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.