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# Federal regulations require that corporations use separate

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Director
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Federal regulations require that corporations use separate [#permalink]

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16 Aug 2008, 07:10
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Federal regulations require that corporations use separate accounting firms for audit and non-audit services. This presents difficulties for many multi-national companies because there are only four large international accounting firms based in the United States. An outspoken group of CEOs has suggested breaking up the “Big Four” firms into smaller operations, so that corporations will have more options for their accounting needs.

Which of the following stipulations would be most helpful in assuring the success of the CEOs’ plan to provide more variety in accounting services by breaking up the Big Four firms?

(A) The firms should maintain their multi-national contacts.
(B) CEOs for the new companies should be chosen from inside each firm.
(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.
(D) The new firms should maintain their internal audit procedures.
(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.
[Reveal] Spoiler: OA
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Re: CR -- Accounting Firms [#permalink]

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01 Dec 2010, 10:16
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zoinnk wrote:
Federal regulations require that corporations use separate accounting firms for audit and non-audit services. This presents difficulties for many multi-national companies because there are only four large international accounting firms based in the United States. An outspoken group of CEOs has suggested breaking up the “Big Four” firms into smaller operations, so that corporations will have more options for their accounting needs.

Which of the following stipulations would be most helpful in assuring the success of the CEOs’ plan to provide more variety in accounting services by breaking up the Big Four firms?

(A) The firms should maintain their multi-national contacts.
(B) CEOs for the new companies should be chosen from inside each firm.
(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.
(D) The new firms should maintain their internal audit procedures.
(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.

Read the question stem: Which of the following stipulations would be most helpful in assuring the success of the CEOs’ plan?
A Plan/Strategy question. We need to support/strengthen/assure the success of the plan.
What is the plan? - To provide more variety in accounting services, break up the Big Four firms.
We are looking for more variety.
I think most of you are fine with A, B and D not being the answer.
C says that the corporation should keep the same firm for audit but choose a new firm for non-audit. It has no relevance to the plan. The plan is to create variety. How the corporations will choose to use that variety is absolutely up to them.

