ASSESSING THE EFFICIENCY OF ACCOUNTING FIRMS USING DATA ENVELOPMENT ANALYSIS WITH MULTI-ACTIVITY NETWORKS

Transcription

1 ASSESSIG THE EFFICIECY OF ACCOUTIG FIRMS USIG DATA EVELOPMET AALYSIS WITH MULTI-ACTIVITY ETWORKS Bo Hsiao Dearen of Inforaion Manageen Chang Jung Chrisian Universiy Tainan Taiwan R.O.C. LihChyun Shu Dearen of Accounancy aional Cheng Kung Universiy Tainan Taiwan R.O.C. Fang-Yu Chou Dearen of Risk PriceWaerhouseCooers Taiwan Taiei Taiwan Absrac Tradiional eans of erforance easureen however are eiher based on few redefined facors ha rovide only a arial view of he syse or liied o a single aciviy and hus ignore he ineracion beween aciviies. To address his roble a odified odel for daa enveloen analysis wih uli-aciviy neworks is roosed for accouning fir in his aer. We assess 298 Taiwanese accouning firs wih hree arallel-conneced aciviies having wo series-conneced rocesses and wo share facors for heir erforance anageen. Afer evaluaing he effeciveness of he odel our resuls show ha Taiwanese accouning firs obain grea advanages in he service rocess and sugges ha Taiwanese accouning firs should focus on fir roducion for huan resource arrangeen and raining exense and labor cos shares. Keywords: Cerified Public Accounan Perforance Measureen Daa Enveloen Analysis ework Daa Enveloen Analysis Muli-aciviy Efficiency Evaluaion

2 1 ITRODUCTIO Globalizaion and raid echnological develoen have required decision akers o focus ore on anaging resources (e.g. huan caial) o be globally coeiive. Therefore easures for syseaically gahering inforaion fro accouning firs should be develoed o evaluae effeciveness and efficiency in disclosure or rovision assurance (Brierley and Gwillia ). However he develoen of such easures involves several challenges (Hi e al. 2001; Johnson and Kalan 1987; Berliner and Brison 1988; Bihiani and Brison 1989). One criical issue is he need o develo a syse ha reresens and easures he erforance of he accouning fir. Only axiizing he rofi of one syse (e.g. accouning and audiing) of an accouning fir does no guaranee he axiu overall rofi of he fir. An effecive syse for easuring erforance has becoe ore difficul o develo because of he increased colexiy of he srucure of an accouning fir. In ers of increased colexiy in conras o noral inus soe variables (e.g. raining exenses and labor coss) are aorioned o differen aciviies and should herefore be considered fro he ersecive of shared resources. Furherore wihou considering he srucures of aciviy uing all variables (e.g. variables for audiing-oriened and variables for anageen advisory-oriened aciviies) direcly ino he sae odel will cause hoogenous validaion hus evaluaion ay cause he bias in he efficiency resuls. Moreover he erforance easureen syse us consider ulile erforance facors o creae eaningful erforance reors. Managers always used o rely on financial or oeraional reors o calculae he raio of single ouu o single inu o evaluae erforance bu such raio rovides insufficien inforaion in he odern business environen (Banker e al. 2003). In addiion facors wih differen oriened uroses ay significanly vary fro one aciviy o anoher deending on he sraegies of he organizaion. As resuls his sudy ais o consruc a odel o evaluae he erforance of an accouning fir wih aciviies fro accouning and audiing (A&A) ax service (TAX) and anageen advisory services (MAS) hrough he black box syse wih exaining he srucure of he aciviies and rocesses of he fir. The odel us be general enough o cover an accouning fir wih ulile aciviies (i.e. A&A TAX and MAS). The roosed odel rovides efficiency indices based on he overall erforance of fir aciviies while sill accouning for he inerrelaion of services. The odel also considers wo-sage rocesses (i.e. roducion and service) which are coonly associaed wih he robles faced by accouning firs o reflec he effec of roducion and service rocesses. This aer rovides a hreefold conribuion o he assessen of accouning firs. Firs his aer rooses a ehod o evaluae he efficiency of an accouning fir wih a colex nework srucure including ha of is ulile aciviies. Second his sudy incororaes aorioned inu coss ino he evaluaion odel which considers raining exenses and labor coss as share inus o evaluae he fir given ha hese coss canno be used o deerine aorionen raios for differen

