After the accounting scandals of Enron and WorldCom, the professional ability and independence of accountants was questioned, and the relevant agencies responsible for formulating accounting laws in many countries amended and updated accounting laws. Among them, the United States promulgated the Sarbanes–Oxley Act in June 2002, and established a full-time Public Company Accounting Oversight Board (PCAOB) to better strengthen supervision and guidance of accounting firms. The aim of this was to increase the independence of accountants and clarify the accountant’s responsibilities in the hope of restoring the investing public’s confidence in the capital market. These measures issued by the United States also prompted the developed markets, such as the United Kingdom, Japan, and Australia, to follow suit, actively adjust their accounting laws, and strengthen the supervision of the public accounting industry.
The frequent occurrence of audit failure cases has also alerted the public accounting industry of Taiwan, to these concerns. With the gradual internationalization of Taiwan’s capital market, the business and responsibilities of Taiwan’s accountants are considerably increasing. Some of the original accounting laws are out-of-date. In order to: (1) promote the integration of Taiwan’s accounting laws with the international developed markets; (2) improve the practice environment and quality of accountants; (3) enhance the performance of accountants’ professional functions; and (4) provide open and transparent accounting information for all stakeholders, Taiwan’s Financial Supervisory Commission (FSC) of the Executive Yuan referred to the accounting management system of developed markets and the changes of the environment for domestic accounting practice. After seven years of research, Taiwan’s FSC of the Executive Yuan finally promulgated the fully amended Certified Public Accountant Act on 26 December 2007.
As a social structure, accounting is affected not only by rule amendments, but also by the change of the structure of the rule-making field [1
]. In today’s open society, the implementation of accounting reform is inevitable [2
] as no two countries in the world have the same accounting laws, especially between developed markets and emerging markets. Simply stated, there are significant differences in accounting laws between the United States and Mexico even though they are not geographically far apart [3
]. Meanwhile, as well-documented in accounting literature, the differences as such are reflected in the following major factors, e.g., political and economic systems and historical origins, accounting profession, accounting education, financial sources, taxation, culture, economic development level [3
]. However, we assume that the different requirements of accounting information quality in different countries are the main factors when it comes to the explanations made to deal with the differences of accounting laws in different countries.
The quality of accounting information has a significant impact on the decision-making and judgment made by those who use the financial information, and the development of accounting firms is closely associated with the quality of accounting information. Therefore, research on the impact of Taiwan’s new Certified Public Accountant Act on the development of accounting firms highlights the significance of its practical purpose. In the past few decades, revenue management has developed into a universal and indispensable methodological framework [7
]. A plethora of research has been conducted into the connection between different types of revenue and independence of accounting firms [8
]. We draw upon past experiences and focus on the impact of the new Certified Public Accountant Act on accounting firms’ revenue among the many effects this has on accounting firms. Given the fact that large accounting firms occupy most of the market share in Taiwan, the new Certified Public Accountant Act mainly affects large accounting firms. Therefore, this paper attempts to use the revenue function in economic theory to explore the impact of Taiwan’s amendment of the Certified Public Accountant Act on the revenue of large accounting firms, i.e., whether legal changes enhance the sustainability of accounting firms’ revenue. In doing so, the public accounting industry regulators and the public accounting industry policy-making departments provide a reference basis.
This study adopted annual pooling data of large accounting firms for the period 1989–2017 to undertake an empirical analysis of accounting firms. The revenue of Taiwan’s accounting firms is mainly composed of accounting and auditing (A&A), tax services (TAX), and management advisory services (MAS), so the impact of the new Certified Public Accountant Act on accounting and auditing shares (A&A%), tax services shares (TAX%) and management advisory services shares (MAS%) is also included in this reported research. In addition, an additional analysis of the impact of factors such as A&A, TAX, MAS, different human resources and the big four accounting firms (Big 4) on firms’ revenue are also taken into account to suggest regulators evaluate the long-term impact of new Certified Public Accountant Act on the development of firms from the perspective of revenue, and consider the further amendment of the Act to promote the healthy development of the public accounting industry.
