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An empirical study of returns to scale of CPA firms in the post SOX era

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Abstract

This paper performs empirical tests for the returns to scale pattern of certified public accountant (CPA) firms in the post Sarbanes–Oxley Act (SOX) era using data envelopment analysis. Analyzing a sample of 70 of the top 100 CPA firms from Accounting Today surveys over the 6 years period 2005–2010, we find that our sample CPA firms as a whole exhibit decreasing returns to scale in the post SOX era, suggesting that these CPA firms had exhausted scale economies by expansions through mergers and acquisitions and organic growth. Thus, these firms may consider stopping their expansion plans and downsizing or divestitures in order to improve their production efficiency.

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Notes

  1. The Big 4 CPA firms consist of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst and Young, and KPMG.

  2. We follow Hood (2005) and classify Big 4 CPA firms as the first-tier and top 100 non-Big 4 CPA firms as the second-tier.

  3. The increase in operation scale size could be in part attributable to firms’ internal growth.

  4. Some firms use both M&A and organic growth to expand their business.

  5. Chang et al. (2009b) use 87 CPA firms while we use 70 CPA firms. The difference in sample composition may influence the estimation results. However, the CPA firms excluded from our sample are the Big 4 firms and those smaller ones that do not appear consistently over the 6 years sample period.

  6. Unlike the individual year’s test result, the result based on panel data pooled over 6 years needs to be interpreted with caution because a maintained assumption that the inefficiencies are independently distributed across years does not necessarily hold for the balanced panel data used in our study.

    Table 2 Statistical test results of returns to scale when the inefficiency is assumed to be exponentially distributed (p values in parentheses)
    Full size table

  7. Other factors including the reduced cost of information technology may result in higher profits for these CPA firms that may explain in part why the mergers are continuing in the industry in spite of the observed DRS pattern. However, due to data limitation we are unable to further explore these issues in this study.

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Acknowledgments

The authors acknowledge the comments from two anonymous reviewers, William Cooper, Rajiv Banker, Ben Lev, participants of the \(6\mathrm{th}\) International Symposium on DEA at Temple University, INFORMS 2010 at Austin, Texas, the \(4\mathrm{th}\) International Conference on Management Science and Engineering Management at Chungli, Taiwan, and the Research Workshop at the National Chung Hsin University.

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Authors and Affiliations

  1. LeBow College of Business, Drexel University, Philadelphia, PA, 19104, USA

    Hsihui Chang & Hiu Lam Choy

  2. College of Business Administration, Seoul National University, Seoul, 151-916, South Korea

    Iny Hwang

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  1. Hsihui Chang
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  2. Hiu Lam Choy
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  3. Iny Hwang
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Correspondence to Hsihui Chang.

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Chang, H., Choy, H.L. & Hwang, I. An empirical study of returns to scale of CPA firms in the post SOX era. Ann Oper Res 229, 253–264 (2015). https://doi.org/10.1007/s10479-015-1826-4

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  • DOI: https://doi.org/10.1007/s10479-015-1826-4

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