3 aciviies. Third his sudy rooses an evaluaion ehod ha considers he roducion and service efficiency of he accouning fir and does no change is redeerined qualiy in he shor run. The odel incororaes ore facors and hus enables a ore corehensive and horough erforance evaluaion yields ore eaningful and reasonable resuls. The res of his aer is organized as follows. Secion 2 reviews relaed research on accouning firs. Secion 3 describes he odel of he accouning fir roble aricularly in ers of he uli-aciviy srucure share inu and service qualiy. Secion 4 exlains he evaluaion of 298 Taiwanese accouning firs fro he Financial Suervisory Coission of Taiwan. Secion 5 offers suggesions for fuure research. 2 LITERATURE REVIEW Tradiional ehods of erforance easureen include balanced score cards (Bhagwa and Shara 2006; Iner e al. 2003) sider diagras agency heory (Sarens 2007) and z-chars. However several of hese ehods are based on qualiaive daa and are affeced by he subecive views of aricians and hus roduce abiguous resuls. In addiion hese revious sudies have exained accouning firs hrough descriive saisics (Chang e al. 2009; Chang e al. 2011; Cheng 2010) and deerined and analyzed he key facors ha enhance he erforance of accouning firs. However he accouning indusry or oher indusry-relaed oics are difficul o corehensively analyze. Thus he erforance of differen organizaions reains difficul o coare because he weigh of facors vary wih he organizaion. DEA is considered he beer aroach o organizing and analyzing daa because i allows fir efficiency o evolve over ie requires no rior assuion abou he secificaion of he bes-racice fronier and aniulaes he seing for racice. Recenly sudies on he erforance evaluaion of accouning firs hrough DEA have osly used radiional DEA or nework DEA odels wih relaively sile srucures (Banker e al. 2003; Banker e al. 2005; Cheng 2010) ha is wih only one aciviy (i.e. assuing ha such an aciviy is regarded as a black box). For exale Cheng (2010) used DEA o evaluae he efficiency of accouning firs and o conduc ulile-inu and -ouu analyses. Cheng (2010) used he Charnes Cooer Rhodes (CCR) DEA odel (Charnes e al. 1984) o evaluae he efficiency of accouning firs. Huang (2001) used he Banker Charnes Cooer (BCC) DEA odel (Banker e al. 1984) o evaluae he sae efficiency and found ha echnical efficiency osiively affecs he rofiabiliy of accouning firs. Banker e al. (2005) and Chang e al. (2009a) used he Malquis index o easure changes in roduciviy and efficiency. Banker e al. (1999) used DEA o assess he efficiency of 100 Aerican accouning firs and found ha he efficiency of hese firs is gradually iroving alhough high inefficiency sill exiss. Few of hese sudies discussed he rocesses and aciviies associaed wih erforance and efficiency according o assessen based on a black box syse (i.e. single-aciviy) (Banker e al. 2005; Chang e al. 2009a; Chang e al. 2011; Cheng 2010). Alhough hese sudies effecive o assess heir efficiency however he single-aciviy ehod

