Peer Review Mandates and CPA Entrepreneurship

I study whether mandatory peer review affects CPA entrepreneurship—that is, CPAs’ decisions to start, continue, or cease operating their own CPA firms. In an effort to promote service quality, CPA firms have to be reviewed by other CPA firms to meet licensing requirements. While this peer review system is the main oversight mechanism for CPA firms without public clients, little is known about its consequences. I exploit the staggered introduction of peer review mandates and, using a novel dataset based on CPA licenses, find that CPA entrepreneurship declines with the introduction of mandatory peer review—CPA entrepreneur entries decline, and CPA entrepreneur exits increase. Exits are pronounced for young female CPA entrepreneurs but not for CPA entrepreneurs subject to disciplinary actions. These findings suggest that differences in the costs of meeting licensing requirements, rather than active screening on service quality, explain the observed heterogeneity in exit effects.