The Straight Shooter: An Interview with Eli Mason

By Jay Dismukes

Not very long ago, Thomas J. Marino, managing partner and CEO of J.H. Cohn LLP, described Eli Mason as the “conscience of the accounting profession.” The title seems to fit.

As a senior partner of Mason and Company, LLP, an accounting and tax firm formed in 1946 with a specialty in the music and entertainment fields, now merged with J.H. Cohn and referred to as the Mason and Company Division, Mr. Mason has held numerous esteemed and influential positions over the years. He’s been a chair of the Board of Advisers of Baruch College, City University of New York, chair of the New York State Board for Public Accountancy, a nine-year member of the American Institute of CPAs Council, a vice president and member of the Executive Committee of the AICPA, a president of the National Conference of CPA Practitioners, a president of the Foundation for Accounting Education, and a president of the New York State Society of CPAs. The list goes on.

Mr. Mason has more than earned the right to speak his mind about the accounting profession; he clearly has the curriculum vitae to back it up. A tireless writer and author of countless commentaries and published articles, as well as a few unpublished ones, including a Journal of Accountancy submission he penned in 1941 at age 19 called “Audit the Auditor,” Mr. Mason has never held a view he was afraid to express.

The following interview is no exception. In it, Mr. Mason goes as far back as 1933 and scrutinizes all points in between. Though his words are occasionally blunt and at times highly critical of a profession that Mr. Mason believes has taken its share of bad turns, especially in recent years, they are no less evident of a life’s vocation that he clearly and dearly loves.

Q: Do you believe there was a culture within the CPA profession that while perhaps not directly responsible for, at least contributed to, the occurrence of the financial reporting scandals of the last two years such as took place at Enron, WorldCom, Tyco, Adelphia and GlobalCrossing?
A: I don’t think it was a culture. To me, the word culture connotes and implies a kind of intellectual process. There was nothing intellectual about what happened during the past few years…There was nothing cultural about that, it was just crass commercialism…What happened was a complete ethical deterioration and I’m sad to say it was at the very top of the profession…The independent auditors, in my opinion, for Enron, WorldCom, Adelphia Communications and for Tyco, and now we read about HealthSouth, I do not believe that the independent auditors could have missed all of the peculations of the management.…Sometimes I hear the thought expressed, “Well, there were just a few bad apples.” I don’t accept that. Period.

Q: Do you believe these events have significantly impacted public confidence in the ability of the profession to present objective and informative opinions on their public company clients? How damaged is the profession’s reputation?
A: What has bothered me for years is that the printed press refers to the public accounting industry…We believe we are a profession, but the press does not…Maybe they are right, maybe we are not a profession, maybe we are an industry…We have lost the glory, and the truth is that the high-sounding nomenclature, “the trusted professional,” may not apply any further.

Q: In light of your 1994 CPA Journal article “Public Accounting: No Longer a Profession?,” in which you suggested that public accounting was at risk of overcommercializing, transforming itself into a business or industry rather than a profession, is it fair to say that the profession lost its way? If so, when and why did this occur?
A: Perhaps when I wrote that article, “Public Accounting: No Longer a Profession?,” I began to feel vibrations. I began to sense that the major accounting firms were pushing all kinds of services…To be very explicit, the major firms were peddling illegal tax shelters* with no economic justification. They should have known that these tax shelters were illegal. The U.S. Treasury Department knew they were illegal…

The main reason these firms marketed many of these tax shelters was to create “value billing.” Typically, accountants were trained over the years to bill on an hourly basis, and hourly rates have increased over the years…But they were not satisfied with hourly rates and so they charged fees in the millions based on the false thesis that we were saving the clients many, many millions by these tax procedures, and the motivation, obviously, was to bring in more revenue to the firms...

I think the major reason for the dilution of our reputation was the lack of good auditing by the major firms in connection with their public companies, and the logical question is, “Was there a reason for the dilution of strict auditing standards?” I believe that the current system pertaining to the audit of public companies must be corrected.

There is no secret that the argument has been made for the rotation of audit firms. It’s interesting that since the Securities Acts were enacted in 1933…certain of the large public companies have always had the same audit firm…Such a long relationship has obvious failings. We know for a fact that in the case of many of the public companies, the financial executives came from the very firm that audited the public company. The fact is that the financial executives are so familiar with the audit procedures to be conducted by the independent accountants that they could anticipate and do anticipate the nature of the audit.

In fact, it has been stated that these public accounting firms almost have a proprietary interest in maintaining their relationship with their clients…There’s a great benefit to bringing in new auditors. The argument that has been given over the years against rotation is that it will be too expensive for public companies. When you consider the waste of corporate funds in Enron, WorldCom, Adelphia and the rest of them, the argument that we don’t want to increase audit costs is so specious as to be absurd.