Now, why is E the answer?
The Big Four firms should divide so that the audit and non-audit sections are not broken up.
This says that if one firm A, breaks up into two firms B and C, both B and C should have audit and non-audit sections. You should not split the audit and non audit sections. Now, if this happens, the corporations get even more variety.
Today corporations have 4 options for audit functions and 3 (after one firm is chosen) for non- audit functions.
Lets say if each of the 4 firms breaks into 2 firms, with audit going to one firm and non audit going to the other firm then options for audit services - 4, options for non audit services - 4
But if each of the 4 firms breaks into 2 such that each firm has both audit n non audit functions, then options for audit functions - 8, options for non audit functions - 7 (after a firm is chosen for audit).
Hence (E) assures the success of the plan of creating variety.
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Get started with Veritas Prep GMAT On Demand for $199 Veritas Prep Reviews Manager Joined: 12 May 2006 Posts: 185 Followers: 1 Kudos [?]: 43 [3] , given: 0 Re: CR -- Accounting Firms [#permalink] ### Show Tags 16 Aug 2008, 08:57 3 This post received KUDOS Really tough one as none of the answer looks good. Lets discuss it: Conclusion: After splitting the companies should have more accounting options for their audit and non-audit services. (A) The firms should maintain their multi-national contacts. Irrelevant and this will by no mean provide more options. (B) CEOs for the new companies should be chosen from inside each firm. Irrelevant as it does not matter where the CEOs come from. (C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs. This limits the options with the companies. (D) The new firms should maintain their internal audit procedures. Irrelevant (E) The Big Four firms should divide so that the audit and non-audit sections are not broken up. This can be the answer IMO as by doing this each small accounting firm will have the capability of providing both audit and non audit service and hence will give more options to the companies. Director Joined: 12 Jul 2008 Posts: 518 Schools: Wharton Followers: 22 Kudos [?]: 143 [2] , given: 0 Re: CR -- Accounting Firms [#permalink] ### Show Tags 16 Aug 2008, 14:46 2 This post received KUDOS OA/OE is below Anyone else think that the OA/OE is just plain wrong? The OE seems to say that E imples that the Big Four firms will break into separate auditing and non-auditing companies. I posted this to make sure I wasn't going crazy... Situation: A group of CEOs has proposed that the Big Four accounting firms be broken into smaller firms so that corporations will have more options for audit and non-audit services. Reasoning: Which added provision will help assure the success of the CEOs’ plan? The CEOs suggest breaking up the Big Four firms so that corporations can have more choices for their audit and non-audit services, which must, by federal regulation, not be performed by the same firm. Anything that further insures that audit and non-audit services will be kept separate in breaking up the firms will also assure that CEOs will get the added variety they are seeking. 1. This option does not directly impact the question of variety. 2. The origin of new CEOs does not deal with variety or with the separating of audit and non-audit services. 3. This provision specifies what decisions corporations may be allowed to make, but it does not insure variety. 4. This option does not directly impact the question of variety. 5. If each Big Four firm breaks into two – one performing audit services, and one performing non-audit services – then the field will have gained the variety sought by CEOs. The correct answer is E. Manager Joined: 15 Jul 2008 Posts: 55 Followers: 2 Kudos [?]: 29 [1] , given: 2 Re: CR -- Accounting Firms [#permalink] ### Show Tags 16 Aug 2008, 20:57 1 This post received KUDOS grepro wrote: Really tough one as none of the answer looks good. Lets discuss it: Conclusion: After splitting the companies should have more accounting options for their audit and non-audit services. (A) The firms should maintain their multi-national contacts. Irrelevant and this will by no mean provide more options. (B) CEOs for the new companies should be chosen from inside each firm. Irrelevant as it does not matter where the CEOs come from. (C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs. This limits the options with the companies. (D) The new firms should maintain their internal audit procedures. Irrelevant (E) The Big Four firms should divide so that the audit and non-audit sections are not broken up. This can be the answer IMO as by doing this each small accounting firm will have the capability of providing both audit and non audit service and hence will give more options to the companies. Good explanation, thanks lot!!! Manager Joined: 24 Aug 2010 Posts: 193 Location: Finland Schools: Admitted: IESE($$),HEC, RSM,Esade WE 1: 3.5 years international Followers: 6 Kudos [?]: 84 [1] , given: 18 Re: CR -- Accounting Firms [#permalink] ### Show Tags 06 Oct 2010, 04:50 1 This post received KUDOS zoinnk wrote: Federal regulations require that corporations use separate accounting firms for audit and non-audit services. This presents difficulties for many multi-national companies because there are only four large international accounting firms based in the United States. An outspoken group of CEOs has suggested breaking up the “Big Four” firms into smaller operations, so that corporations will have more options for their accounting needs. Which of the following stipulations would be most helpful in assuring the success of the CEOs’ plan to provide more variety in accounting services by breaking up the Big Four firms? (A) The firms should maintain their multi-national contacts. (B) CEOs for the new companies should be chosen from inside each firm. (C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs. (D) The new firms should maintain their internal audit procedures. (E) The Big Four firms should divide so that the audit and non-audit sections are not broken up. E. Conclusion: Big four firms into smaller options so that corporations will have more options for their accounting needs. Now lets look for a hole in this argument. The weakness in this argument is that the CEO thinks that when the BIG Four are broken up, there will be more number of accounting firms providin auditing and non-auditing needs equally. But how can we be sure that there will be equal number of audit and non-audit sections. To close this gap, we choose E because it eliminates the possibility of not having equal number of auditing and non-auditing firms. Intern Joined: 29 Jan 2011 Posts: 17 Location: India Concentration: Finance, Marketing Schools: HKUST, ISB GMAT Date: 11-20-2011 GPA: 3.6 WE: Business Development (Other) Followers: 0 Kudos [?]: 10 [1] , given: 7 Re: CR -- Accounting Firms [#permalink] ### Show Tags 17 Oct 2011, 20:32 1 This post received KUDOS The CEO is suggesting a plan to address the problem of options not available for accounting needs and not the services such as audit and non-audit. Option C – they may retain the same firm and hire new firm for non-audit services, but this does not address the problem of availability of options Option E - The Big Four firms should divide so that the audit and non-audit sections are not broken up – this does address the problem, more options are available irrespective of the services they render and thus helps assuring the success of the CEOs’ plan Option E Veritas Prep GMAT Instructor Joined: 16 Oct 2010 Posts: 6666 Location: Pune, India Followers: 1827 Kudos [?]: 11094 [1] , given: 218 Re: Federal regulations require that corporations use separate [#permalink] ### Show Tags 10 Oct 2013, 00:04 1 This post received KUDOS Expert's post gamelord wrote: Quote: Federal regulations require that corporations use separate accounting firms for audit and non-audit services. This presents difficulties for many multi-national companies because there are only four large international accounting firms based in the United States. An outspoken group of CEOs has suggested breaking up the “Big Four” firms into smaller operations, so that corporations will have more options for their accounting needs. Which of the following stipulations would be most helpful in assuring the success of the CEOs’ plan to provide more variety in accounting services by breaking up the Big Four firms? (A) The firms should maintain their multi-national contacts. (B) CEOs for the new companies should be chosen from inside each firm. (C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs. (D) The new firms should maintain their internal audit procedures. (E) The Big Four firms should divide so that the audit and non-audit sections are not broken up. I can't agree with the OE & OA that E is the answer! Premises: Corps are REQUIRED use SEPERATE accounting firms for Audit and Non-audit services. There are only Big four -> limited choices -> Suggest: more firms to choose Questions: assure SUCCESS of breaking up Big 4 Assumption: more choice to choose SEPERATE accounting firms (E) "The Big Four firms should divide so that the audit and non-audit sections are NOT broken up" -> this's meaningless to comply with regulation that require Seperate accounting firms for 2 services -> E can't be the correct answer When the firm breaks up into two, the two parts are treated as 2 different firms (only then can there be any additional options). There is no point of breaking up if the two firms are still considered one. The reason (E) is the answer is this: (E) The Big Four firms should divide so that the audit and non-audit sections are not broken up. This says that if one firm A, breaks up into two firms B and C (considered two different firms now), both B and C should have audit and non-audit sections. You should not split the audit and non audit sections. Now, if this happens, the corporations get even more variety. Today corporations have 4 options for audit functions and 3 (after one firm is chosen) for non- audit functions. Lets say if each of the 4 firms breaks into 2 firms, with audit going to one firm and non audit going to the other firm then options for audit services - 4, options for non audit services - 4 (very little increase in options) But if each of the 4 firms breaks into 2 such that each firm has both audit n non audit functions, then options for audit functions - 8, options for non audit functions - 7 (after a firm is chosen for audit). Hence (E) assures the success of the plan of creating variety. _________________ Karishma Veritas Prep | GMAT Instructor My Blog Get started with Veritas Prep GMAT On Demand for$199

