Independence at what cost? Regulation, accounting careers, and human capital

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.