With my next CPA examination section coming up in a few days, I thought I would talk about some interesting data published by NASBA and the AICPA, how this information can help exam candidates be successful, and my personal thoughts on the exam.

Understanding the CPA Exams

One of the most surprising things I have noticed among my fellow exam candidates is a lack of understand of how the exam is graded and why students fail.

While understanding the content being examined is, of course, the most important part of any examination, I believe that understanding the examination format and trends in the testing environment can help students focus their study habits and lead them to success.

How the Exam is Scored

Understanding how the CPA Exam is scored goes further than looking at the breakdown of MCQ and TBS. The CPA exam is graded along Itemized Response Theory and Multi-Stage Testing, meaning that testlets are varied in difficulty based off your performance. Further, the exam has a given number of “Pre-Test” questions that are not graded and all graded questions are statistically evaluated for fairness. Knowing these facts can dramatically change how a candidate will structure their exam time and give a candidate a better understanding of how they are performing by gauging the level of difficulty of their testlets.

2014 CPA Exam Performance by Education

(Note: FT here stands for First Time candidates)

NASBA separates the data presented here into Bachelor’s Degrees, Advanced Degrees, FT Candidates, and FT Candidates who sit within 1 year.

Looking at the 2014 data, we see that the overall pass rate of FT Candidates holding Bachelor’s Degrees (53.4%) and Advanced Degrees (56.8%) differs by 3.4%. Further we see that this overall difference holds true for the previous 3 years of data presented. From this, we can see that the level of education obtained holds a small advantage in passing the CPA exam.

But things get more interesting when we look into the difference in performance of FT Candidates and FT Candidates who sit within 1 year. For Bachelor’s Degree holders, we see that the overall pass rate of FT Candidates (53.4%) differs from FT Candidates who sit within 1 year (60.9%) by 7.5%.

So the larger question here is, “Why are FT Candidates who sit within 1 year performing better?”

I believe we can answer this question, in part, by looking at the type of students who fall within this candidate category.

First, both Bachelor’s Degree and Advanced Degree candidates who sit for the exam within 1 year tend to be younger by 3 years. This is significant because the CPA exam covers the majority of business coursework required by a Bachelor’s Degree in Accountancy and students who take the exams closer to their graduation date will be more familiar with the content. In addition, we can see that the added benefit of advanced accounting coursework covered in higher level degrees may not be widely tested and this may account for the relatively similar performance between Bachelor Degree holders and Advanced Degree holders. From cost accounting to business law, the majority of CPA exam topics are not likely to surprise recent graduates with a Bachelor's Degree. In addition, many schools of accountancy are aware of the importance of the CPA in a student’s future career path and, to better prepare students for the exam, structure their tests in a similar manner as the CPA exams.

The problem for candidates who delay their exams is that the world of accountancy is not static. The financial reporting environment is constantly evolving and accounting frameworks are in perpetual motion to better meet the political and financial needs of business stakeholders. The longer a candidate waits to take the exam, the greater the risk that the candidate will be out of touch with the frameworks governing accounting. This is compounded by the fact that a candidate who takes the exams later in their careers are typically specialized in a particular facet of accounting and may be less prepared to pass an exam that requires a broad and general view of the entirety of their business coursework.

The second factor behind the greater success of FT candidates who sit within 1 year can be seen in the number of candidates who fall in this category and the structure of the exams. In 2014, 30.7% of Bachelor’s Degree candidates and 39.5% of Advanced Degree candidates fell into the “within 1 year” category. I believe that this subset of candidates can broadly be characterized as more motivated and confident in their knowledge of accounting principles and concepts. Taking the exam within a 1 year period is usually an optional decision made by the candidate that requires drive and careful planning. While each state board of accountancy is responsible for the requirements of licensure, the 3 most popular states for examination (California, New York, and Texas) all abide by the 18 month examination period.

2014 CPA Exam Performance by All Jurisdictions

Looking at the pass rates we can see that there is usually a greater chance of failing a section than there is a chance of passing. But by looking at the pass rates for each section and the average scores, I believe we can better understand the differences between the sections and plan accordingly. Here I will talk generally on the average scores and go into greater detail on the exam sections.

Looking broadly at all of the sections we find that the average scores fall in the 70s (Note: to pass a CPA exam a candidate must have a score of 75 or higher). This shows that candidates are not taking their exams lightly and most are almost at the threshold of passing. But as a warning, we can see that re-examinations hold a lower average pass rate. This may be caused by a false sense of comfort of “almost passing” and the thought process that studying on a few problem areas will lead to a passing score on the next round. But the content covered by each exam is broad and each examination holds a different variety of questions. When studying for the exams, whether for the first time or a retake, a CPA candidate must take a concentrated look at all topics that have a potential to be tested.

For AUD we see the lowest pass rate at 46.4%. I believe this is due to the largely conceptual and high-level work management components to the content being tested. From my experience in audit, the average auditor will not explore or examine these aspects of audit in their first year or even sometimes their second year of fieldwork and will leave these aspects to more senior level auditors, instead focusing their efforts on simply testing and documentation. Despite this, it is my belief that there is a fundamental logic that ties together every topic covered in the AUD exam. As you study for this section, you should find your pace accelerating as you grasp the rationale underlying audit and attest services. Understanding the logic behind audit and attestation is ultimately what determines whether a candidate will pass or fail.

For FAR we see the lowest average score at 70.1 points. I believe this is due to the sheer volume of content and technical memorization required by this section. Merely understanding the underlying principles and framework will often get you started on a problem, but only by understanding the particular GAAP or IFRS procedures will you get to the right answers.

For BEC we see the highest overall pass rates at 55.5%. This exam is lower in content scope and quantitative rigor in exam questions. Reading questions carefully and having a good understanding of the various formulas/ratios on the exam are key to passing this exam.