4 canno assue hese rocesses and aciviies as indeenden because hey (i.e. he single-aciviy ehod) ignored each aciviy was affeced by oher aciviies in oeraions. In suary hese revious sudies have assessed he erforance of accouning firs in ers of heir inu ouu efficiency (Banker e al. 2003; Banker e al. 2005; Cheng 2010) however no eirical sudy has exlored he roduciviy and share inus of he aciviies of each dearen and considered ulile-aciviy wih shared inus in our bes knowledge. 3 PROBLEM DESCRIPTIO AD MODELIG FORMULATIO This sudy ais o consruc a DEA odel o assess he erforance of accouning firs in ers of heir relaive efficiency. The DEA odel can idenify inefficien aciviies and rocesses and rovide suggesions for iroveen on he basis of he overall efficiency of he accouning fir. This secion resens cases in which an accouning fir faces several roducion aciviies a he sae ie such as in accouning firs ha rovide audiing ax and anageen services. The rofis of an accouning fir are deerined by he following hree aciviies: (1) accouning and audiing aciviy (A&A) which includes iniial ublic offering insurance and oher financial insurance; (2) axaion aciviy (TAX) which includes incoe ax insurance ax and business liigaion services and oher ax services; and (3) anageen advisory aciviy (MAS) which includes consuling services indusrial and coercial regisraion and oher anageen services. By using DEA odels his sudy assues ha all required daa exce for shared variables are colee and deerinisic. Such daa include he srucure of he accouning fir being evaluaed and he inus and ouus for evaluaing efficiency. Differen wih hese revious sudies viewed he analysis of oeraion erforance and efficiency as a black box syse (Banker e al. 2005; Chang e al. 2009; Chang e al. 2011; Cheng 2010). These radiional DEA odels evaluaes decision arking uni (DMU) efficiency by ransforing inus fro a black box ino ouus (Figure 1 dashed line) bu disregards he arallel srucure of heir aciviies and service rocedures. An accouning fir ha is efficien in A&A ay no be efficien in TAX or MAS; hence he efficiency raings for differen aciviies us be disinguished. When an accouning fir oinly erfors aciviies and rocesses ha are echnologically differen he uli-aciviy DEA odel searaes hese aciviies and rocesses ino differen echnologies (Mar Molinero 1996; Tasi and Molinero 2002; Yu e al. 2013). Following he revious discussion anagers decrease inus and increase ouus while ainaining he rovided huan caial a is redeerined level on service qualiy in he shor er. The redeerined service qualiy canno be changed (i.e. in he shor run) and as an inerediae role he inu-oriened ersecive is suiable for ransforing oeraion inus ino he required service qualiy (hereafer roducion rocess is used). Furherore anagers are resonsible for iroving he oeraions of he accouning fir while ainaining he qualiy of is services (fixed a a redeerined level by saff). This ouu-oriened ersecive is ore suiable for he service

5 rocess. The redeerined service qualiy can be considered as he ouu for he roducion rocess and as he inu for he service rocess. Each aciviy was divided ino a series of roducion and service rocesses (i.e. wo adacen rocesses conneced) o accuraely evaluae he erforance of he accouning fir afer he hree-aciviy were deerined (Yu e al. 2013; Hosseinzadeh e al. 2009). Given ha caabiliy (i.e. his sudy uses he service qualiy of huan caial as a caaciy ie) canno be exanded wihin a shor ie ouu consuion ay subsanially differ fro ouu roducion. To illusrae his consrain in our odel which used service qualiy as an inerediae variable he value of huan caial us be consan in boh he ouus of he roducion rocess and he inus of he service rocess. Besides oeraing exenses are also considered as an inerediae inu or ouu. Differen wih huan caial oeraing exenses (service revenue) us be reaed as a noral inu or ouu. If huan caial canno easily be adused in he shor er he inu-oriened aroach is ore suiable in odeling he firs rocess (i.e. he roducion rocess) whereas he ouu-oriened aroach is ore suiable for he second rocess (i.e. he service rocess). Figure 1. Srucure of Aciviies of an Accouning Fir. Suose ha here are v 1... accouning firs and ha each fir engages in k aciviies (i.e. A&A (denoed as ) TAX (denoed as ) and MAX (denoed as )). Le x a denoe a h (a=1 n ) inu variable of k h aciviy of h accouning fir while a x are s h s each fir roduces he d (s=1 n s ) share inu variable of h accouning fir. For roducion rocess h inerediae huan caial ouu variable (i.e. non-discreionary) of