While the impact of the amendment of accounting law on the financial environment of corporations and institutions cannot be denied, scholars have yet to examine the significant effect the amendment of accounting law has on revenue of accounting firms. Existing relevant literature mainly discusses the impact of the amendment of other laws, for example, the Tax Reform Act [11
], IFRS16 [15
], the Securities Act [18
], etc. At present, there are only two studies in the literature related to the impact of the amendment of accounting law, although some scholars have focused on the legal effect amendment that accounting law has on cash accounting information systems [19
] or on the division of accounting firms [20
]. However, the amendment of accounting law as a general phenomenon has not attracted scholarly attention. In light of its power to impact accounting firms, this article calls attention to the negative effects that the amendment of accounting law may have on the firm’s revenue, and suggests measures to neutralize them.
Accounting firms are known as “gatekeepers of the capital market” and play a very important role in the transparent disclosure of corporate accounting information. Therefore, it is important to study the impact that the amendment of the Certified Public Accountant Act has had on accounting firms. Our theory and findings make several contributions. First, to the best of our knowledge, we have pioneered the survey report research of this kind using a public accounting industry revenue function in accounting research to study the impact of changes in the Act. There is no existing literature on the impact of the amendment of the accounting law on the revenue of the public accounting industry. This article will fill this gap in the literature. Second, revenue has a significant impact on the survival and development of firms [21
]. From the perspective of revenue in economic theory, by discussing the amendment of accounting law and their effects on accounting firms, we find that the amendment of the Certified Public Accountant Act has had a positive effect on overall revenue, increasing overall revenue and the overall management advisory services shares, and in reducing the overall accounting and auditing shares and tax services shares of large accounting firms. Our results provide an important reference for accounting firms to increase their revenue after the amendment of the Certified Public Accountant Act. Third, according to our research, accounting policymakers can further amend the Certified Public Accountant Act and formulate more suitable public accounting industry policies. We put forward specific measures for the regulators of the public accounting industry to consider, and we put forward matters that should be paid attention to for stakeholders such as clients, creditors, and partners of accounting firms. In the aforementioned ways, this promotes the development of firms and safeguard the interests of stakeholders.
Our findings, however, must be interpreted with caution. Our findings, based on Taiwan’s data, may not be generalizable to U.S. public accounting industry, due to institutional differences. We note, however, that Chen et al. [24
] and Chi et al. [25
] both report that accounting and auditing standards in Taiwan are similar to those in the United States, and important empirical regularities (e.g., [26
]) documented in the U.S. public accounting industry also occur in the Taiwan’s public accounting industry [27
]. Thus, there are significant similarities between Taiwan and the United States, making our findings relevant for the U.S. public accounting industry. In addition, we call for future research to further investigate the impact of accounting law amendments on the firms from other perspectives, as well, such as the cost’s perspective.
The remainder of this paper is organized as follows. Section 2
deals with the background and development of this research hypothesis. In Section 3
, provides theoretical model, estimation model, data and variables of this study, and the empirical results are included in Section 4
. Section 5
is concerned with additional analyses of this reported research. Finally, in Section 6
, we summarize the impact of our findings on the public accounting industry and provide suggestions for managers.
2. Background and Hypothesis Development
Researchers and policy makers have long been interested in the issuance or amendment of laws. Many studies have been mainly conducted to analyze the industry data and government data. (These include studies of the Tax Reform Act [11
], the Economic Recovery Tax Act [29
], IFRS16 [15
], the Securities Act [18
], the America Invents Act [32
], the American Recovery and Reinvestment Act [34
], the American Jobs Creation Act [36
], the Sherman Act [38
], the Taxpayer Relief Act [39
], the Glass-Steagall Act [42
], the Gramm–Leach–Bliley Act [43
], and the Omnibus Trade and Competitiveness Act [44
].) The focus of these studies is on the significant impact of the promulgation or amendment of laws on society or related industries.