Q: It has been suggested that the rise in technology in the mid-’80s helped lead to the reduction in audit fees in exchange for more lucrative nonaudit service contracts, such as computer consulting—a phenomenon known as “loss leaders.” Do you believe there is any merit to this suggestion?
A: Absolutely not. I never thought that auditing was a loss leader. In my opinion, auditing is very profitable…

The knowledge that certain services interfere with the highest level of auditing goes back dozens of years. There was an SEC Chairman by the name of Manuel Cohen and in an address to the American Institute of CPAs possibly 25 years ago, he said to the audit community, “You should know that we object to certain services.”…And in 1978, the chairman of the SEC, Harrison Williams, promoted Accounting Series Releases 250 and 264 and what they said was that the public company registered with the SEC had to state in their proxy statement the percentage of audit fees for the performance of the audit and the percentage of fees paid to the independent accountant for nonaudit services…In 1981, Harrison Williams was replaced by Mr. John Shad…and he disagreed with Mr. Williams, his predecessor, and ASR 250 and 264 were both rescinded...

The NYSSCPA was the first state society, the first organization in the country, to have in process a quality review procedure. It was known as the quality review task force. As NYSSCPA president, I appointed Emanuel Saxe as chairman of the task force and I appointed Max Block, who later became editor of The CPA Journal, and Warren Cutting, who later became president of the NYSSCPA. It was a very eminent board who conducted these quality reviews…But I have long criticized the current peer review process…

The current peer review system is a comedy because the firm to be reviewed picks their own reviewer. How can you have an independent review if you pick the peer reviewer and then every three years you pick the same reviewer? If you ask me if there could be a cozy relationship between the peer reviewer and the firm to be reviewed, the answer is of course. You are not going to pick somebody that is going to tear you apart.

Q: Where do you see the profession as it stands now? Do you believe Sarbanes-Oxley, and in particular the creation of the PCAOB, was the correct response to helping reform corporate America and mitigating financial fraud and abuse? Similarly, will the legislation help mitigate conflicts of interest and ensure the integrity of the CPA profession?
A: That’s the $64,000 question. I hope so. The problem has always been one of politics…To put it bluntly, the SEC is a political organization…(Former SEC Chairman) Arthur Levitt was under such huge pressure in the year 2000, mainly from the Congress of the U.S. Members of the Senate, members of the House incessantly wrote letters to Levitt criticizing his inquiries and many of these letters ended with a not so polite hint that perhaps they would consider the budget of the SEC…

So the short answer to your question about the new board is that I’m hopeful, and I believe the investing public is hopeful, that it will improve the integrity… There has been a diminution of the integrity and when you dilute the integrity, you dilute the independence and the objectivity of the independent accountant.

Q: Do you believe the SEC has taken on a more prominent role in recent years and has the resources—financially and personnelwise—to carry out its responsibilities?
A: The answer is not yes or no. The mood and action of the SEC depends almost completely on the chairman…Arthur Levitt was probably the supreme activist (chairman). (Former SEC Chairman) Harvey Pitt was an unusual individual and it is almost impossible to describe Pitt. Of course, the new SEC chairman is a man who has been close to Wall Street for many years.

Q: Do you believe state boards of accountancy, in particular New York’s, have the ability to help protect the public from accounting misconduct while also ensuring that the needs, interests and realities of the CPA profession are adequately addressed by state governments? Should the New York State Board for Public Accountancy be given broader enforcement authority, along with budget and staff, as the Society has proposed?
A: I am a former chairman of the state board. You have 54 state boards…those state boards are all different. They are different in size, different in authority, they are different in funding, and they are different in budget…Interestingly, with the exception of the New York state board, I believe that the members of all of the other state boards are appointed by the governor. The members of the New York state board are not appointed by the governor. They are appointed by the Board of Regents. The Board of Regents in New York is a very interesting and unique organization…The Board of Regents in New York has tremendous power…The Board of Regents is not exactly a group of disinterested individuals…When you talk about the New York state board, you must also talk about the State Education Department, the staff of the State Education Department, and the Board of Regents itself.

Q: What is your opinion of proposed accounting reform legislation in New York state? Are you concerned about a “trickle-down” effect, whereby aspects of Sarbanes-Oxley, which concerns public companies and the firms that audit them, would be applied to nonpublic companies and their auditors?
A: If there is an attempt to extend Sarbanes-Oxley to nonpublic companies, to private companies and to accountants who do not audit public companies, it will be a field day for lawyers. Lawyers are always looking for causes and an obvious cause will be “Sarbanes-Oxley doesn’t pertain to us.”