6 k h aciviy of h accouning fir (i.e. y ) and g h inerediae noral ouu d variable of k h aciviy of h accouning fir (i.e. y ). For service rocess he f h g final ouu variable of k h aciviy of haccouning fir will be roduced. I is assued fir k allocaes soe orion of he shared quaniies k s x s o each acivaes and he share raio should be bounded ino he uer bound s and lower bound s. The easure of overall oeraion effeciveness for accouning fir can be esiaed by solving he Model (1) To ehasize he iorance of each rocess we break down he huan caial of he inerediae rocess for he roducion and service rocesses and assue ha he weighs of he wo rocesses are equal o 1/2 and he weighs of hree aciviies are equal o 1/3 as well. The obecive funcion of he h accouning fir can be exressed as Eq. (1.1). The deails of consrain can no be elaboraed for he liied sace. Max ( ) ( ) ( ) ( ) ( ) ( ) (1.1) a. A&A Producion Process Consrain Se P ( ) ( ) ( ) ( ) zv xav (1 ) xa a 1... na (1.2) ( ) ( ) ( ) zv ydv yd d 1... nd (1.3) ( ) ( ) ( ) zv ygv yg g 1... ng (1.4) b. A&A Service Process Consrain Se ( s) ( s) ( s) ( s) z v ydv yd d 1... nd (1.5) ( s) ( s) ( s) ( s) z v ygv yg g 1... ng (1.6) z y (1 ) y f 1... n (1.7) ( s) ( s) ( s) ( s) ( s) v fv f f c. TAX Producion Process Consrain Se () () () () () zv xav (1 ) xa a 1... na (1.8) () () () () zv ydv yd d 1... nd (1.9)

7 () () () () zv ygv yg g 1... ng (1.10) d. TAX Service Process Consrain Se () () () () z v ydv yd d 1... nd (1.11) () () () () z v ygv yg g 1... ng (1.12) z y (1 ) y f 1... n (1.13) () () () () () v fv f f e. MAS Producion Process Consrain Se ( ) ( ) ( ) ( ) ( ) zv xav (1 ) xa a 1... na (1.14) ( ) ( ) ( ) ( ) zv ydv yd d 1... nd (1.15) ( ) ( ) ( ) ( ) zv ygv yg g 1... ng (1.16) f. MAS Service Process Consrain Se ( ) ( ) ( ) ( ) z v ydv yd d 1... nd (1.17) ( ) ( ) ( ) ( ) z v ygv yg g 1... ng (1.18) z y (1 ) y f 1... n (1.19) ( ) ( ) ( ) ( ) ( ) v fv f f g. Shared Inus for Three Aciviies ( ) ( ) ( ) svzv xs svzv xs svzv xs 1 1 ( ) ( ) ( ) (1 ) s (1 ) s (1 ) s xs s 1... ns sv sv sv 1; v ; 1... (1.20) (1.21) ( ) ( ) ( ) ( ) ( ) ( ) z z z z z z 0 (1.22) ( k) ( k) ( k ) sv sv sv ; k ; v 1... (1.23) Where z and z are inensiy variables associaed wih he roducion service and service rocess resecively. In addiion and are denoed fron rocess and rear rocess

8 resecively of efficiency scores in h accouning fir of k h aciviy. ( k) ( k) 1 ; k a (2) k a ( k) ( k) 1 ; (3) 4 EMPIRICAL STUDY In his secion we use he Models (1) of DEA odel o evaluae he efficiency resuls of he accouning fir shown in Figure 1 o deerine if his odel can accuraely easure he efficiency of an accouning fir wih differen aciviy and roducion condiions. 4.1 Inu and Ouu The daa are obained fro he audi qualiy daabase of he Taiwan Econoic Journal which collecs is daa fro he Annual Survey of Accouning Firs in Taiwan ublished by he Financial Suervisory Coission of Taiwan. A oal of 954 accouning firs were lised on he daabase in Firs wih incolee daa are reoved fro he lis leaving us wih 298 firs o analyze. This sudy focuses on hree aciviies of accouning firs: A&A TAX and MAS. We use a suffix o differeniae he aciviy yes shown in Table 1. Each aciviy has wo shared inus naely raining exense and labor coss. These shared daa are colleced fro an accouning fir insead of an aciviy. The variables in he nework are indivisible. Table 1 oulines he variable araeers whereas descriive saisics of he daa are resened in Table 2. Aciviy A&A TAX MAS Inus Inerediae Coon Shared Huan Caial Coon Eloyee for Training exense ( x s1 ; Huan Caial Index Oeraing Coss for A&A ( x 1 ; in in T for A&A ( y d1 ) A&A ( y g1 ;in T ersons) Labor coss ( x s2 ;in T Eloyee for Training exense ( x s1 in Huan Caial Index Oeraing Coss for TAX ( x 1 ; in T for TAX ( y d1 ) TAX ( y g1 ;in T ersons) Labor coss ( x s2 ;in T Eloyee for Training exense ( x s1 ;in Huan Caial Index Oeraing Coss for MAS ( x 1 ; in T dollars; in T for MAS ( y d1 ) MAS ( y g1 ;in T ersons) Labor coss ( x s2 ;in T Table 1. Measures of Inus and Ouus of Accouning Firs. Ouu A&A Revenue ( y f1 ;in T TAX Revenue ( y f1 ;in T MAS Revenue y ( f 1 ;in T