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Re: CR -- Accounting Firms [#permalink]

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16 Aug 2008, 09:30
lets think it further, what do we mean by "success" of CEOs plan ... OR why did they suggest the plan anyway... why do we need more options for companies selecting an accounting firm...

one reason could be.. before federal regulation companies had only one accounting firm taking care of both audit and non audit work... now for several reasons (confidentialty may be) ..companies dont want to change the accounting firms but still they have to follow the federal regulation.... SO CEO suggested that divide the accounting firm into two .. keep the audit work with the old firm and give the non audit work to the new one ( same people, new name ) ....

So both the federal regulations and the other objective (not to change the accouting firm) are met.

C IMO...
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Re: CR -- Accounting Firms [#permalink]

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16 Aug 2008, 09:33
grepro wrote:
Really tough one as none of the answer looks good. Lets discuss it:

Conclusion: After splitting the companies should have more accounting options for their audit and non-audit services.

(A) The firms should maintain their multi-national contacts.
Irrelevant and this will by no mean provide more options.
(B) CEOs for the new companies should be chosen from inside each firm.
Irrelevant as it does not matter where the CEOs come from.
(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.
This limits the options with the companies.
(D) The new firms should maintain their internal audit procedures.
Irrelevant
(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.
This can be the answer IMO as by doing this each small accounting firm will have the capability of providing both audit and non audit service and hence will give more options to the companies.