The issuance and replacement of audit-related laws also has a significant impact on the public accounting industry. Among them, the most far-reaching influence is the Sarbanes–Oxley Act (SOX) issued by the Congress and the government of the United States, which was accelerated by the scandal concerning Enron, the largest energy company in the United States, in December 2001. SOX has made a historic change in the norms of the public accounting industry. Li [10
] found a change in the correlation between audit (and total) fees and going concern opinions, i.e., from no correlation at all in 2001 to a positive correlation in 2003. This part of the findings indicates that auditors have become more conservative after the promulgation of SOX. Dezoort et al. [45
] based on the empirical materials obtained from 372 audit committee members of listed companies, found that after the promulgation of SOX, audit committee members have more responsibility for solving accounting problems. At this time, audit committee members have more professional knowledge of the evaluation of accounting issues, and are more concerned about the accuracy of financial statements in comparison with that associated with the SOX before. Moreover, Defond and Lennox [46
] found that more than 600 low-quality auditors withdrew from the market after the SOX was promulgated. In other words, the audit quality of American auditors has been improved with the withdrawal of low-quality auditors from the market after the implementation of SOX. Huang et al. [47
] used both fee-levels and fee-change models and found that the Big 4 became more conservative in the post-Sox period with respect to client acceptance and pricing decisions; i.e., controlling for audit and client characteristics, audit fee levels rose approximately 74% in the post-SOX period. Non-audit fees fell significantly over the same period, but total fees paid to auditors rose because the audit fees increased more than those paid to offset the decline in non-audit fees. The significant impact of SOX on the public accounting industry of developed markets encourages us to have a strong interest in studying the impact of the comprehensive amendment of the Certified Public Accountant Act of Taiwan, which was carried out in 2007, on the public accounting industry.
In December 2018, South Korea amended its Certified Public Accountant Act. One of the key changes was its allowance of divisions and mergers after the division of accounting firms. While the division of a company aims to separate assets and sales, the division of an accounting corporation aims to separate its partners and to succeed in its audit contracts. The amendment adopted divisions and mergers after the division of accounting corporations in order to facilitate restructuring of accounting corporations [20
]. The 29th amendment to the Act on Accounting of the Czech Republic brought extensive changes, one of them being the legalization of cash accounting. The statement of reasons for this amendment refers to the demand for cash accounting from small accounting entities. Šimíková [19
] analyses its development and assesses the new concept of cash accounting. At present, the only two related studies in the literature mentioned above do not involve the impact of the amendment of accounting law on the revenue of accounting firms. The revenue of accounting firms is directly related to the survival or death of firms, which has a significant impact on the whole social economy. Therefore, from the perspective of accounting firm’s revenue, this study explores the impact of accounting law amendments on accounting firm’s revenue.
Since the amendment of Taiwan’s Certified Public Accountant Act was implemented, the new Certified Public Accountant Act has broadened the scope of accounting practice (for example, accountants can act as administrative litigation agents in tax-related cases). Therefore, we believe that the overall revenue of accounting firms would increase after the implementation of the amendment of the Certified Public Accountant Act. At the same time, several empirical studies using audit client-level data have documented that the extra-large accounting firms tend to order more than proportional revenue from their services relative to the other accounting firms [48
]. In addition, the Big 4 usually occupies the majority of the market share [53
], so we believe the overall revenue improvement was to a greater extent in the Big 4. Consequently, we proposed the first hypothesis of this study as follows:
Hypothesis 1 (H1).
Ceteris paribus, the amendment of the Certified Public Accountant Act has had a positive effect on the revenue of large accounting firms, and to a greater extent for Big 4.
