150 hours: a look back.

What the fifth year of education did to Florida--and what it will do to you.

The ship has sailed on the question of whether the 150-hour requirement is a good or a bad idea. Like it or not, the stipulation is the law of the land in 45 states, and the remaining holdouts will probably join eventually. The adoption of this change to qualify to take the CPA exam has raised other questions: How will it affect the supply of accounting graduates, especially during the years immediately before and after implementation? Should firms continue to hire accounting graduates with four-year degrees and help them meet the additional education requirement, or should firms hire five-year graduates who have already met it? What can firms do to prepare for the changes implementing the rules will bring? Finally, what models are there to look to for answers? Florida was the first state to fully implement the 150-hour education requirement on August 1, 1983, so it provides an excellent opportunity to examine how public accounting firms and accounting students responded to the implementation. The details of Florida's experience may contain some lessons.

SURPLUS AND SHORTAGE

Under Florida law, candidates were required to apply for the CPA examination before August 1, 1983, to qualify to take the examination under pre-150-hour rules. Accounting students who otherwise would have graduated in 1984 accelerated completion of their program requirements to apply for and take the CPA examination in 1983. This created a surplus of four-year accounting graduates in 1983 followed by a dearth in 1984. William D. Pruitt, Jr., 1989-90 Florida Institute of CPAs president and managing partner of Arthur Andersen's Miami office, recalled a particularly nasty insight: "I remember waking up in the middle of the night in 1983 and saying to myself, `We're not going to have anybody to hire in 1984.' And that's exactly what happened."

Three major factors contributed to this shortage:

* First, the acceleration already cited.

* Second, many four-year accounting students who graduated in 1984 enrolled in graduate programs to earn the 30 additional hours required before starting their careers in 1985 or later.

* Finally, in 1984 some four-year accounting graduates relocated from Florida to states that did not have the additional education requirement.

The dimensions of the 1983 surplus and the 1984 shortage in Florida are shown in exhibits 1 and 2, pages 54 and 55. Exhibit 1, for example, shows a peak number (1,722) of four-year accounting degrees earned from nine Florida universities during the academic year 1982-83. This exhibit also indicates a substantially higher number (209) of accounting master's degrees earned during the academic year 1985-86, compared with the number earned prior to that year. In addition, exhibit 2 shows a dramatically higher number (3,294) of Floridians taking the CPA examination for the first time during 1983, compared with the consistently lower numbers from 1979 to 1982 and the trough of 54 first-time candidates during 1984. (In fact, the number of first-time CPA examination candidates in Florida plummeted from 2,306 in November 1983 to only 12 in May 1984.)

Exhibit 1: BAs and Mas from Nine Florida
Universities(*) 1978-79 through 1993-94

Academic      Number of           Number of
  Year      Accounting Bas   Accounting/Tax Mas

1978-79         1,445                72
1979-80         1,475                84
1980-81         1,496               123
1981-82         1,344               126
1982-83         1,722               104
1983-84         1,309               129
1984-85         1,227               128
1985-86         1,227               209
1986-87         1,239               244
1987-88         1,254               221
1988-89         1,184               268
1989-90         1,391               290
1990-91         1,482               342
1991-92         1,549               373
1992-93         1,624               430
1993-94         1,542               399

(*) Florida Atlantic University, Florida International University, Florida State University, University of Central Florida, University of Florida, University of Miami, University of North Florida, University of South Florida and University of West Florida.

Source: MGT of America, Inc., 1996, pp. 2-8 and 2-10.

Exhibit 2: First-Time Candidate's Pass Rates,
Florida CPA Examinations 1979-94

         Number      Number     Percentage
       First-Time    Passing     Passing
Year   Candidates   All Parts   All Parts

1979     1,447         217        15.0%
1980     1,862         286        15.4%
1981     1,688         285        16.9%
1982     1,629         259        15.9%
1983     3,294         376        11.4%
1984        54         17         31.5%
1985       407         132        32.4%
1986       578         194        33.6%
1987       602         208        34.6%
1988       741         232        31.3%
1989       731         238        32.6%
1990       758         209        27.6%
1991       824         233        28.3%
1992       756         245        32.4%
1993       695         245        35.3%
1994       709         215        30.3%

Source: MGT of America, Inc., 1996.