I chose C for this one because it allows the new firms to immediately get business, helping them get off the ground.

I don't disagree with you choice for E.

I read E as "The Big Four audit firms will keep their audit and non-audit business and spin off other parts of their business." My reading of that option meant that option E contradicts the first premise in the stimulus.

This question is from a gmatclub verbal test. I will post OA and OE after a few other responses.
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Re: CR -- Accounting Firms [#permalink]

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16 Aug 2008, 09:37
Initially i also read E the way you did however on rethinking it can also mean that a big firm may have several small sections consisting of audit and non audit teams (may be i went too far....)
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Re: CR -- Accounting Firms [#permalink]

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16 Aug 2008, 13:32
IMO E.

Federal regulations require separate accounting firms for audit and non-audit services but this presents difficulties for big firms. If big firms divide into small part, they look like separate units though their processes will be same.
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 08:55
shekharvineet wrote:
zoinnk wrote:
Federal regulations require that corporations use separate accounting firms for audit and non-audit services. This presents difficulties for many multi-national companies because there are only four large international accounting firms based in the United States. An outspoken group of CEOs has suggested breaking up the “Big Four” firms into smaller operations, so that corporations will have more options for their accounting needs.

Which of the following stipulations would be most helpful in assuring the success of the CEOs’ plan to provide more variety in accounting services by breaking up the Big Four firms?

(A) The firms should maintain their multi-national contacts.
(B) CEOs for the new companies should be chosen from inside each firm.
(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.
(D) The new firms should maintain their internal audit procedures.
(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.

E.
Conclusion: Big four firms into smaller options so that corporations will have more options for their accounting needs.
Now lets look for a hole in this argument. The weakness in this argument is that the CEO thinks that when the BIG Four are broken up, there will be more number of accounting firms providin auditing and non-auditing needs equally. But how can we be sure that there will be equal number of audit and non-audit sections. To close this gap, we choose E because it eliminates the possibility of not having equal number of auditing and non-auditing firms.

Well explained.
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 10:03
IMO E...

I got to get this one right.... (coz i used to work for a Big Four Accounting Firm... )
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 10:43
grepro wrote:
Really tough one as none of the answer looks good. Lets discuss it:

Conclusion: After splitting the companies should have more accounting options for their audit and non-audit services.

(A) The firms should maintain their multi-national contacts.
Irrelevant and this will by no mean provide more options.
(B) CEOs for the new companies should be chosen from inside each firm.
Irrelevant as it does not matter where the CEOs come from.
(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.
This limits the options with the companies.
(D) The new firms should maintain their internal audit procedures.
Irrelevant
(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.
This can be the answer IMO as by doing this each small accounting firm will have the capability of providing both audit and non audit service and hence will give more options to the companies.

your explanation does not fit well with the option.What your explanation says has already been suggested by the group.The question stem asks for an assumption.
This is an assumption question.
If the audit section is broken down into 3 different sections A1,A2,A3.
How does it matter to the client if it hires A1,A2, or A3 to do the auditing
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 10:51
What does option E mean. does it mean that the auditing section is broken down into 3 autonomous sections which have absolutely no interdependency
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 12:36
mundasingh123 wrote:
your explanation does not fit well with the option.What your explanation says has already been suggested by the group.The question stem asks for an assumption.
This is an assumption question.
If the audit section is broken down into 3 different sections A1,A2,A3.
How does it matter to the client if it hires A1,A2, or A3 to do the auditing

This is not an assumption question. This is more of a "strengthen the conclusion" question.
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 13:36
its E
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 21:45
Great Question. +1 to zoinnk for posting the question.
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Re: CR -- Accounting Firms [#permalink]

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06 Oct 2010, 23:09
This is a +1 question.Couldn't find any relavent answer but chose E based on poe.
C-almost a restatement of premise.
D-not about maintaining internal audit procedures.
E is left.
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Re: CR -- Accounting Firms   [#permalink] 06 Oct 2010, 23:09

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