For REG we see the an average score of 71.3 and a pass rate of 49.4%. It is also, anecdotally, the section where direct work experience will benefit a candidate the most. My colleagues in entry level tax positions have expressed familiarity with the concepts tested on this exam in a way that my entry level audit colleagues have not been able to see in their entry level audit work. The two major subjects covered in this section are business law/ethics and taxation. When looking at business law, try to understand the reasoning behind the rules and statutes given. Ask yourself, "what are they intended to prevent or protect?" Look carefully at the questions and try to place who is benefiting from the transactions, who is ultimately responsible, and how can we make things right. For the taxation section, try to frame the questions as if they were happening to you. The topics covered under taxation have a direct effect or will potentially effect major decisions in our lives. Buying a house, sending a gift, receiving an inheritance, business expenses, and medical bills are all part of our lives or will be important in our futures.

Study Time Management

There are 2 points of time management that a CPA candidate must prepare for. The first is planning your study hours and the second is planning your test time allocation.

In planning your study hours a candidate must have a critical and honest assessment of their study habits. While every candidate has their own unique stories and responsibilities, I know that all candidates have obtained, at a minimum, a bachelor's degree. Each degree carries a different set of skills and experiences but the one thing that we all take away from our universities is a knowledge of how we study effectively. With this in mind we should look at the average study times for CPA candidates.

Please keep in mind these study hours are anecdotal and sourced from friends and colleagues, but I believe they provide a decent benchmark to planning your exam studies.

AUD: 80 - 140 Hours

FAR: 120 - 200 Hours

BEC: 60 - 90 Hours

REG: 60 - 90 Hours

As we can clearly see, there is a huge disparity between reported study hours. In order to more effectively study for this exam, I believe it is important to plan how many hours you want to dedicate to this exam and track the progress of your studies.

My personal study plan looks like this:

AUD: (Budgeted) 100 Hours (Actual) 83 Hours

FAR: (Budgeted) 150 Hours (Actual) 188 Hours

BEC: (Budgeted) 70 Hours (Actual) 61 Hours

REG: (Budgeted) 85 Hours (Actual) TBD

As you can see, my study schedule did not always go along with my plans. School, internships, interviews, friends, and family are all just as important to me as this exam and nothing can ever go exactly as planned. I want to dive deeper into these study hours to explain what I did to manage my hours and what I wish I could have done differently to make my study time more efficient.

In studying for both AUD and BEC, I realized these 2 sections are my strongest sections. The concepts covered in audit, economics, finance, operations management, and info systems have always interested me and are often topics covered in the press. For these two sections I largely skipped the reading material and TBSs while focusing on the video lectures and MCQs. I believe this study method worked well for me because I was still very familiar with the concepts and was actively able to connect the lessons with real life events. In addition, I found the videos a little too slow paced so I downloaded and replayed the videos at 1.3x speed in my personal video player and cemented my knowledge through MCQ reviews.

During my studies for FAR, I quickly found my AUD and BEC study method to be ill suited to the exam content. I am very much a visual learner, but for this exam I needed to focus on the text and MCQ. While this tactic had me effectively moving through the material, by the time I had reached my review phase I had realized that I had essentially forgotten major portions of the earliest lessons of the exam. What happened next was an exhausting 2 weeks of nonstop review and coffee. In looking at what I did wrong, I realized that for an exam with more rigorous calculations and depth, I should have constantly reviewed and refreshed the older material as I took on new concepts.

I have incorporated this study tactic to my REG studies and, so far, the review sessions have slowed down my pace, but the review has proven easier with the concepts still so fresh in my mind and I am confident that it will ultimately lead to better results on my upcoming exam.

Exam Time Management

In my personal experience, and from some insight from a Prometric test proctor, candidates will often finish AUD early, run out of time on FAR, and find BEC to be just enough time. My personal advice would be to make sure to take your time and really read the questions on AUD carefully. With many candidates finishing this section early and knowing that AUD has the lowest pass rate, it only makes sense that you review your answers. For FAR, I would try to keep away from the bathroom breaks if possible, be aware of the time, and keep engaged through every single question. I know this is challenging over a 4 hour period but you didn't come all this way for nothing. For BEC make sure to take the time to physically draw or write out the formulas/ratios for difficult conceptual questions, I promise it won't be a waste of time. For me, the conceptual questions were often the trickiest and tried to move you to a particular answer. But by having the formulas/ratios in front of me, I was better able to see the correct answers.

Overcoming Challenges

As I have mentioned, the CPA is a very broad exam. This means that the majority of candidates will have to reface challenging topics. My challenge was cost accounting. The thought of going through cost accounting again was a bit worrying to me at first, but going over the material for the second time was pretty empowering. The second time around truly is a lot easier. I understand now that I didn't fully grasp the flows of cost accounting, but after reviewing the topic I can confidently say, cost accounting was never an issue on my BEC exam.

Another challenge I have heard from students is regarding the written communication section of the BEC exam. In particular, my international student peers often express discomfort at the idea of a written section in the CPA. But in all honesty, the written section is not challenging if you understand what is being "e-graded". Structure, grammar, and vocab are the keys to passing the written section. The structure you can prepare before the exam and can adapt it to any situation and the vocab is picked up from your studies. As for grammar, I believe that many international students look down on their personal written communication skills but, having proofread many of their essays, I believe many international students have a better grasp on technical writing and proper grammatical structure than many US candidates.

I hope this information helps anyone interested in taking the CPA examination, it has been a personal goal of mine to pass all 4 sections on my first try and within the 1 year period and I am well on my way to finishing this chapter of my life. If anyone has any advice for me or has any questions on my CPA experience, do not hesitate to ask!