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# Federal regulations require that corporations use separate

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Intern
Joined: 24 May 2011
Posts: 25
Concentration: Finance, Entrepreneurship
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Re: CR -- Accounting Firms [#permalink]

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10 Sep 2011, 01:32
VeritasPrepKarishma 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.

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.

Thank you for your explanation. I was confused with the word "broken up" in choice E. Now it is clear for me.
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Joined: 09 Jun 2011
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Re: CR -- Accounting Firms [#permalink]

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10 Sep 2011, 06:11
VeritasPrepKarishma 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.

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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Re: Federal regulations require that corporations use separate [#permalink]

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16 Nov 2011, 22:55
E.

Above reasons pretty much cover it.
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Re: Federal regulations require that corporations use separate [#permalink]

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10 Jan 2012, 11:11
+1 E
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Re: Federal regulations require that corporations use separate [#permalink]

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01 Apr 2012, 10:37
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
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Re: Federal regulations require that corporations use separate [#permalink]

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10 Oct 2012, 09:49
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?

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 !
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07 Apr 2014, 10:06
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.
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Re: Federal regulations require that corporations use separate a [#permalink]

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08 Apr 2014, 14:13

In particular the title of the post must be the first sentence of the question itself

Thanks for collaboration

Regards
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Re: Federal regulations require that corporations use separate a [#permalink]

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23 Apr 2014, 17:08
Criterion for success of CEO's plan is "that corporations will have more options for their accounting needs."

I am not able to understand how E is achieving this.

E) The Big Four firms should divide so that the audit and non-audit sections are not broken up.

If a firm divides it operation then audit and non audit can go under any operations.
Federal regulations require that corporations use separate accounting firms for audit and non-audit services.
Even if these 4 firms do some realignment in their operations how it will satisfy the requirement of existing corporation .. existing corporation will have to seek either of the services with other firm because FG doesnt allow them to seek both under single firm.
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Re: Federal regulations require that corporations use separate a [#permalink]

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26 Apr 2014, 08:01
Here Broken Up is to be deduced like this

BCG Splits into BCG-1 And BCG-2...both should have A and NA sections..You should not split up the sections..i.e just 1 section in each firm..
I would not care about the wording here..its plain bad and Non GMAT
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Re: Federal regulations require that corporations use separate a [#permalink]

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30 May 2014, 08:26
unknown5386 wrote:
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?

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.

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.

Any body explains for me how we can choose the correct answer?

I honestly still don't get the logic on E. Could some please illustrate with an example?

Btw, BCG is a consulting firm, were are talking about accounting firms here, such as E&Y, Deloitte and all those. Thought it would be good to know since you'll need to tell these differences once you are recruiting in HBS

Cheers!
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Federal regulations require that corporations use separate a [#permalink]

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30 May 2014, 12:34
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.

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Re: Federal regulations require that corporations use separate [#permalink]

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31 Oct 2015, 05:34
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:

[Note: We will need to assume that the number of smaller firms the Big 4 splits into, in each case will be same, to make a fair comparison]

(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.
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Re: Federal regulations require that corporations use separate [#permalink]

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26 May 2017, 13:31
Merged topics. Please, search before posting questions!
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Re: Federal regulations require that corporations use separate   [#permalink] 26 May 2017, 13:31

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