whether the rule resulted in more high-quality candidates entering the profession, as measured by the share of candidates passing the exam on their first attempt. Instead, we found that the number of CPAs who passed the certification exam on their first attempt significantly declined, and the number of CPAs who passed on a subsequent attempt significantly increased. The decline in CPAs who passed on their first attempt was driven by candidates from universities with a larger share of minority students and less financial aid. Thus, the rule appears to have deterred many high-performing minority candidates from entering the profession.
We also studied descriptions of disciplinary actions involving CPAs to learn how the 150-hour rule affected their behavior. Our research finds no change in the frequency of administrative violations or more serious offenses, including tax fraud, negligence, and theft, after the rule’s adoption.
Lastly, we examined data containing over 8 million job postings to investigate whether the 150-hour rule influenced employers’ perceptions of the quality of CPAs. Our results show no association between the rule’s adoption and the number of postings for accountants or employers’ preference for candidates with the extra year of study. The rule’s implementation may explain why the labor market perception of CPAs did not improve and why quality may have declined. Most states did not require additional accounting or business courses, leaving candidates free to choose the coursework that comprises the extra 30 credit hours. In sum, it was difficult to detect redeeming effects that would justify the sizable reduction in CPA entry that disproportionately affects minority individuals.
Overall, our research finds that the 150-hour rule significantly reduced minority entry to the CPA profession while generating, at best, no improvement in the quality of CPAs. Although we focused on the CPA profession, given the availability of licensing, exam, and discipline data, our findings are relevant to many other occupational fields with general education requirements, including law, medicine, teaching, and the trades. There is growing concern that licensing rules are often arbitrary and imposed to protect licensed individuals from competition—a possibility raised by Milton Friedman and George Stigler over a half century ago.
