An Empirical Analysis of Returns to Scale of Accounting Firms

Based on the annual data on three inputs (the number of certified public accountants, the number of other employees, and total assets as of year-end) and three outputs (revenue from auditing services, revenue from taxation services, and revenue from managerial advisory and other services) drawn from annual reports of Korean accounting firms for the 5-year sample period from 2012 to 2016, this study has examined the effects of returns to scale on individual accounting firms and the accounting industry in Korea. Empirical results can be summarized as follows. First, yearly cross-sectional analysis on the effect of returns to scale on 119 individual accounting firms indicates that the proportion of accounting firms that operate in the most productive scale size is 15.97% in 2012, 13.45% in 2013, 20.17% in 2014, 21.01% in 2015, and 15.13% in 2016, respectively. The proportion of accounting firms that exhibit the decreasing returns to scale pattern is 27.73% in 2012, 37.82% in 2013, 33.61% in 2014, 44.54% in 2015, and 41.18% in 2016, Received(June 8, 2018), Review Result(June 17, 2018), Accepted(July 13, 2018), Published(August 31, 2018) (Professor) 02844 Department of Business Administration, College of Social Sciences, Sungshin Women's University, 2 Bomun-ro 34da-gil, Seongbuk-gu, Seoul, Republic of KOREA email: sylee@sungshin.ac.kr * 2016 An Empirical Analysis of Returns to Scale of Accounting Firms Copyright c 2018 HSST 344 respectively. The proportion of accounting firms that exhibit the increasing returns to scale pattern is 56.30% in 2012, 48.74% in 2013, 46.22% in 2014, 34.45% in 2015, and 43.70% in 2016, respectively. Second, both yearly cross-sectional analysis and pooled data analysis on the effect of returns to scale on the accounting industry support the hypothesis that the accounting industry in Korea exhibits the increasing returns to scale pattern, assuming that the inefficiency scores follow the exponential distribution or the half-normal distribution. This empirical result indicates that there exist scale economies in the Korean accounting industry. Furthermore, this is consistent with the ‘bigger’ accounting firm policy that has been initiated and implemented by the Korean financial regulatory authorities such Financial Supervisory Service and Financial Supervisory Commission to advance the entire Korean accounting industry. Therefore, in order to improve their production efficiency, it is suggested that Korean accounting firms need to benefit from economies of scale by expansions through mergers and acquisitions.