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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 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.
[Reveal] Spoiler: OA

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New post 16 Sep 2014, 02:25
Official Solution:


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.


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 still have 4 options for audit and 4 for non-audit. Hence there would not be effectively any expansion in the number of choices.

Answer: E
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Re: V05-17 [#permalink]

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New post 23 Sep 2014, 17:29
Although I marked the answer correctly, can someone please explain in greater detail why 'E' is the right option...I selected 'E' by poe..

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New post 01 Nov 2014, 08:12
My take on this.

If the non-auditing and audit sections are broken up then there might be a chance that audit and non-audit section can get combined then again they could have instead of Four big firms, 10 small firms(with both audit and non-audit) but Corporates can't separate them out.

However, in this question POE is much better because other options are not relevant.

p2bhokie wrote:
Although I marked the answer correctly, can someone please explain in greater detail why 'E' is the right option...I selected 'E' by poe..

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Re: V05-17 [#permalink]

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New post 24 Nov 2015, 17:54
mathurvarun wrote:
My take on this.

If the non-auditing and audit sections are broken up then there might be a chance that audit and non-audit section can get combined then again they could have instead of Four big firms, 10 small firms(with both audit and non-audit) but Corporates can't separate them out.

However, in this question POE is much better because other options are not relevant.

p2bhokie wrote:
Although I marked the answer correctly, can someone please explain in greater detail why 'E' is the right option...I selected 'E' by poe..


wouldn't the presence of 10 firms instead of 4 serve exactly the purpose stated in the passage?

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Re: V05-17 [#permalink]

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New post 30 Dec 2015, 03:08
I've selected answer E eliminating the other answers.. However I am not fully convinced by answer E, and I think the explanation isn't 100% coherent.. :?

:arrow: the answer says that the Big Four firms should divide so that the audit and non-audit sections are not broken up..
:arrow: While the explanation, from my understanding, says basically that it the companies break up so that audit services and non-audit services are separated, the field will have gained the variety sought by CEOs..

:?: isn't it the opposite of what stated in answer choice E :?:

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New post 13 Feb 2016, 09:37
Noda86 wrote:
I've selected answer E eliminating the other answers.. However I am not fully convinced by answer E, and I think the explanation isn't 100% coherent.. :?

:arrow: the answer says that the Big Four firms should divide so that the audit and non-audit sections are not broken up..
:arrow: While the explanation, from my understanding, says basically that it the companies break up so that audit services and non-audit services are separated, the field will have gained the variety sought by CEOs..

:?: isn't it the opposite of what stated in answer choice E :?:



Hi Noda,

thats also my understanding!! I don't get it - "Big 4 should divide so that the audit and non-audit sections are NOT broken up". Doesn't that mean that they will not be seperated? They will remain together?!

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New post 02 Mar 2016, 13:42
I agree. I am almost certain that the answer choice was incorrectly worded.

I think they meant to say that "The Big Four firms should divide so that the audit and non-audit sections *ARE* broken up."

Please correct this, or provide a better explanation for the answer as it is currently worded.

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New post 01 Apr 2016, 18:38
I think this is a poor-quality question and I don't agree with the explanation. The answer here states "The Big Four firms should divide so that the audit and non-audit sections are not broken up". When really this is the opposite of the right answer according to the solution. I think the "not" is incorrect and should be removed from the answer.

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New post 13 May 2016, 08:01
I think this is a poor-quality question and I don't agree with the explanation. There is an error - it says "sections are NOT broken up".

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Re: V05-17 [#permalink]

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New post 13 May 2016, 14:24
navinc wrote:
I think this is a poor-quality question and I don't agree with the explanation. There is an error - it says "sections are NOT broken up".


kirbygilliam wrote:
I think this is a poor-quality question and I don't agree with the explanation. The answer here states "The Big Four firms should divide so that the audit and non-audit sections are not broken up". When really this is the opposite of the right answer according to the solution. I think the "not" is incorrect and should be removed from the answer.


Made changes in option 5 - in OA and in OE. Please let me know whether the question makes sense now.

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I think this is a poor-quality question and the explanation isn't clear enough, please elaborate. If each of the four firms breaks in two
then 4 firms means 8 firms. Anyway breaking the firm will help in getting more options

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New post 31 May 2016, 09:29
frangiearth wrote:
I think this is a poor-quality question and the explanation isn't clear enough, please elaborate. If each of the four firms breaks in two
then 4 firms means 8 firms. Anyway breaking the firm will help in getting more options


A corporation needs to take up 2 types of services:

A. audit services.
B. non-audit services.

Suppose, before breaking up, the four players (accounting firms) were P1, P2, P3 and P4.

Hence the corporation had 4 choices for carrying out each of A (audit services) and B (non-audit services) : P1, P2, P3 and P4.

Now, suppose the players break up into audit and non-audit sections. P1 breaks into P1a and P1b (the ending letter a denotes an audit firm and b denotes a non-audit firm).

Now the 8 players are P1a, P1b, P2a, P2b, P3a, P3b, P4a and P4b .

Now suppose the corporation wants to carry out audit service. It still has 4 options : P1a, P2a, P3a and P4a.

The same is true for non-audit services as well - the corporation still has 4 options: P1b, P2b, P3b and P4b.

Thus the number of choices does not increase by breaking up the players into audit and non-audit sections.

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I think this the explanation isn't clear enough, please elaborate.

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New post 11 Jun 2016, 09:07
rpriya wrote:
I think this the explanation isn't clear enough, please elaborate.


Please refer to the further explanation provided just above your post : v05-184888.html#p1691300

In case you are not clear even after this explanation, please feel free to write back - we can try to explain in more detail.

