Audit and Assurance · Internal audit and governance and the differences between external audit and internal audit

Corporate Governance Principles and Codes for ACCA AA

Updated 11 October 2026 · Fact-checked

Corporate governance is the system by which a company is directed and controlled. Its purpose is to protect shareholders and other stakeholders by making the board accountable, transparent and fair. Governance codes set out best practice for listed companies. To answer exam questions, name the principle, link it to the scenario, and explain the effect.

Understand Corporate Governance Principles and Codes

A company is owned by shareholders but run by directors. This creates a risk. Directors may act in their own interest, not the owners'. Corporate governance is the set of rules, practices and processes that reduce this risk. It sets how the board is chosen, how it is held to account, and how information reaches owners.

The key principles are easy to remember:

Accountability: directors answer to shareholders for what they do and for the company's results.
Transparency: the company discloses accurate, timely information about performance, risks, pay and decisions.
Fairness: all shareholders, including minorities, and other stakeholders are treated fairly.
Integrity and responsibility: directors act honestly and in the company's long-term interest.
Independence: the board has enough objective people, so one person or group cannot dominate.

Governance codes turn these principles into practice. Many are on a comply or explain basis. A listed company must follow each provision or explain why it did not. Other regimes use a rules-based approach, where compliance is compulsory and enforced by law. Comply or explain is more flexible. It lets a company choose a better-fitting approach, but only if it gives a sound reason.

Typical code provisions cover a balance of executive and non-executive directors, separation of the chair and chief executive, an audit committee, a remuneration committee and a nomination committee, regular board evaluation, directors' re-election, and a statement on risk management and internal control. Specific wording varies by country, so in the exam use the features in the scenario and the general principles, not memorised code clauses.

Good governance matters to auditors. It affects the control environment and the risk of material misstatement. Weak governance, such as a dominant director or no audit committee, raises audit risk. Auditors may also report on governance matters to those charged with governance.

Key rules to remember

Core principles: Accountability + Transparency + Fairness (plus integrity, independence, responsibility); Use these as headings in written answers and link each to the scenario.
Comply or explain: Follow the provision OR disclose and justify the departure; A listed company is not breaking the code if it explains a departure. The explanation must be genuine.
Separation of roles: Chair ≠ Chief executive; Splitting the roles avoids too much power in one person.
Key board structures: Audit committee + Remuneration committee + Nomination committee, led by non-executive directors; Committees bring independent oversight of reporting, pay and board appointments.

How to solve Corporate Governance Principles and Codes questions

Use this method for any governance question, whether it is an objective test or a written requirement.

1Read the requirement and note the verb: identify, explain, evaluate or recommend.
2Scan the scenario for governance features: one person as chair and CEO, few non-executives, no committees, weak disclosure, large pay, family control.
3Decide whether each feature is a weakness or a strength. Label it with the matching principle.
4For each weakness, state the risk it creates, such as bias, fraud, misstatement or unfair treatment.
5Give a practical recommendation, such as appointing independent non-executives or forming an audit committee.
6If the question is from the auditor's view, link the point to audit risk, the control environment or reporting to those charged with governance.
7Finish with a brief conclusion, or check that each requirement mark has a separate point.

Quickest way: Feature, principle, risk, fix

When to use it: Use when time is short, especially in objective test cases and short written parts.

Underline each governance feature in the scenario.
Write one line per feature: feature, principle breached, risk, fix.
Match the number of points to the marks available.
In an objective question, pick the option that names the principle or code feature that fits the facts most exactly. Reject options that are true in general but do not fit the scenario.

