An Empirical Study On The Operational Performance Of Public Accounting Firms Using Data Envelopment Analysis

The constantly developing capital market and the increasing investors are calling forhigher credibility of the disclosed information. This requires independent third-partyorganizations to leverage their professional expertise to attest the quality of the information,thereby alleviating the information asymmetry between the investors and investees. Indeed,this is exactly the context in which the public accounting industry rapidly rose. Publicaccounting firms have been an indispensable player in the economics of a country. They serveas the important role to improve the quality of economic information, maintain the marketorder, regulate the market, guide the rational allocation of scarce resources, and deepen theopening-up.In order to better play this “economic police” role so as to provide better attestationservices, public accounting firms must be operated with high efficiencies. An efficient publicaccounting firm not only possesses strengthened competitiveness, but also promotes thesustainable growth of the whole industry.This thesis defines and analyzes the efficiencies of44listed CPA firms in China, usingthe public data in2012. By leveraging the Data Envelopment Analysis approach, we firstcalculate the technical efficiencies of those firms (called decision-making units, DMUs) withthe CCR model and then calculate their pure technical efficiencies and scale efficiencies withthe BCC model. These numbers tell whether a CPA is technically efficient or not. The BCCmodel also reveals the return-to-scale ratio of each firm. All these pieces of informationsuggest the possible areas those firms could improve on.In addition, this thesis introduces the cross efficiency model as an auxiliary tool toevaluate technical efficiencies. This model is able to evaluate both efficient and inefficientDMUs at the same time. It also avoids the cases in which some mavericks become100%efficiency by using extreme weights in the self-appraisal.The empirical study shows that:1) the overall efficiency of China’s public accountingfirms is at a high level;2) most of those inefficient firms exhibit an increasing return-to-scale;3) those inefficient firms generally have excessive inputs in the number of their branches andpartners, but deficient outputs in the audit revenues and the annual growth of the auditrevenues;4) the “Big Four” firms have better performance than local firms in general, but thelatters, BDO and Ruihua as two representative examples, are catching up; most medium-sizeand large-size firms could improve their operational efficiencies by means of mergers.