V05-17

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.


Premise (X): break-up the “Big Four” Firms into smaller operations

Conclusion (Y): corporations will have more options for their accounting needs

As usual, for an assumption question, it is often effective to negate a choice and examine whether the argument X —> Y thereby breaks down. If negation of a choice breaks down the argument, then the choice must be an underlying assumption.

Negating option E leads to the following statement:

Let us examine what happens when each of the firms is broken into an audit and a non-audit section:

Before break-up:

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.

After break-up:

Now taking negation of option E as basis, each player breaks up into an audit and a non-audit sections. P1 breaks into P1a and P1b (the ending letter a denotes an audit firm and b denotes a non-audit firm), So the 8 players after break-up 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 corporations will NOT have more options for their accounting needs (= negative of conclusion Y) by breaking up each player into an audit and a non-audit section ( = negative of option E). Thus, negating option E breaks down the argument X—> Y and hence is the correct answer.

A brief explanation of the other options are as below:


Answer: E