Common mistakes in Corporate Governance Principles and Codes

Listing code provisions from memory without linking them to the scenario.
Students learn a code as a list and recite it.
Fix: Start from the scenario facts. Name only the provisions that relate to them and explain the effect.
Saying a company breaks the code whenever it departs from a provision.
Students forget the comply or explain approach.
Fix: Say that the company must explain the departure. A departure is a concern only if the explanation is weak or missing.
Confusing governance with internal control or management.
The topics overlap and use similar words.
Fix: Governance is about direction, oversight and accountability at board level. Internal control is the system management uses to manage risk. Show how the first shapes the second.
Treating non-executive directors as part of day-to-day management.
Students mix up the executive and non-executive roles.
Fix: Non-executives provide independent challenge, scrutiny and oversight. They do not run operations.
Ignoring the auditor's angle.
Students answer as if the exam were a business paper.
Fix: Add one sentence on how weak governance affects audit risk, the control environment or communication with those charged with governance.

Worked examples

Example 1

Bryant Co is a listed company. Its chief executive, Mr Hale, is also chair of the board. The board has six members: Mr Hale, three other executives and two non-executives. There is no audit committee. Identify the governance weaknesses and explain the risks. (6 marks)

Show the solution

Weakness 1: one person is chair and chief executive. This breaches the principle of separating roles. The risk is that Mr Hale has unchecked power and the board may not challenge him.
Weakness 2: only two of six directors are non-executive. The board lacks enough independent challenge. This weakens accountability and independence. Decisions may favour management.
Weakness 3: there is no audit committee. Nobody independent oversees financial reporting, internal controls or the external auditor relationship. This raises the risk of misstatement and weak controls.
Consequence for the audit: these weaknesses suggest a weaker control environment. This raises the risk of material misstatement and may need a more cautious audit approach.
Recommendation: split the chair and chief executive roles, appoint more independent non-executives, and set up an audit committee made up of non-executives.

Answer: Three weaknesses: combined chair and CEO role, too few non-executives, and no audit committee. Each reduces independent oversight and raises the risk of poor decisions and misstatement. The company should separate the roles, add independent non-executives, and form an audit committee.

Example 2

A listed company's annual report says it did not comply with the code provision that the board should evaluate its own performance each year. It gives no reason. Explain the issue and what the auditor should consider. (4 marks)

Show the solution

Many codes work on comply or explain. A company may depart from a provision, but it must explain why.
Here there is no explanation. The company has not met the disclosure expectation. This is a transparency failure.
Without board evaluation, weak performance and skills gaps may go unnoticed. This reduces accountability.
The auditor considers the effect on the control environment and on the risk assessment. The auditor may also raise the matter with those charged with governance.
The auditor also checks whether the other information in the annual report, including the governance statement, is consistent with the auditor's knowledge from the audit.

Answer: The company has breached the transparency expectation by departing without an explanation. It also weakens accountability. The auditor should consider the control environment, raise the matter with those charged with governance, and read the governance statement for consistency with audit knowledge.

Exam tips

Always tie each point to a fact in the scenario. Generic code lists score few marks.
Use the terms accountability, transparency and fairness as anchors. Markers recognise them quickly.
In objective tests, read for the exact scenario fact. An option can be correct in theory but wrong for the case.
Say 'comply or explain' when a listed company departs from a provision, and judge the quality of the explanation.
In longer answers, add a short recommendation. Many requirements ask what should change, not just what is wrong.

Corporate Governance Principles and Codes 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 Principles and Codes: frequently asked questions

What is corporate governance in ACCA AA?

It is the system by which a company is directed and controlled. It makes sure the board acts in the interests of shareholders and other stakeholders. In AA you link it to control environment and audit risk.

Do I need to memorise a specific governance code for AA?

You should know the general principles and typical provisions, such as independent non-executives, board committees and separate chair and chief executive roles. Use the scenario facts to apply them. Do not rely on recalling exact clause wording.

What does comply or explain mean?

A listed company should follow each code provision or say why it has not. The explanation should be clear and sensible. It lets a company choose a different approach where that better suits its circumstances.

How does corporate governance affect the auditor?

Weak governance raises the risk of material misstatement and affects the auditor's view of the control environment. The auditor may also communicate governance concerns to those charged with governance.