Knowledge that Transforms

We review the empirical accounting literature on private firms. Recent advances in data gathering provide new openings to examine private firms which, despite driving half of private sector economic activity, have historically been challenging to study. We provide a conceptual framework to organize the literature, centering on information production, information verification, and information dissemination. Four key takeaways emerge from our review. First, private firm settings offer unique advantages for understanding the economic role of accounting. Because private firms face less regulation than public firms, their accounting choices can shed light on economic tradeoffs that public firm choices cannot. Second, there is limited descriptive evidence on many fundamental accounting choices, including the extent to which private firms follow US GAAP, obtain an audit, or use various management accounting practices. Third, studies jointly modeling private and public firms provide more complete, robust analyses of the economy, regulation in particular. Fourth, private and public firms differ on many central dimensions, which raises difficulties related to conducting empirical analysis and assessing generalizability.

On-the-job training is a key driver of human capital development (Becker, 1962). We argue that the Sarbanes-Oxley Act (SOX), aimed at strengthening auditor independence, changed the economics of public accounting and unintentionally reduced opportunities for accountants to invest in their human capital on the job. SOX barred public accounting firms from offering consulting services to audit clients and introduced barriers to accountants transitioning to client firms. This weakened opportunities for collaboration between audit and consulting, limited accountants’ exposure to addressing clients’ business problems, and reduced networking. This diminished opportunities for accountants to gain broad experience, develop skills, and grow professional networks, making the accounting profession less attractive, especially to top talent. Using individual-level data, we compare accountants (treated group) and consultants (benchmark group) before and after SOX, within the same public accounting firm, time, and location. After SOX, accountants were less likely to move into consulting roles or to clients of their audit firms, and their wages declined. Consistent with reduced career opportunities discouraging accounting education, we find a drop in the quality of students declaring accounting majors after SOX. Importantly, to more directly connect career opportunities to university accounting enrollments, we show that when university alumni transitions from public accounting to consulting decline, both the quantity and quality of subsequent accounting enrollments at their alma maters drop. We uncover a previously overlooked cost of regulations concerning the accounting profession.