An Exploratory Study of Factors Affecting Production Function in the Accounting Industry

Using a hand-collected unbalanced panel of data for Korean accounting firms from the year 1997 to 2018, this paper analyzes the production function relating the output of accounting firms as a function of two labor inputs and a capital input along with contextual variables that influence the relationship between the three inputs and the single output. The major results from the empirical analysis of this study are drawn as follows. First, this study finds that both the economies of scale and the economies of scope exist in the Korean accounting industry over the 1997-2018 period. Second, it is documented that the level of productivity improves continuously over the sample period. Third, it is shown that both the proportion of revenue from taxation services and the proportion of revenue from management advisory & other services are productive in generating total revenue, while the proportion of revenue from auditing services is not productive. In addition, taxation services are found to exhibit a higher productivity than management advisory & other services. Lastly, it is demonstrated that the contextual variables such as the degree of leveraging of partner time, the level of investment in employee training and education, the employee retention rate, the debt-to-equity, and the quick ratio are positively associated with accounting firm productivity.