Federal regulations require that corporations use separate accounting

Question

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 for non-audit services corporations will have significantly more options than they have now.
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. Each of the Big Four firms should not be broken into an audit and a non-audit section.

KarishmaB · Accepted Answer

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.

KarishmaB · 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.

grepro · Answer

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.

durgesh79 · Answer

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...

zonk · Answer

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.

priyankurml · Answer

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.

zonk · Answer

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.

shekharvineet · Answer

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.

vdbhamare · Answer

i think its E because

If audit & non audit functions are separated then 2 copany represent same firm for different jobs hence no of options remains same

thevenus · Answer

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?

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?

I totally agree with the experts here but my take is a little different for the same correct AC.

(A) The firms should maintain their multi-national contacts.
 who cares, rather they are supposed to to get more business?the primary demand is to have separate accounting firms for audit and non-audit services,which is no where mentioned here-incorrect. 
(B) CEOs for the new companies should be chosen from inside each firm.
 CEOs can be chosen anyway, but where is the primary need which can fulfill the federal regulations?-incorrect. 
(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.
 is this a mandatory law?even if this is done or maybe not, doesn't give much to the primary objective or maybe it gives but , its not the strongest answer to choose. 
(D) The new firms should maintain their internal audit procedures.
 they should, if they were good enough to be presented to the federal law.but where is the federal demand getting fulfilled?-incorrect 
(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.
 Correct- what was the reason behind the breaking up of larger firms into smaller ones? so that they can serve audit and non audit services both through them.Hence they should not be broken up(this is the trickiest part) if broken they can be either serving auditing or non-auditing, which will not serve the purpose eventually.

Lets assume 4 major auditing firms A B C & D are doing both auditing and non auditing work.
Now the Federal law wants the Corporations to go for auditing in one and non-auditing for another company.
If the corporations chose A for auditing then it has to choose other than A for non-auditing and this will be a problem for all the companies because there are too many corporations. 
Now to solve this CEOs want to breakup large Accounting firms into smaller one such as;
 A -  a,b,c,d,e,f  for auditing and  g,h,i,j k,  for non-auditing
 B - 1,2,3,4,5  FOR auditing and  6,7,8,9,10  for non-auditing
similarly C &D will break into small firms.

Now, the corporations can have a lot more options to choose from,such as, A corporation can choose "a" for auditing and "9 " for non-auditing.OR within A itself , the corporation can choose a & 4 for auditing and non-auditing services respectively.

Hope this helps !

souvik101990 · Answer

Conclusion: Big four firms broken into smaller companies so that companies will have more options for accounting and auditing.
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 providing 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.

prasi55 · Answer

If the big four firms divide such that their audit and non-audit sections are broken up, then you cannot assure that an equal number of audit and non-audit sections will be created.

Why? For simplicity, let's assume that there are just two big firms. Suppose Firm 1 decided to retain its audit section and split its non-audit section to create two new firms, each providing non-audit services. Suppose Firm 2 did the same. Now there would be two audit firms and four non-audit firms.

Why is this a problem? For simplicity, suppose some corporations require both audit and non-audit services. Only two corporations can benefit from this new arrangement, as they each have to pick one audit firm (2c1ways) and one non-audit firm (4c2). There are more choices for these two corporations than before the division, of course. But not more than two such corporations can use the services--the same as before. Even if the two firms chose to split into two audit firms and six non-audit firms, the two corporations would have 2c1 options for audits and 6c2 options for non-audit services. Such a split would favor corporations that require only non-audit services and disadvantage those that require audits.

What if a stipulation forced the firms to split while ensuring that the audit and non-audit sections are not broken up? Firm 1 cannot split only the non-audit section into two. Firm 2 too cannot. Suppose both the firms followed this stipulation and split into four firms--two audit and two non-audit--each.

Now more than two corporations can benefit, as there are four audit and four non-audit firms. And even if only the same two corporations chose to benefit, they have more options: 4c2 for the audit and 4c2 for the non-audit.

Math experts can correct the figures above, if the numbers are incorrect. But the point is that, assuming many corporations might require both audit and non-audit services (not a necessary assumption), the stipulation in E serves well to ensure that the breaking up doesn't skew the ratio of audit to non-audit firms.

--Prasad

iamnvm · Answer

Like most people were, I was confused between options C and E, and even ended up picking C, but here's why I think E is indeed right:

(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.
 If there are 'n' smaller firms now, each corporation has an option of choosing from 'n-1' accounting firms. Number of choices = n-1

(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.
 Each corporation has a choice of choosing any of the 'n' smaller firms. Number of choices = n

As n>n-1, E is the winner as it supports the CEOs' plan of having a greater variety of options.

JakeMulholland · Answer

Hello, E as an answer choice doesnt seem right. Please elaborate as to why this answer would assure more options/variety.

kapurajay23 · Answer

GMATNinja

TarunKumar1234 · Answer

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?

CEOs of MNCs wants to get more options, so they are planning to break 4 BIG firms for auditing purpose.

(A) The firms should maintain their multi-national contacts.-> It doesn't give more options to CEOs.
(B) CEOs for the new companies should be chosen from inside each firm.-> How it is going to help to get more options in Auditing company.
(C) Corporations must keep the same firm for their audit services, but should choose a new firm for non-audit needs.-> Still for Audit, CEOs have 4 choices then for non audit needs 1 less choice. It doesn't help.
(D) The new firms should maintain their internal audit procedures.-> How it is going to help to get more options in Auditing company.
(E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.-> Okay. If a BIG 4 get divided in multiple firms having audit and non-audit sections not broken up. then for non-audit purpose, CEOs will have more choices. Correct.

So, I think E.

Vishalcv · Answer

E might seem like the best of the lot, but it is very very poorly structured.  "The Big Four firms should divide so that the audit and non-audit sections are not broken up."  - 'audit and non-audit sections are not broken up' is a very lousy phrase. GMAT includes way better sentences in their options. A better version of E would be " Each of the new firms provide audit as well as non-audit services"

owen1ee · Answer

The E option in the context doesn't match the E in the discussion.

Vedang02 · Answer

Can someone post an updated explanation as the Option E has been modified

Federal regulations require that corporations use separate accounting

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Federal regulations require that corporations use separate accounting

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