Scale and scope economies in Korean accounting firms around Sarbanes-Oxley regulations

This paper examines how scale and scope economies in accounting firms changed after Sarbanes-Oxley (SOX) regulations. Korea enacted SOX-type legislation to improve financial reporting quality in 2005. Our sample comprises 301 firm-year observations from 2002 to 2008. The sample period is divided into the pre-SOX (2002–2004) and post-SOX (2006–2008) periods. We estimate a multi-product translog cost function to determine whether significant changes occur in scale and scope economies during the pre- and post-SOX periods. Empirical results suggest that overall and product-specific economies of scale prevailed in accounting firms during the full sample, pre- and post-SOX periods. Accounting firms were less able to exploit scale economies in the post-SOX period. The marginal costs of producing Audit and Accounting (A&A) increased, whereas those producing Tax Services (TAX) declined. Cost complementarities existed only in jointly providing TAX and Business Advisory Services (BAS) during the pre-SOX years. In contrast, scope economies occurred in the joint production of A&A and TAX or TAX and BAS during the post-SOX period. Our analysis can be applied to the accounting industry in other countries that have adopted SOX-type regulations.