A Tale of Two Professions: The Impact of SOX and the Crisis on Public Accounting and Law Firms’ Revenue Generation

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Abstract

We examine the impact of the Sarbanes–Oxley Act of 2002 (SOX) and the global economic crisis of 2008 on revenue generation patterns of public accounting and law firms. Using a sample of firm-year observations from both industries, we show that since the enactment of SOX, public accounting firms have significantly increased leveraging of partner time and decreased charge-out rates to boost their revenue per partner. While law firms also exhibit an increase in revenue per partner in the post-SOX era, their increase is rooted in higher average charge-out rates and lower leveraging. Following the crisis, the public accounting industry was insulated by the relatively inelastic nature of its services. Consistently, accounting firms’ revenue per partner continues to increase post-crisis, but is driven by higher charge-out rates. By contrast, law firms suffered a decline in demand for their services, reducing their revenue generation by reducing their charge-out rates. We also consider cross-sectional variations within each industry and find significant differences across firms in the impact of SOX and the economic crisis.

Authors

• Keval U Amin, Stony Brook University

• Rajiv D Banker, Temple University

• Eunbin Whang, Temple University