McLelland

In his recent article the accountant/erstwhile-economist Chris Silvey posed a question similar to, Why do accountants have to work longer than 40 hours to make a decent living?  I think he's asking an important question, the answers to which would have important implications for the accounting/auditing profession.  One of the more common answers to the question is that Sarbanes-Oxley simply requires more out of accountants/auditors.  But I've been wondering for the past several years whether the inability of accountants to make (what they consider) a decent living working 40 hours per week doesn't have more to do with accountants' inability to optimally self-regulate from the public's perspective.

Let me explain by posing a question:  Why has a *self-regulating profession* (i.e., the accounting profession) repeatedly failed to meet its own standards, and the public's expectations, over the last 50 years?  The typical economist's answer is probably something like, Because the accounting profession has found it optimal to fail in this way.  This kind of makes sense since every time the accounting profession fails, a new wave of law/regulation follows that provides an even better Full Employment Act for Certified Public Accountants.  Just kidding, kind of ...  When I posed the question to my colleague, Mark Bagnoli, he responded with all sincerity by saying, "Isn't that the way a self-regulating profession is defined?"  His basic idea was that self-regulating professions have captured their regulating organization, so they have no feedback control system that brings them into alignment with expectations of other parties.

There is evidence of all this, by the way.  A friend of mine who is a partner at a certain Big 4 accounting firm mentioned to me lately that "We've never made more money than we're making now!  It's almost unbelievable."  I asked, What are you making money in?  His response was, "You name it; we're making money everywhere in our practice."  I asked, Is it good work?  His reponse was, "No, it's mundane as hell.  We could use accounting para-professionals to do a lot of it if we had to."  (He was talking primarily about the Sarbanes-Oxley Section 404 work.)  One gets the idea that the combination of Sarbanes-Oxley and the lack of a certain other international accounting firm in the market since 2001 means paydirt to the remaining firms.  Perhaps the accounting profession somehow guided events resulting in both diminished competition and an increased (artificial) demand for its services by "capturing" the U.S. Legislature and its affiliated agencies.

This explains the increased work in a roundabout way and, as it turns out, also might explain why accountants/auditors have to work longer hours to make a decent living: It's because the increased demand is an artificial demand of sorts;  without the accounting profession's failures, no new law/regulation.  And without the new law/regulation, the accounting profession would naturally gravitate--via Adam Smith's Invisible Hand--to services the public valued most highly that the profession was capable of providing ... not the "mundane as hell", time-consuming, low-paying services that require accountants to work more hours to generate the same level of value!  Perhaps the addiction to easy, compliance-oriented accounting and auditing work is actually degrading the aggregate human capital employed in the accounting industry.

In the end, I think it would be relatively straightforward to put together an equilibrium model explaining why accountants (1) are working longer and harder (... albeit for more money), and (2) not really using the breadth and depth of knowledge and skills they have (or should have).  More on this later ...