Audit and Assurance · Corporate governance

Corporate Governance Codes and Best Practice for ACCA Audit and Assurance

Updated 11 October 2026 · Fact-checked

A corporate governance code is a set of best-practice provisions on how a company is directed and controlled. It covers board balance, separate chairman and chief executive roles, director appointment and pay, and shareholder relations. Most codes work on comply or explain. In AA you spot weaknesses, explain the risk, and recommend a fix.

Understand Corporate Governance Codes and Best Practice

Corporate governance is the system by which a company is directed and controlled. Owners (shareholders) appoint directors to run the business. Because owners and managers are different people, there is a risk that managers act in their own interest. Codes of best practice exist to reduce that risk and to build investor trust.

Most codes, such as the UK Corporate Governance Code, use a principles-based approach. Companies are expected to follow the provisions, or to comply or explain. If they do not follow a provision, they must disclose this and give reasons. Investors then judge whether the explanation is reasonable. This differs from a rules-based approach, where compliance is compulsory and set by law, as in the US Sarbanes-Oxley Act. Codes usually bind listed companies through listing rules, not all companies.

Codes cover four main areas that AA questions use again and again.

Board composition: a balance of executive and non-executive directors, with a good proportion of independent non-executives. Directors should have a mix of skills and experience. Boards should be refreshed and evaluated regularly.
Chairman and chief executive: the roles should be held by different people. The chairman leads the board. The chief executive runs the business. If one person holds both, too much power sits with one individual, and there is less challenge to decisions. A chief executive should not go on to become chairman of the same company.
Appointment and remuneration: a nomination committee, led by independent non-executives, should run a formal and transparent appointment process. A remuneration committee of independent non-executives should set pay. Pay should be linked to long-term performance and should not be set by the directors themselves. No director should decide their own pay.
Shareholder relations: the board should communicate openly with shareholders, explain strategy and performance, and hold an annual general meeting where shareholders can ask questions and vote. Directors should be open to dialogue with major investors.

The OECD Principles of Corporate Governance are international guidance. They cover the rights of shareholders, fair treatment of shareholders, the role of stakeholders, disclosure and transparency, and the responsibilities of the board. They are not law. Countries use them to shape their own codes.

Why does this matter to an auditor? Weak governance raises the risk of fraud and misstatement, and weakens the control environment. It also affects how you assess risk at planning.

Key rules to remember

Comply or explain: Follow the provision, OR disclose non-compliance and give reasons; Applies to principles-based codes for listed companies. It is not a free choice to ignore the code without disclosure.
Split of roles: Chairman (leads the board) ≠ Chief executive (runs the business); Combining the roles concentrates power and weakens challenge.
Board balance: Executive directors + independent non-executive directors, with sufficient independent NEDs; Codes set a minimum proportion of independent NEDs for larger listed companies. Quote the proportion only if the question gives it.
Committees: Nomination, remuneration and audit committees = independent NEDs; No executive should decide their own pay or appointment.
Weakness answer pattern: Weakness → Risk → Recommendation; Use this for every governance weakness question.

How to solve Corporate Governance Codes and Best Practice questions

Use this method for any governance scenario or written question. It keeps your answer structured and earns marks for each point.

1Read the scenario and underline facts about the board, chairman, chief executive, directors' pay, appointments and shareholders.
2Match each fact to a code area: board composition, chairman and CEO, appointment, remuneration, or shareholder relations.
3Decide whether the fact is a weakness or a good practice. Check if the question asks for weaknesses only.
4State the weakness clearly, using a fact from the scenario.
5Explain the risk it creates, such as lack of challenge, self-interest, fraud or poor decisions.
6Give a specific recommendation, such as appoint independent NEDs or set up a remuneration committee.
7Use a separate paragraph or bullet for each point. Link to the audit if asked, for example the effect on control environment or risk assessment.

Quickest way: Weakness, risk, fix in three lines

When to use it: Use when time is short in a Section C written part or when an objective test case question asks you to identify the governance issue.

Scan the scenario for four triggers: one person in two top roles, few or no independent NEDs, executives setting their own pay, or poor shareholder communication.
For each trigger, write one line each for weakness, risk and recommendation.
For objective questions, pick the option that matches the code provision exactly, such as separate chairman and CEO, and reject options that give power to executives.
Stop when you have one fully developed point per mark available.