FIRMS MOBILIZED TO FIND A SOLUTION

Doubling up. Some of Florida's public accounting firms addressed the 1983 surplus and the 1984 shortage by hiring a larger number of accounting graduates in both 1982 and 1983. Professor Henry R. Anderson, former chairman of Florida Institute of CPAs' 150-hour committee and former director of the school of accounting at the University of Central Florida, said, "Several firms anticipated the reaction of students to accelerate their programs and graduate before the effective date of the law, and firms doubled up on their hiring in 1982 and 1983."

Hiring arrangements. Many Florida firms hired four-year graduates for full-time positions and arranged to assist these entry-level personnel to complete the additional education requirement. Urban firms found such arrangements especially attractive because new hires had convenient access to evening graduate programs, for example. Firms could satisfy their demand for entry-level personnel and provide opportunity to hires to earn the 30 additional hours without the tuition, fees or overhead associated with a full-time fifth year of education.

Douglas A. Snowball, professor and former director of the school of accounting at the University of Florida, described the conditions that encouraged such arrangements:

"Because of financial factors, uncertainty about the permanence of the 150-hour requirement, and attractive offers in the wake of the post-1983 staffing shortage, many four-year graduates accepted accounting positions and entered part-time programs available in the larger cities."

Anderson, too, pointed out that "one of the key lessons learned from Florida's experience with the 150-hour requirement is that both CPA offices and students have a difficult time accepting the new educational requirements. Because CPA firms experience a shortage of entry-level personnel when students are confronted with additional courses and more costs, literally hundreds of `arrangements' develop between firms and students. The sad part about this is that the benefit is only short-term, and a large percentage of these students never return to school to complete their remaining courses and never take the CPA exam."

Thus, despite good intentions, these arrangements often failed. Snowball explained the reason: "It is difficult to do justice simultaneously to academic course work and a challenging professional position, especially when others are entering the firm with their educational requirements completed." Scheduling problems also resulted from the combination of overtime, out-of-town business assignments and evening or other part-time course work.

Georgia on their minds. Under one provision of Florida's licensing regulations, Florida may issue a reciprocal certificate (a license endorsement) to a CPA of another state if the applicant meets the requirements in effect in Florida. This provision enabled four-year accounting graduates from Florida to establish residency and sit for the CPA examination in neighboring Georgia or another non-150-hour state. Then they could return as CPAs, accept full-time positions with firms in Florida, complete Florida's additional education requirement and apply for CPA license endorsement in Florida upon successful completion of the 30 additional hours.

The increase in license endorsements that began in 1982 in Florida, shown in exhibit 3, page 56, was due to "Florida accounting students who sat for the CPA exam in Georgia and returned to Florida to qualify and eventually work in the profession" according to MGT of America, a research company that did a study on behalf of the AICPA in 1996. An analysis of exhibit 3 shows that Florida averaged 463 license endorsements annually after 1983, compared with an average of 233 endorsements during the five-year period before 1983. This increase in endorsements also resulted in an increase in the annual number of total licenses issued by Florida since 1978. The figures in exhibit 3, for example, show that Florida averaged 1,147 total licenses annually for the five years before 1983, compared with an average of 1,304 total licenses issued for the 11-year period following implementation of the 150-hour law.

Exhibit 3: Florida CPA Licenses Issued,
1978-94

         Number of                   Number of
            New       Number of        Total
Year     Licenses    Endorsements     Licenses

 1978         692       129              821
 1979         778       164              942
 1980         881       250            1,131
 1981       1,247       205            1,452
 1982         974       416            1,390
 1983       1,172       596            1,768
 1984       1,179       441            1,620
 1985       1,031       416            1,447
 1986         897       510            1,407
 1987         785       460            1,245
 1988         735       403            1,138
 1989       1,154       438            1,592
 1990         695       408            1,103
 1991         694       447            1,141
 1992         844       495            1,339
 1993         625       579            1,204
 1994         618       492            1,110

Source: MGT of America, Inc., 1996.