The new Certified Public Accountant Act stipulates that “accountants who are engaged in management advisory services or others that may affect their independence shall not undertake the audit of financial reports.” In the meantime, the new Certified Public Accountant Act conducts differentiated management of accounting firms by referring to the relevant laws of the United States and Japan. From the perspective of safeguarding public rights and interests and promoting social integrity, the new Certified Public Accountant Act for the first time requires the accounting authorities to inspect accounting firms with A&A
qualification, and stipulates that accounting firms shall not evade, hinder or refuse inspection. Strict supervision lead to firms more cautious [54
]. In view of the strict supervision of A&A
under the new Certified Public Accountant Act, we expect accounting firms to appropriately reduce A&A
shares under severe regulatory pressure. In other words, the new Certified Public Accountant Act would possibly reduce A&A%
of accounting firms. However, because Big 4 has relatively good A&A
normativity, we expect the aforementioned situation to be lesser in the Big 4. Based on these arguments, we specifically proposed the following hypothesis:
Hypothesis 2 (H2).
Ceteris paribus, the amendment of the Certified Public Accountant Act reduces the overall A&A% of large accounting firms, but to a lesser extent for the Big 4.
The government must commit itself to making wise use of limited material and human resources [55
] Enterprises also need to make full use of various resources and utilize the most needed resources in the most profitable business. The opportunity cost theory shows that when a specific human resource is occupied by a certain business, it will lose the potential revenue of that human resource in another business [56
]. The new Certified Public Accountant Act stipulates that accountants can act as agents of tax administrative litigation, and this therefore enables accounting firms to open another source of revenue. As accountants can obtain a larger revenue when they act as tax agents, this regulation will inevitably cause firms to allow more tax experts to act as tax agents to obtain better revenue, and the number of professionals engaged in TAX
will be reduced, and so is the revenue share on TAX
. However, by providing more attractive career opportunities and better pay, larger firms tend to attract more productive employees [57
], and the Big 4 have attracted many TAX
experts, and a large number of high-quality tax experts can usually cover both tax administrative litigation agency business and TAX
. Therefore, we expect the above situation to a lesser extent in the Big 4. This suggests the following hypothesis:
Hypothesis 3 (H3).
Ceteris paribus, the amendment of the Certified Public Accountant Act reduces the overall TAX% of large accounting firms, but to a lesser extent for the Big 4.
The total revenue of accounting firms is mainly composed of A&A revenue, TAX revenue and MAS revenue. The new Certified Public Accountant Act has strengthened the supervision of A&A and TAX of accounting firms. We posit that, A&A% and TAX% of accounting firms will decline to an greater extent after the implementation of the amendment of the Certified Public Accountant Act, and accounting firms MAS% will increase due to the aforementioned situation and the strong growth of Taiwan’s management advisory market. However, after the implementation of the new Certified Public Accountant Act, the Big 4 rely heavily on their own financial resources to establish management advisory companies in order to divest most of the MAS. Therefore, we posit that the implementation of the amendment of the Certified Public Accountant Act will give rise to a decrease in the Big 4’s MAS%. Accordingly, we therefore hypothesize:
Hypothesis 4 (H4).
Ceteris paribus, the amendment of the Certified Public Accountant Act increased the overall MAS% of large accounting firms, but the MAS% of the Big 4 decreased.
6. Conclusions and Discussion
We used the translog revenue function and revenue share functions to estimate the impact of Taiwan’s amendment of Certified Public Accountant Act in 2007 on large accounting firms, and discussed the relationship between independent variables such as accounting and auditing (A&A) price, tax services (TAX) price, management advisory services (MAS) price, human resources, the big four accounting firms (Big 4) and a dependent variable of the total revenue (REVENUE) through the average partial effect (APE). This study used an annual pooling data of large accounting firms from the year of 1989 to the year of 2007. This was to undertake an empirical analysis of accounting firms.
The empirical results show that the implementation of the amended Certified Public Accountant Act had a positive effect on the revenue of large accounting firms, and this positive effect was greater for the Big 4, i.e., legal changes enhanced the sustainability of accounting firms’ revenue. Meanwhile, the amendment of Certified Public Accountant Act reduced the overall Accounting and Auditing shares (A&A%) of large accounting firms, especially with the Big 4. The amendment of the Certified Public Accountant Act increased the overall management advisory services shares (MAS%) of large accounting firms, but the MAS% of the Big 4 decreased.