I find that trickle-down is verbiage. I believe in facts. So what you are saying leads me to advance my feeling about the relationship of the current scene to the vast majority of practicing CPAs…It has always been my feeling that the second-level and local accounting firms can without difficulty engage in the audit of public companies. I’m not saying that a local firm could audit General Electric or General Motors, but I speak from experience—my small firm, at one time, audited several public companies…We prepared all the necessary forms for filing with the SEC, we never had any difficulty. We were never sued in connection with any of the work we did for public companies. For one reason or another, we stopped auditing public companies.

In my opinion, there are second-level firms who have the ability and they should pursue audits of public companies, and there should be a general redistribution of firms that audit public companies. I know the names of well-qualified second-level firms who could easily audit public companies.

One of the reasons that local firms and second-level firms were forced to step back was because underwriters and representatives of Wall Street insisted over the years that: “We need a Big Eight firm, we need a Big Six firm, we need a Big Five firm, we need a Big Four firm in the prospectus because it will sell stock.” It seems to me at the present time, the name of a Big Four firm may not exactly be a benefit perhaps.

So I know from actual experience that there have been cases where underwriters advised the company that was considering selling stocks or bonds that they (use) one of the major firms. Of course, a subterranean reason was the deep-pocket theory, namely that if there is a problem at a future date and a possible lawsuit, they would rather sue a company with large insurance coverage rather than a smaller firm. But that has been, in my opinion, to the detriment of the accounting profession, in general. Medium-sized firms can audit many public companies that are presently audited by the major firms.

Q: If there were to be state accounting laws that did reflect Sarbanes-Oxley, would that hurt the small- to medium-sized firm?
A: No, I don’t think you could do it by law, whether it be federal law or state law. I don’t see how you can legislate the naming of the independent auditor. What Sarbanes-Oxley and the PCAOB could do is to consider the question of rotation. By virtue of rotation, they might be looking for firms with the capability of conducting an audit, other than the major firms. But I don’t think any federal legislation or state legislation could stipulate that it must be a firm of this size or that size. It could never happen.

I think the state societies, all 54 of them, should make it known that the audit of public companies is not an exclusive right of the major firms. Furthermore, that diversity of firms to audit public companies would be in the public interest and in the profession’s interest.
Of course, if a particular state society were to pursue that consideration, they would receive immediate and powerful response from the major firms. Nobody likes to be told that “We think there should be more competition.”

Q: As a former vice president and member of the American Institute of CPAs’ Council, do you believe the Institute is out of touch with its grassroots membership or that it represents their interests?
A: So much has been written recently, and so much has been stated about the AICPA and the management of the AICPA, that I don’t want to be redundant…I would be saying nothing that would be novel or new.

Q: Do you believe that the profession needs to return to the era when the audit by and large defined, set apart and distinguished the purity of the profession? If so, is it reasonable to think that the profession can return to that point given the current marketplace—economics, the boom in technology, complex business structures, the many other services CPAs have come to provide?
A: The rules and regulations pertaining to practice by independent accountants before the SEC are set forth very clearly in a document known as Regulation S-X, which is very explicit…Regulation S-X, which is the rule of practice promulgated by the SEC, says the independent accountant should be a firm of certified public accountants, recognized, and I’m paraphrasing, by a state board.

There was a time when I was a young accountant that every firm, including the major firms, proudly exhibited on their letterhead “Certified Public Accountants.” As the move toward expansion of services occurred, different titles appeared in some occasions, such as “Accountants and Auditors,” “Accountants and Consultants.” And then finally, I can’t recall exactly how many years ago, the major firms omitted any title. They felt they didn’t need a title, they had the name. I think the display of the title “Certified Public Accountant” was a very proud description, as well as a technical description.

I am almost certain that New York state law states that all partners of a firm of certified public accountants must be, in fact, certified public accountants. So now I connect that with Regulation S-X, which says that the independent accountant shall be a firm recognized by a state agency as a firm of certified public accountants. Now I say, was there more prestige at a time when the title “Certified Public Accountant” was proudly displayed? I think so.

So what I’m leading up to is I believe the great statesmen of the New York State Society…Charles Waldo Haskins, Arthur B. Foye, Thomas G. Higgins, Jacob S. Seidman, and Maurice Austin (all former NYSSCPA presidents) were giants of the profession.…The point I’m trying to make is that we did have giants and these giants were men of great technical skill.

It’s obvious that a new breed manages the major accounting firms…But I don’t know if they reached their pinnacles because of their technical skill or “business skill.” If I were to think aloud, perhaps some of the current problems, perhaps some of the embarrassing events of the past few years, were due to the change in the kind of leadership that you have in the past few years, especially with respect to the leadership of the major firms.