In my last column, “Hidden Advantage,” I argued that flexible labor markets were one of Virginia’s hidden competitive strengths. But I noted one area of concern: Virginia’s propensity for regulating professional and occupational groups tend to tighten labor supply in their professions and drive up prices for their services.
The current issue of Virginia Business magazine offers a case study of this phenomenon. Over the next 15 years, about 75 percent of the nation’s Certified Public Accountants will approach retirement, reports Editor Robert Powell. At the same time the Sarbanes-Oxley Act, which tightens financial reporting standards for publicly traded companies, has increased the demand for CPAs.
To ensure an adequate supply of CPAs, CPA organizations are increasing scholarships and promoting the profession to students. In Virginia, the number of CPAs licensed has increased 22 percent to 21,310 over the past five years. However, writes Powell:
A temporary kink in the CPA pipeline occurred last year because of new education requirements. Adopting a standard used by many other states, Virginia last year increased the number of earned credit hours required for taking the CPA exam from 120 to 150. As a result, many accounting graduates stayed in school to earn their master’s degree and get the additional credits. The Board of Accountancy licensed only 192 CPAs in 2006, down from 656 the year before. The number of new CPAs is expected to return to a more normal level this year.
All of these actions need to be seen against the backdrop of unprecedented demand and a shortage of CPAs. As the Virginia Society of CPA notes on its home page, “The majority of CPA firms in the United States are having a tough time finding qualified employees at all levels, according to the 2007 Top Management of an Accounting Practice (MAP) Issues Survey.”
Drawing upon the tenets of public choice theory, I would hypothesize that the leaders of the CPA profession would use the legislative process to stack the deck in their economic favor. They would have at least two sets of self-serving considerations. First, they are incentivized to restrict the number of people practicing their profession, thereby creating pressure to raise fees. But that is offset to some degree by a countervailing incentive: The industry leaders are partners in their firms and they share in their firms’ profits. If they restricted access to the profession too much, they would have fewer CPAs to employ and would forego the mark-up charged for their services. In theory, there is a profit-maximizing sweet spot of an ideal number of CPAs, and CPAs, through their collective actions, I suggest, will seek to achieve it.
I don’t know for a fact that CPAs think in such calculating terms. All I’m suggesting is that they have every incentive to think that way, and their actions seem to be consistent with the profession’s economic interests.
The ability to influence the supply of employees entering your occupation is pretty advantageous, if you can pull it off. I’m sure that labor unions representing blue-collar occupations would love to have the same power as the CPAs. In Virginia, however, the regulatory authority to rig labor markets in your favor is largely a white-collar prerogative.
Update: After reading the comments made in response to this post, I’ve concluded that I don’t have any solid evidence to support my hypothesis stated above. For the time being, Virginia CPAs stand absolved of my suspicions — unless new evidence presents itself.
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