Evaluating tax education: a survey of new hires.

Accounting education appears to be experiencing a crisis. According to some practitioners, the current educational model is obsolete. Many accounting educators think likewise about tax education.

To determine the current state of affairs and predict the tax profession's future needs, in 1999-2000 the AICPA's Tax Education Committee sponsored a survey of accounting practitioners, which focused on how public accounting firms viewed professionals hired by their tax departments. Although the survey's response rate was not adequate for a detailed statistical analysis, the results indicate that new hires are not living up to firms' expectations, and suggest that universities need to reevaluate their curricula, to address technical skills, as well as critical thinking and interpersonal skills. Even schools that cover this material in-depth should find ways to improve it, because, according to the survey, few areas exist in which the performance of recent graduates is sufficient for success.

Although the survey did not specifically address continuing education, accounting firms may want to reevaluate their current requirements and curricula to eliminate deficiencies identified in the survey

The Survey

The survey was distributed to a stratified random sample of AICPA member firms. Firms were categorized into three groups: the Big 5, firms with over 20 members and all others. The population comprised 689 Big-5 offices and 359 firms with over 20 members. Of these, the number surveyed was 69 (or 10%) Big-5 offices, and 72 (or 20%) over-20-member offices. From the remaining population of firms with fewer than 20 members, 300 were selected, resulting in a total sample size of 441. Roughly one-quarter (101 firms) responded.

Profile of New Hires

Academic background. The non-Big-5 firms reported hiring 197 employees in 30 tax departments. The majority of new hires had baccalaureate degrees in accounting; a few had law or masters' degrees. The Big 5 hired 1,132. Approximately the same number who had masters' degrees in tax had baccalaureate degrees. A sizeable portion had basic or advanced law degrees.

In general, the academic backgrounds of new hires were not what the firms preferred; most would have liked new hires with advanced degrees. Unfortunately, in general, respondents misread this part of the survey; therefore, no conclusions could be drawn.

In the past, the number of masters' degree programs with a tax specialty had exploded. For example, between 1980 and 1994, they increased from 30 to 111. Although a current count is not available, anecdotal evidence indicates a decline, with student enrollment decreasing overall. This is consistent with a significant drop in the number of students who major in accounting. It may also explain why firms are not hiring as many students with advanced degrees as they would like. Given this trend, firms will likely find it difficult to recruit sufficient, qualified new hires in the future. Firms (as well as professional organizations, such as the AICPA) and universities should work together to attract students to the accounting profession.

Professional background. The survey revealed that in the non-Big-5 firms, only 6% of professionals transferred from an audit to a tax division; in the Big 5, only 10% did likewise. Traditionally, students who were not sure whether they wanted to practice tax or auditing commonly started off their careers in audit, feeling confident that they could always switch to tax. However, based on the survey results, students should probably decide between the two areas while in school, as recent opportunities to transfer between divisions appear limited.

For new hires in tax, 59% percent in the non-Big-5 and 32% in the Big 5 came from other firms. Hiring and training new employees is expensive. Despite this, inter-firm movement seems to be considerable; consequently, many firms may not recover these costs. Firms should review their turnover rates and devise ways to retain employees. They would also be wise to reconsider the academic backgrounds of recent graduates they consider for employment, as a way to keep turnover rates under control.

The survey showed that public accounting firms hire few people from industry. This questions the need for professionals with industry-specific knowledge in public accounting. Further, people working in public accounting should be aware of the apparent limited potential to return there if they choose to work in industry.

Skills Rated

The crux of the survey focused on identifying skills that new hires need to succeed, as well as how firms view the abilities these employees have already. The survey covered general skills (such as overall accounting knowledge, oral and written communications skills and an ability to work in groups), as well as specific knowledge (about topics like corporate tax, passthrough entities and international taxation).

On a scale of one to five, respondents ranked a skill's significance as it relates to a new hire's success. A score of five indicated that the skill was very important. They also ranked new hires' initial job performance for the same skills. A score of five meant that performance was excellent; three, satisfactory; one, unsatisfactory. A zero indicated that no basis existed for an evaluation.

Average ratings on the importance of a skill for success ranged from 3.13 to 4.06, indicating that most firms believed that the same skills contribute to success. The average performance ratings ranged from 2.3 to 3.2, which placed performance between marginally unsatisfactory and satisfactory. Comparing the Big 5 to the non-Big-5 firms indicated that new hires demonstrated a more satisfactory initial performance in the Big 5. Responses were limited to personnel that firms hired directly from college, and, because the non-Big-5 firms hired fewer recent graduates (as well as fewer overall), the results may be biased. On the other hand, the Big 5 tended to hire students with high grade-point averages and advanced degrees, leading to an expectation that these employees would most likely demonstrate a better job performance initially.

Non-Big 5. For these firms, oral and written communication skills, as well as critical thinking, were important non-technical skills, for which new hires were rated from satisfactory to good. Within this group, compliance firms did not rank a single technical tax skill as important (a score of four or higher); the "individual tax" category received the highest score, at 3.84. Technical skills were important to consulting and miscellaneous firms; knowledge of passthrough entities and individual taxation scored highest. Even though consulting firms ranked knowledge of transfer tax and of estates and trusts as significant, the initial performance of new hires in these specialized areas was only between marginally unsatisfactory and satisfactory.