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New post 11 Aug 2016, 12:11
I don't agree with the explanation in (E). And no, if we break each firm into 2 parts, we do not have 4 choices as we did earlier. We have 4*3 choices now.

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New post 16 Aug 2016, 11:38
abhirupg07 wrote:
I don't agree with the explanation in (E). And no, if we break each firm into 2 parts, we do not have 4 choices as we did earlier. We have 4*3 choices now.


Could you please explain why you think that there would be 4*3, i.e. 12 choices? Have you gone through the explanations above why there would be just 4 choices in each type of audit? If you have, then exactly where do you disagree?

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Re: V05-17 [#permalink]

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New post 13 Sep 2016, 10:15
Hi, I have read the prior explanations in this forum, but I still don't understand why choice E is the correct answer.

As I understand from the statement,

Situation 1: Before breaking the "Big Four" (A, B, C and D)

If a corporation needs to take two services (audit and non-audit services), then to meet with the new federal regulation, the corporation will have to choose one company among the "Big Four" for the audit services, and a second one among the three remaining companies for the non-audit services. For example, if the corporation choose A for the audit services, then the corporation will only be available to choose among B, C and D for the non-audit services. This give us a total of 12 combinations considering the "Big Four" companies before being broken (This situation considers 4 options for audit services and 3 options for non-audit services).

Situation 2: The "Big Four" companies are broken in A1, A2, B1, B2, C1, C2, D1 and D2 (1: audit services; 2: non-audit services).

In this new situation a company can choose among four options for audit services and among four options for non-audit services.
For example, if the corporation choose A1 for audit services, then the corporation can still choose among four non-audit companies (A2, B2, C2 and D2). Considering this, there are more options than in "Situation 1", because there are 16 possible combinations (4 options for audit services and four options for non-audit services).

Considering these two situations choice E would be incorrect, because even breaking the "Big Four" companies into 2 (one audit and other non-audit services) the options for the companies that require these services have increased from 12 to 16.

Please let me know if I misunderstood the question.

Thanks!

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sayantanc2k wrote:
frangiearth wrote:
I think this is a poor-quality question and the explanation isn't clear enough, please elaborate. If each of the four firms breaks in two
then 4 firms means 8 firms. Anyway breaking the firm will help in getting more options


A corporation needs to take up 2 types of services:

A. audit services.
B. non-audit services.

Suppose, before breaking up, the four players (accounting firms) were P1, P2, P3 and P4.

Hence the corporation had 4 choices for carrying out each of A (audit services) and B (non-audit services) : P1, P2, P3 and P4.

Now, suppose the players break up into audit and non-audit sections. P1 breaks into P1a and P1b (the ending letter a denotes an audit firm and b denotes a non-audit firm).

Now the 8 players are P1a, P1b, P2a, P2b, P3a, P3b, P4a and P4b .

Now suppose the corporation wants to carry out audit service. It still has 4 options : P1a, P2a, P3a and P4a.

The same is true for non-audit services as well - the corporation still has 4 options: P1b, P2b, P3b and P4b.

Thus the number of choices does not increase by breaking up the players into audit and non-audit sections.


Hi,
In (e), according to your explanation, this is my understanding:
As the federal require that the corp use seperate service, before the breaking up, if one corp chose P1 (for audit, for example), then there are only three choices (P2,3,4) left for it for non audit. So it has 3x3=9 possible outcoumes.
After breaking up, if one corp chose P1a for audit, it has four choices for non audit (p1b, p2b, p3b, p4b). So, the outcome is 4x4=16.
Hence, if a firm breaks up to two - audit and non audit, there is still more choices for corporation than before. So that (e) is not valid. Am I right? Please correct and explain where i was wrong. Thank you.

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New post 26 Sep 2016, 19:23
ThangLe wrote:
sayantanc2k wrote:
frangiearth wrote:
I think this is a poor-quality question and the explanation isn't clear enough, please elaborate. If each of the four firms breaks in two
then 4 firms means 8 firms. Anyway breaking the firm will help in getting more options


A corporation needs to take up 2 types of services:

A. audit services.
B. non-audit services.

Suppose, before breaking up, the four players (accounting firms) were P1, P2, P3 and P4.

Hence the corporation had 4 choices for carrying out each of A (audit services) and B (non-audit services) : P1, P2, P3 and P4.

Now, suppose the players break up into audit and non-audit sections. P1 breaks into P1a and P1b (the ending letter a denotes an audit firm and b denotes a non-audit firm).

Now the 8 players are P1a, P1b, P2a, P2b, P3a, P3b, P4a and P4b .

Now suppose the corporation wants to carry out audit service. It still has 4 options : P1a, P2a, P3a and P4a.

The same is true for non-audit services as well - the corporation still has 4 options: P1b, P2b, P3b and P4b.

Thus the number of choices does not increase by breaking up the players into audit and non-audit sections.


Hi,
In (e), according to your explanation, this is my understanding:
As the federal require that the corp use seperate service, before the breaking up, if one corp chose P1 (for audit, for example), then there are only three choices (P2,3,4) left for it for non audit. So it has 3x3=9 possible outcoumes.
After breaking up, if one corp chose P1a for audit, it has four choices for non audit (p1b, p2b, p3b, p4b). So, the outcome is 4x4=16.
Hence, if a firm breaks up to two - audit and non audit, there is still more choices for corporation than before. So that (e) is not valid. Am I right? Please correct and explain where i was wrong. Thank you.


Excellent observation - just a small correction: In the first case there are 4x3 = 12 choices (not 3x3 = 9 choices).

Nonetheless, we have slightly modified the question to take care of the issue you pointed out.

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Re: V05-17   [#permalink] 26 Sep 2016, 19:23

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