9 Aciviy/Shared Variables Average Sd. Dev. Min Max x A&A TAX MAS Shared y d1 g y y f1 x yd y g1 y f x yd y g1 y f x s x s Table 2. Descriive Saisics of Inus fro Three Aciviies of Accouning Firs in Cheng e al. (2009) indicae ha huan caial is based on he qualiy of service roduced during a given eriod. The huan caial index us be calculaed based on he level of educaion (EDU) 1 exerience (STAFF35) 2 cerificaion (LICESE) 3 and raining (TRAIIG) 4. Furherore he range of he wo shared inus us be queried fro he exerise of accouning illusraing ha he raining exenses of he hree aciviies us no be less han 10% of he overall raining exenses. The share raio of he raining exense also canno be higher han 80% of he overall raining exense. For exale if he raining exense of A&A akes 80% of he overall raining exense he raining exenses of TAX and MA us only ake 20% of he overall raining exense. The range of he labor cos us no be less han 25% of he overall labor coss and canno be higher han 45 % of he overall labor coss. We use he ssaisical ehods of rincial coonens analysis (PCA) wihou roaion 1 Based on he research designs of DeFond (1992) and Francis and Wilson (1988) he educaion level (EDU) variable is defined as he average nuber of years o obain a degree in accouning which is calculaed as follows: (nuber of audiors wih docoraes for aciviy k 23 + nuber of audiors wih aser s degree for aciviy k 18 + nuber of audiors wih bachelor s degree for aciviy k 16 + nuber of eloyees wih a senior high school diloa for aciviy k 12 + nuber of eloyees wih oher educaion level for aciviy k 9) / year-end nuber of eloyees for k-h aciviy. 2 The work exerience of eloyees (STAF35) is calculaed by dividing he nuber of eloyees older han 35 years for aciviy k by he year-end nuber of racicing arners for aciviy k (Kura and Vinniconer 2008). 3 The rofessional qualificaion level of eloyees (LICESE) is easured by he nuber of eloyees wih a CPA license for aciviy k divided by he year-end nuber of racicing CPAs for aciviy k. 4 The logarih of exendiures of he raining variable (TRAIIG) is deerined by analyzing coonens wihou roaion o cobine he four variables of each aciviy and o exrac a coon facor o caure he overall level of he service qualiy of he k-h aciviy.

