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‘150-hour rule’ for CPA certification causes a 26% drop in minority entrants


Professional occupations and entrepreneurial ventures are important to economic mobility and growth. But onerous occupational licensing requirements can make it harder for low-income individuals to participate, according to MIT Sloan associate professor of accounting Andrew Sutherland.

Sutherland, a co-author of new research entitled “Occupational Licensing and Minority Participation in Professional Labor Markets,” said roughly one quarter of U.S. workers require a license to do their job.

“For occupations like medicine, one can understand the rationale,” Sutherland said. But in many states, it’s also florists, hair braiders, shampooers, and auctioneers who face these requirements. “There is growing concern that some licensing requirements are arbitrary and disproportionately affect lower-income workers,” he said.

In the field of accounting, some observers argue that the current dearth of talent can be traced back to a four-decades-old rule that was implemented by the American Institute of Certified Public Accountants: To obtain a CPA license, accountants must complete 150 credit hours (five years) of university study rather than 120 hours (four years).

At the time the rule was implemented, the AICPA said that students needed the additional hours of study to keep up with new tax laws and more sophisticated approaches to auditing.

State Boards of Accountancy had discretion over when to enact the 150-hour rule. By 2015, all states and territories had adopted it, but most didn’t impose any requirements on what courses students must take to satisfy the rule. That means students can fulfill the requirement by taking humanities or other non-business-related classes.

Now, new research by Sutherland, Mattias Uckert, and Felix W. Vetter shows that the 150-hour rule didn’t measurably improve CPA service quality but did create additional barriers to entry for minority candidates.

“Tuition in professional fields like accounting is expensive, and forgoing a year of income to complete a fifth year of college entails a sacrifice,” Sutherland said. “Naturally, the burden of such requirements tends to fall on those least able to afford the additional year.”

The research quantifies the impact of the 150-hour rule: It has dampened new entry into the field — particularly among minorities.

A stark decline in minority entrants

Relying on publicly available CPA license data, the authors looked at how many CPAs earned their license each year from 1986 to 2019. The authors recorded a 14% overall decline in new CPAs entering the field following a given state’s 150-hour rule enactment. But the results were starkest for Black and Hispanic populations: Following the rule’s enactment, entry among minorities dropped by 26% compared with nonminorities.

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Notably, the additional requirements didn’t appear to improve CPA service quality. In fact, there was a decrease in the share of candidates passing the notoriously grueling CPA exam on the first attempt. Moreover, the decrease was greatest for students from universities with more minorities and less financial aid. Sutherland said he suspects that the rule deterred many of the best candidates from entering accounting.

The authors also collected comprehensive data on disciplinary actions involving CPAs and examined the frequency of professional violations, tax fraud, and other misconduct over a 30-year period. They found no indication that the additional year of education reduced CPA involvement in these incidents.

Finally, the authors studied whether employers valued the additional year, by examining the education requirements detailed in a large dataset of job postings. Once again, they found no evidence that the 150-hour rule moved the needle.

“You might say, ‘Well, maybe there’s some benefit of requiring the extra year; perhaps candidates get better training, and then that translates into improved service quality for consumers of CPA services.’ But that doesn’t seem to be the case,” Sutherland said. “We had a hard time finding any redeeming quality that would justify the entry distortions we see.”

Having fewer minorities in accounting can have a ripple effect

“Several of the Big Four — the largest professional accounting firms — are saying that if it weren’t for this rule, they’d be able to attract more and better candidates,” Sutherland said.

Having fewer minorities in the field could also have a ripple effect by reducing mentoring and recruiting opportunities and making it harder for businesses to find the services they need in order to access financial markets and grow.

Accounting work is often relationship-based, and CPAs commonly work in the communities they grew up in, Sutherland said. The rule could be “taking away service providers that are important to that community,” he said.

Sutherland plans to further research the impacts of the 150-hour rule by collecting data on financing outcomes and business formation across communities.

“When licensing bodies do this, it doesn’t affect everyone equally,” Sutherland said. “It’s an unintended consequence of the regulation.”

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For more info Tracy Mayor Senior Associate Director, Editorial (617) 253-0065