The Effect of Passing Rate of CPA Examination on the Industrial Structure of Accounting Firms in Taiwan

Auditing report conveys useful information about the financial condition of a firm to the public and is costly to the firm. In Taiwan, the passing rate of the certified public accountant (CPA) exam is quite low before 1988. However, the Examination Yuan in Taiwan raises the passing rate of CPA exam since 1988. Due to the increase of the passing rate, the auditing market is full of CPAs and the market becomes more competitive. This paper examines the effect of the passing rate of CPA exam on the industrial structure of accounting firms and the earnings of CPA firms. Basically, we find that the earnings of CPA firms is positively related to the market share, on-job training costs, labor costs and lawsuit risk. Moreover, the earnings of CPA firms decline after the increase of the passing rate due to a more competitive market. We also find that the on-job training becomes more significant after the increase of the passing rate but the market share becomes less significant. Obviously, the increase of the CPA passing rate induces the accounting firms to spend more education expenditure in raising the quality of their practicing CPA and thus the audit quality. However, the market share of accounting firms is less significant because the market is more competitive after the increase of the passing rate of the CPA exam. Our results are consistent with the theoretical arguments on the agency costs and the monopoly power of the market.