10 o cobine hese four driving facors fro a se of variables. The siles rue eigenvecor based ulivariae analysis PCA exlains he variances aong daa by exloring heir inernal srucures. This analysis roduces a significan coon facor called he huan caial index. The eigenvalues of all hree aciviies are greaer han 1.0 and can hus be used o describe he daa horoughly. Facors wih eigenvalues less han 1.0 are obscure and difficul o idenify. Cheng e al. (2009) indicaes ha he huan caial index can be exressed by Equaion (4): y ( EDU ) ( STAF35) ( LICESE) ( TRAIIG) e (4) d Efficiency Measureen Each roducion aciviy and service efficiency can be obained hrough Model (1). # A&A TAX MAS Overall Average Sd Dev Max Min Table 3. Descriive Saisics of Inus fro Three Aciviies of Par of Accouning Firs in Table 3 shows ha he roducion of accouning firs is ore efficien han heir service rocesses regardless of aciviy ilying ha hese firs us reduce heir saff in such a way ha heir huan caial reains he sae. A he sae ie he oeraion cos us coensae for he iroveen of he roducion rocess. Coared wih convenional evaluaion aroaches uli-aciviy nework DEA rovides subsanial inforaion on each aciviy or rocess. This advanage has rarely been discussed by revious sudies. ine (# 6 # 54 # 106 # 133 # 146 # 190 # 193 # 205 and # 257) of he 298 overall efficiency scores of accouning firs have reached he value of 1 (i.e. inefficiency scores are zero) indicaing ha he efficiency scores of each aciviy have also reached he value of 1. This resul indicaes ha hese accouning firs can be caegorized hrough bencharking. Accouning fir #1 in Table 3 has an efficiency of (i.e. 0.4) saller han ha of (i.e. 1.0) indicaing ha he service rocess of he fir reaches he benchark of his indusry bu is roducion rocess does no reach he bes racice. This accouning fir us reduce is nuber of eloyees o irove he efficiency of is roducion. Alhough he fir has reduced is

11 saff for A&A i can sill incur addiional oeraion exenses brough by assive exenses which subsequenly reduce is service rocess efficiency. Therefore reducing invesen in saff increases he efficiency scores of accouning firs. By conras accouning fir # 19 in Table 3 has a (i.e. 0.84) higher han (i.e. 0.11) and canno reach he fronier. Therefore he fir has o focus on is oeraional cos raher han on eloyee reducion. The efficiency of he roducion rocess is lower han ha of he service rocess in os coanies indicaing ha invesing in saff o roduce business cos sill roduces cerain effecs. Coared wih oher accouning firs wih high huan caial indices sall-scale accouning firs can allocae heir saff and oeraion exense rofiles. Moreover oversaffed accouning firs encouner difficulies in adusing heir inu and ouu raios. 5 COCLUSIOS This sudy divides he aciviies of he accouning indusry ino hree aciviies o exlore he direc and ineracion effecs of each aciviy and rocess. These effecs ay influence he efficiency of accouning firs. A odified uli-aciviy nework DEA aroach ha siulaneously anages A&A TAX and MAS aciviies is used o evaluae he echnical efficiency of accouning firs in Taiwan. This odel no only considers he ineracion beween various aciviies and rocesses ha ake u he oeraion of accouning firs bu also rovides soluions o share and diensionaliy robles. The robles associaed wih noral inus and inerediae roducs are siulaneously considered by he inegraed fraework of he odel. The allocaion of huan caial and cos shares is considered he ain influencing facor for accouning firs in Taiwan. The service rocess is ore efficien han he roducion rocess. Coanies easily adus heir inu ouu sharing raio o irove heir oeraing incoe by coaring he efficiencies of heir roducion and service rocesses. This sudy exaines he srucure of he aciviies and rocesses of hese firs o fill he research ga and o rovide useful inforaion for raciioners and oher researchers. However his sudy also has liiaions. Firs we consider only soe of he firs in our reference daabase. The daabase liss 954 accouning firs bu we consider only 298 firs afer disregarding firs wih incolee daa and wihou oeraing incoe. We collec our eirical daa fro he audi qualiy daabase of he Taiwan Econoic Journal which collecs is daa fro he Annual Survey of Accouning Firs in Taiwan. However we are rohibied fro obaining deailed daa because he firs wan o roec heir rade secres. Second he diversiy of huan caial can furher be discussed in fuure research. Thirdly he ioran weigh of each aciviy can be deerined only by oher aroaches. Finally revision of he ehodology o include he above-enioned liiaions is suggesed fuure sudies. ACKOWLEDGEMETS The auhors hank he anonyous referees for heir valuable coens and suggesions. Dr. Hsiao also hanks he suor by he Minisry of Science and Technology of Taiwan under roec nuber

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