Additional analyses indicate that the Big 4 relied less on tax services and more on management advisory services, accounting, and auditing to generate revenue. In addition, the increase in the prices of A&A
would lead to an increase in the total revenue of accounting firms, and the increase in the price of MAS
would result in a decrease in the total revenue. Revenue is equal to the price multiplied by the quantity. The key to the relationship between revenue and price lies in the size of the elasticity. If it is elastic, raising the price will lead to a decrease in revenue. As shown in Table 6
, the average MAS
) obtained in this study is elastic. Therefore, we suggest that it is necessary for accounting policymakers to supervise those accounting firms not to increase the MAS
price easily, so as further to enable the firms to benefit from long-term developments. Specifically, regulators can try to set a maximum increase limit on the P_MAS
of accounting firms, and convey to partners the important information that the increase of P_MAS
Our analysis of APE also showed that in terms of human resources, the investment of accounting firms in the number of employees is positively related to the total revenue, which might result from larger firms with greater revenue needing more employees. At the same time, firms would increase their total revenue by hiring more highly-educated employees. In addition, according to the additional analyses, we suggest that management should take into account the investment of human resources. To be specific, firms should hire more employees to promote improved operations, and it is necessary to recruit more employees with high educational backgrounds in the process of recruiting employees to improve the overall quality of the firm’s human resources. We also suggest that when an accounting firm has insufficient funds, if the firm urgently needs to invest in human resources at this time, then it should be more inclined to recruit employees with highly educated backgrounds rather than just prefer employees with more experience. We also discourage excessive investment in employee training, especially when an accounting firm has insufficient funds. It is also important to note that, regulators, clients, creditors and other stakeholders should have a clearer understanding of the increase in the revenue of accounting firms after the amendment of the Certified Public Accountant Act. The amendment of the Act has a great promotional effect on the improvement of the revenue of accounting firms, that is, after the amendment of the Certified Public Accountant Act, the revenue of accounting firms generally improved. Therefore, in this circumstance, stakeholders such as regulators, clients, creditors, etc., should pay special attention to a small part of accounting firms whose revenue may decline, and these firms are likely to have a major adverse situation in their operating conditions. What needs to be noted by stakeholders is that accounting firms with poor operation have greater incentives to lose audit independence in order to obtain revenue. Therefore, the regulators should strengthen the supervision of audit independence of accounting firms with reduced revenue under the background of the amendment of accounting law, and the clients should pay attention to the reputation risk and litigation risk that may be caused by entrusting their business to this type of accounting firm for audits (e.g., the major negative impact of the collapse of Andersen on their clients). In addition, it is necessary for the creditors to add necessary insurance clauses in their contracts.
The public accounting industry is closely related to the development of enterprises and to the economy, and revenue directly affects the survival and development of accounting firms. As far as we know, there are only two research studies in the literature that have discussed the impact of the amendment of accounting laws in the past, and there is no literature discussing the impact of the amendment of the Certified Public Accountant Act on the revenue of accounting firms; therefore, this study fills the gap in the research. We apply translog revenue function and revenue share functions to the impact of the amendment of accounting law on the public accounting industry, and point out the effect of the amendment of Taiwan’s Certified Public Accountant Act on the revenue and revenue share of large accounting firms. Our research results will give accounting firms, accounting policymakers, and other stakeholders more to consider concerning the amendment of the Act. At the policy formulation level in particular, the policy formulation department of the public accounting industry can use our research results as a reference for further improvement of the Act.
In the future, researchers may be able to obtain more information about the training and employee experience inputs of accounting firms, so that they can more accurately analyze the impact of those inputs. Another limitation of this study is that we were unable to obtain the accurate results of the Certified Public Accountant Act on the TAX of large accounting firms. This will be another area for future research.