In recent years, universities have been offering only one undergraduate tax course. Perhaps the weak performance of new hires in the non-Big-5 firms in technical expertise is a byproduct of this.

Big 5. Oral and written communication skills, and critical thinking, received high ratings from the Big 5. Further, the initial job performance of new hires was better in this group, which can probably be attributed to their additional education. The emphasis that graduate programs place on these skills is paying off, but is still not sufficient.

Unexpectedly, compliance and miscellaneous firms ranked technical tax skills higher than consulting firms. This may be the result of these firms' limited response. Another surprise was the low rank of state and local tax, which was below four, indicating that this specialization is marginal to Big-5 practices. Given the growth in state and local tax groups, a higher ranking was expected. However, because it is handled only by a limited number of large offices, this specialty may be underrepresented in the survey. Knowledge of transfer tax and estate and trust income tax was ranked as only slightly to somewhat important (which is consistent with prior surveys).

The performance of new hires on most of the technical tax material was below three, indicating a less-than-satisfactory initial performance. This is definitely contrary to expectation, given the number of new hires with masters' and law degrees. Universities need to exercise care before omitting or reducing technical course content. In addition, firms may want to evaluate new hires' continuing education requirements, to ensure that all deficiencies in technical taxation are eliminated, before the employees restrict their learning to a specialty.

Knowledge Caudal for Satisfactory Performance

Respondents indicated the top four critical skills and knowledge that they look for in a new hire. To indicate relative importance, they were asked to allocate 100 points among the four areas.

Non-Big 5. Technical knowledge was the most important area of knowledge to the non-Big-5 firms. Although not completely consistent with the rankings previously discussed, the response is consistent with expectations. (Possibly, the long list of skills that a respondent had to rank initially caused a slight decrease in the ranking values).

Communication skills and overall accounting knowledge were the second and third most important areas of knowledge. Critical thinking also received significant attention. These responses are consistent with prior studies.

Big 5. In general, the response from the Big 5 was unexpected. For example, technical knowledge was not the first priority of any respondent in compliance, and was important to only one in consulting, which assigned it only 40 points. Another area of great expectation was critical thinking, which respondents seemed to overlook, although it fared better than technical tax knowledge. Communication was the only skill that respondents ranked as high as expected, consistent with that for new-hire success.

The biggest surprise was the high rank that ambition received. Ambition plays a significant role in an employee's success. However, to measure or evaluate it, even with today's improved job interview techniques, is difficult. Given the emphasis on ambition, job applicants should carefully consider where they want their careers to be in five to 10 years, and how their skills can help resolve problems and improve a firm's bottom line.

The survey's unexpected results might be due to the advanced degrees and high academic credentials of many Big-5 new hires, requiring employers to use other criteria (such as communication skills and ambition) to weed out or hire applicants. Alternatively, employers might assume that job applicants with excellent academic backgrounds could probably learn the technical side of the business if they are ambitious and can communicate well and think on their feet. If the interpretation of the survey's results is correct, the Big 5 need to ensure that their continuing education classes cover the technical knowledge that new hires might lack initially.

Conclusion

Given the survey's low response rate, it is difficult to draw conclusions and make many meaningful recommendations. Despite this, some observations can be made.

A redesign of both undergraduate and graduate tax and accounting offerings will be crucial if universities want to improve students' oral and written communication skills, as well as their problem-solving abilities. This applies to group work as well, but the time spent on this activity must be balanced against a need for greater nontechnical content coverage.

Further, the survey seems to indicate that new hires do not have the technical knowledge that employers want. Over the past few years, many universities have stopped offering a second undergraduate tax course, to meet accreditation standards, expand content and meet professional recommendations. The time has come for universities to consider offering another course again to improve students' technical knowledge. As a byproduct, this will also enhance students' research abilities, and communication and critical-thinking skills. Recent modifications in accreditation standards will allow universities to add a second course.

Universities should encourage undergraduates to determine their specialties, given the limited ability to switch between tax and audit after they become employed. Taking a second tax class before choosing a specialty would help students in making that decision. Undergraduate internship programs in both tax and audit would also help students to select a field. Further, waiting until graduate school to specialize is usually too late, as switching between tax and audit during the one-year period normally required to complete graduate school would be difficult.

Based on the survey's results, firms should think about changing their recruiting habits and continuing education requirements. Given that many new employees lack acceptable technical knowledge, firms should offer additional technical courses, taking into consideration the limited advanced knowledge of students. Courses should cover topics fully, not just concentrate on recent developments or planning opportunities.

New hires may require additional supervision and direction from managers and partners to get up to speed. A careful review of their work for technical accuracy and depth would ascertain whether they are meeting professional standards.

Both undergraduate and graduate programs and CPA firms should work toward attracting more qualified people into the profession. Unless the decline in enrollment is reversed, firms will be unable to hire qualified employees.

A long-term commitment from both firms and universities will ensure that the CPA profession is going to survive.

Editor's note: For more information about this column, contact Dr. Schnee at [e-mail].

Edward J. Schnee, Ph.D., CPA Joe Lane Professor of Accounting and Director, MTA Program Culverhouse School of Accountancy University of Alabama, Tuscaloosa Tusclaoosa, AL