Out-of-state hires. The additional education requirement created a disadvantage for Florida firms in recruiting from other states, and it intensified competition among Florida firms for accounting graduates from the state's universities. Starting salaries of entry-level personnel in Florida increased, and firms began recruiting from the "full range of graduates from in-state accounting programs, instead of seeking only the elite top graduates," according to MGT. Although this problem will eventually go away as other states move to 150 hours, it will remain an issue for the next few years as each state moves at its own pace.

Larry Harris, director of human resources for Arthur Andersen's south Florida practice, described changes in out-of-state hiring practices, saying, "A decade ago our practice hired approximately half its recruits from out-of-state schools, especially from the Midwest and the North-east. Currently, the firm hires 75% to 80% of new recruits from in-state schools." He added that the 150-hour law put Florida "at a disadvantage in getting referrals from out of state. As a result, recruiting for Florida graduates is intense, so much so that only in New York State does the starting salary of an average staff accountant at AA surpass [the starting salary] in Florida."

Hire five-year graduates. Many of Florida's firms initially encouraged four-year accounting graduates to accept full-time positions in public accounting before completing the additional education requirement over several years, so the number of five-year accounting graduates increased only slightly during the first few years after 1983. However, staffing shortages diminished by 1990. Snowball noticed this, saying, "Our students increasingly tended to complete their CPA requirements before accepting permanent positions and were encouraged to do so by recruiters." Exhibit 1 shows a steady increase in the number of master's degrees earned at nine Florida universities, from 104 in academic year 1982-83 to nearly 400 by academic year 1993-94.

By the end of the 1980s, many Florida public accounting firms, especially the larger firms, met staffing needs by recruiting mostly five-year graduates. In 1988 Anderson observed the phenomenon and said, this "is the first year that Florida colleges and universities are producing a sufficient number of qualified people to sit for the CPA exam to satisfy the demands of the Big Eight firms in the state; regional and local firm personnel demands [though] are still not being met." However, in an October 1991 Journal article, Scott T. Rhine, 1988-89 Florida Institute of CPAs president and partner in Schmidt, Raines, Trieste, Dickenson, Adams & Co. of Boca Raton, and John K. Simmons, professor of accounting at the University of Florida, noted, "The pipeline has refilled."

PROS AND CONS

The experiences of firms in Florida can prepare you for the types of changes your state may experience, specifically for the impact of a five-year degree on starting salaries, technical competence, work performance, staff retention and the expense of the fifth year of education.

Firms will have to pay more to get more. On the basis of its survey of 1,009 Florida CPA examination candidates, MGT said that public accounting firms paid new hires with five-year degrees about $2,000 (8.3%) more per year than those with four-year degrees. Other firms cited higher salary differentials for five- and four-year graduates. In 1990 Snowball said the average starting salaries in the preceding two years "were 16.5% higher for five-year graduates than for four-year graduates."

To obtain the firms' perspectives on the impact of the 150-hour law, MGT surveyed Florida public accounting firms. A total of 156 firms, mostly local firms with one office, responded. MGT's results suggested that costs "may be offset by a more productive entry-level accountant." MGT also reported that "initially the $2,000 additional salary plus associated overhead costs to a firm are usually distributed through a relatively high percentage of billable time for entry level staff. This would tend to minimize increased charges to clients."

Doing better. The CPA examination measures technical competence. It is noteworthy that Florida's CPA examination pass rate for first-time candidates increased with implementation of the 150-hour requirement and remains significantly higher than the corresponding national pass rates. Exhibit 2 shows that the average pass rate of Florida's first-time candidates increased from 15% before 1983 to over 30% after the law's implementation. By comparison, the national CPA examination pass rates for first-time candidates overall and for those first-time candidates holding advanced degrees are about 16% and 27%, respectively.

Albert Lopez, partner in charge of human resources and recruiting for BDO Seidman's Miami office, reported in 1994 an even higher first-time CPA exam pass rate of 80% for its new hires. "This allows the firm to be able to give them more responsibility sooner," Lopez said.

Arthur Andersen's Harris recently noted another indicator of higher technical competence for Florida's five-year graduates. "We are seeing a higher quality of entry-level staff at AA's Florida practices. Among entry-level staff receiving instruction at AA's training center in St. Charles, Illinois, new hires from the Florida offices have the best overall scores on tests that measure comprehension. Part of the reason for their high success rate may be that 75% to 80% of AA's new hires in the state have a master's degree in accounting."