Common mistakes in Corporate Governance Codes and Best Practice

Listing the code provision without applying it to the scenario.
Students learn the code by heart and write it out.
Fix: Quote a fact from the scenario in every point, then link it to the provision.
Stating the weakness but not the risk or recommendation.
Students stop once they have spotted the problem.
Fix: Always write three parts: weakness, risk, fix.
Saying companies must always follow the code by law.
Confusing principles-based codes with rules-based law.
Fix: Say that listed companies comply or explain. Legal rules apply only where the law or listing rules require them.
Treating a non-executive director as independent automatically.
The word non-executive sounds independent.
Fix: Check for close links, such as a former employee, family ties, shareholdings or long service, which can reduce independence.
Confusing the roles of chairman and chief executive.
Both are senior and the titles sound similar.
Fix: Chairman leads the board and its meetings. Chief executive runs the day-to-day business.
Giving generic advice such as improve governance.
Students lack specific recommendations ready.
Fix: Name the action: appoint independent NEDs, form a remuneration committee, separate the roles, or hold meetings with major shareholders.

Worked examples

Example 1

Delta Co is a listed company. Its founder, Mr Rao, is both chairman and chief executive. The board has five executive directors and one non-executive director, who is Mr Rao's brother. Directors set their own bonuses. Identify the governance weaknesses and recommend improvements.

Show the solution

Weakness 1: Mr Rao holds both chairman and chief executive roles. Risk: too much power in one person, little challenge to his decisions. Recommendation: appoint a separate chairman.
Weakness 2: the board is dominated by executives with only one non-executive. Risk: weak oversight and decisions that favour management. Recommendation: appoint more independent non-executive directors.
Weakness 3: the only non-executive is Mr Rao's brother. Risk: he is not independent, so he is unlikely to challenge Mr Rao. Recommendation: replace or supplement him with genuinely independent NEDs.
Weakness 4: directors set their own bonuses. Risk: excessive pay not linked to performance, and shareholder distrust. Recommendation: set up a remuneration committee of independent NEDs to decide pay.

Answer: Four weaknesses: combined chairman and CEO, an executive-heavy board, a non-independent non-executive, and directors setting their own pay. Fixes: separate the roles, appoint independent NEDs, and create an independent remuneration committee.

Example 2

Which ONE of the following is a provision of best-practice governance codes? A) The chief executive should normally become chairman after retiring. B) The remuneration committee should be made up of independent non-executive directors. C) Executive directors should set their own pay. D) Shareholders should not be given the chance to question the board.

Show the solution

Option A: codes advise against a chief executive moving on to be chairman of the same company, because it reduces independence. So A is wrong.
Option B: codes say pay should be set by a committee of independent non-executives, so no director decides their own pay. This matches best practice.
Option C: this is the opposite of best practice, as it creates self-interest.
Option D: codes encourage dialogue and an annual general meeting with questions, so D is wrong.

Answer: B

Exam tips

In Section C, give each point as weakness, risk, recommendation. Examiners reward application to the scenario.
In objective questions, choose the answer that increases independence and separates power.
Comply or explain means disclose and justify non-compliance. Do not say it is optional.
Link governance to audit where asked: weak governance weakens the control environment and raises risk of material misstatement.
Do not quote specific percentages or code provision numbers unless the question gives them.

Corporate Governance Codes and Best Practice in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Corporate Governance Codes and Best Practice: frequently asked questions

What does comply or explain mean in corporate governance?

A listed company must follow a code provision or disclose that it has not and explain why. Shareholders then decide if the reason is acceptable. It is a feature of principles-based codes.

Why should the chairman and chief executive be different people?

The chairman leads the board and checks management. The chief executive runs the business. If one person holds both roles, power is concentrated and there is less challenge, which raises the risk of poor decisions or abuse.

How do I answer a governance weakness question in ACCA AA?

Pick out each weakness from the scenario. For each, explain the risk it creates and give a specific recommendation. Keep each point separate so the marker can award a mark for it.

What are the OECD Principles of Corporate Governance?

They are international guidance covering shareholder rights, fair treatment of shareholders, the role of stakeholders, disclosure and transparency, and board responsibilities. They are not law but influence national codes.