MGT's survey showed that 40% to 48% of the respondents believed new hires with five-year degrees performed no differently from those with four-year degrees. These results also revealed that a smaller, significant number of practitioners thought that new staff with five-year degrees compared with those with four-year degrees performed better right away (21%), performed better in the long term (29%), and advanced more quickly within the firm (31%).

Mary Kay Vona, principal in management consulting services and former director of human resources for PricewaterhouseCoopers in Florida, believes that five-year accounting graduates from Florida schools are "very well-rounded professionals" and "seem more savvy." In addition, she said, "The new hires are much more computer literate and better prepared to work as part of a team and make group presentations." On a practical level, though, Vona does not know for sure if the advances make training new hires any easier--in the end, the firm has had to devote the same amount of time and effort to training.

Retention. As stated earlier, many new hires dropped out of public accounting early on and never came back. But what about longer-term retention rates--did the change have any effect on these? The MGT survey showed that the 150-hour requirement did not significantly change staff retention levels. However, two Florida practitioners expressed conflicting views on this issue: BDO Seidman's Lopez said, "Retention rates have improved at BDO since passage of the 150-hour law, because fewer staff accountants leave after a few years to return to school for additional education." In contrast, partner Charles Gund, Jr., reported no noticeable change in retention rates at his firm--Saltmarsh, Cleaveland & Gund in Pensacola--among new hires that graduated from Florida accounting programs.

Fifth-year costs, internships and scholarships. To help students finance their fifth year of education and satisfy the firms' seasonal staffing needs, Florida universities developed innovative programs that allow students to work during the busy season and go to school at other times. The University of Central Florida, for example, established an internship program as part of its fifth-year degree programs in accounting, taxation and business administration. Anderson said that during winter or summer, students take jobs as full-time employees in Orlando-area CPA firms and industries. Each student earns a monthly salary, and participating firms sponsor a special scholarship for each intern. The key advantages of such programs are:

* Public accounting firms get additional staff during their busy season, and students receive money to help finance their fifth year of education.

* Students complete the 150-hour requirement to qualify for the CPA examination and are available to start full-time positions before their second busy season at a firm.

* Students get a "value-added" master's degree--they and their firms will find this adds up to more over the years than just a mere accumulation of 30 additional hours.

WHAT'S AHEAD?

Although 45 states have passed the 150-requirement so far, the new rule has not been widely implemented. It doesn't take effect in Illinois until 2001, New Jersey until 2000 and New York until 2009. California hasn't even passed it. Many firms have not yet felt the short-term effects, and no one knows what the long-term effects will be. But Florida's transition can offer insights. Go to www.aicpa.org/ states/uaa/150chart.htm. Find your state. Find your neighboring states. Start making personnel plans. Being prepared can help you weather the possible short-term staffing problems.

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EXECUTIVE SUMMARY

* MOST STATES HAVE ADOPTED THE 150-HOUR requirement. But as the new rules take effect, firms may notice unintended effects on recruitment and other firm management issues.

* FLORIDA WAS THE FIRST STATE TO ADOPT the 150-hour rule and consequently makes a good case study for other states.

* MANY STUDENTS ACCELERATED their graduation dates to beat the new rule, leading to a brief surplus and subsequent shortage.

* FIRMS FOUND IT DIFFICULT TO RECRUIT from outside the state because out-of-state CPAs were unwilling to meet the more stringent requirements.

* FIRMS TRIED TO SMOOTH THE TRANSITION by having students complete extra educational requirements while working full-time, but such arrangements proved problematic.

* FLORIDA FIRMS MET THE CHALLENGE by hiring recruits with five-year degrees and helping them with internship positions during the busy season.

* IN THE END, FLORIDA HAS BETTER-EDUCATED entry-level personnel, able to get up to speed more quickly; starting salaries have risen accordingly.

JOHN CUMMING, CPA, PhD, is professor of accountancy and chairman, and LARRY J. RANKIN, CPA, PhD, is associate professor of accountancy, both at Miami University, Oxford, Ohio. Cumming's e-mail address is [e-mail]. Rankin's e-mail address is [e-mail].