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Strategic Business Leader · Governance scope and approaches

Governance Failures, Scandals and Their Causes in ACCA SBL

Updated 11 October 2026 · Fact-checked

Governance failure happens when those running a company are not properly directed, checked or held to account. Typical causes are a dominant individual, a weak or passive board, poor internal controls, remuneration that rewards short-term results, and a culture that tolerates wrongdoing. In SBL, you spot the symptoms in the scenario and recommend fixes.

Understand Governance Failures, Scandals and Their Causes

Corporate governance is the system by which a company is directed and controlled. It exists because owners (shareholders) hand day-to-day control to managers. That creates a risk that managers act in their own interest, not the owners'. Governance failure is what happens when the checks on managers do not work.

Scandals tend to repeat the same patterns. The most common causes are:

  • Dominant individual: a CEO or chair (or both roles in one person) whose views go unchallenged. Others are afraid or unwilling to push back.
  • Weak or passive board: non-executive directors who lack independence, time, knowledge or courage. They accept what management tells them.
  • Poor internal control and weak risk management: no effective checks on transactions, no proper escalation, and an internal audit function with little standing.
  • Weak audit and audit committee oversight: auditors who are too close to management, or who earn large non-audit fees from the same client.
  • Pay and incentives: bonuses and share options tied to short-term profit or share price push managers to manipulate results.
  • Culture and ethics: a 'win at all costs' tone from the top, no real whistleblowing route, and fear of speaking up.
  • Complex structures and creative accounting: opaque transactions, off-balance-sheet vehicles and aggressive revenue recognition hide the true position.

Real scandals show these causes in combination. Enron (US energy company) is widely cited for using complex off-balance-sheet entities to hide debt and inflate results, with a board and auditor that failed to challenge. WorldCom (US telecoms) is cited for improperly treating operating costs as capital expenditure, which overstated profit. Parmalat (Italy) is cited for fictitious assets. Other cases you may meet include Maxwell (pension funds misused by a dominant owner-chair), BCCI, Satyam in India (falsified accounts, reported by the founder himself) and Wirecard (missing cash balances). Use these as short illustrations only. Be careful with detail you are not sure of, and do not rely on them in place of the scenario facts.

SBL rarely asks you to retell a scandal. It gives you a fictional company with warning signs and asks you to diagnose the weaknesses and recommend improvements. The scandals give you a bank of patterns and credibility. The scenario gives you the marks.

Governance failures harm many parties: shareholders lose value, employees lose jobs and pensions, lenders and suppliers are not paid, and public trust in markets falls. This is why regulators respond with codes, stronger audit rules and tougher penalties after each wave of scandal.

Key rules to remember

Core logic of governance failure
Weak oversight + strong incentive or pressure + opportunity = misreporting, fraud or poor decisions
A memory aid, not a formal rule. Use it to link scenario facts to causes.
Typical warning signs checklist
Dominant person | Weak board | Poor controls | Weak audit | Bad incentives | Poor culture
Use as a scanning list when reading a scenario. Not every case shows all six.
Answer structure for a failure question
Weakness (from scenario) → Why it matters → Recommended fix
Repeat for each point. This applies the facts and earns professional skills marks.

How to solve Governance Failures, Scandals and Their Causes questions

Use this method for any SBL task asking you to assess governance weaknesses, explain why they matter or advise on improvements.

  1. 1Read the requirement and note who you are writing for (for example, the board or an investor) and the format asked for (report, briefing, memo).
  2. 2Scan the scenario and underline facts that signal weakness: roles combined, directors with long ties to the CEO, no committees, unusual bonus targets, poor controls, ignored warnings.
  3. 3Group the facts under headings such as leadership, board, controls and audit, incentives, and culture.
  4. 4For each weakness, explain the risk it creates (for example, unchecked decisions, misstatement, fraud, loss of trust) and who is harmed.
  5. 5Recommend a specific fix for each weakness, such as separating chair and CEO, adding independent non-executives, forming an audit committee, a stronger internal audit function, balanced pay, or a whistleblowing channel.
  6. 6Prioritise the most serious issues first and be realistic about what the company can do quickly.
  7. 7Where useful, add a brief link to a known scandal, but keep it short and only if accurate.
  8. 8Finish with a clear conclusion or recommendation that suits the audience, in the format requested.

Quickest way: Weakness-Risk-Fix scan

When to use it: Use when time is short, or when the task is worth fewer marks and needs several clear points.

  1. Spend two minutes marking scenario facts against six prompts: person, board, controls, audit, pay, culture.
  2. Write one line per weakness: the fact, the risk, the fix.
  3. Choose the three or four strongest points rather than listing everything.
  4. Add one sentence of overall judgement addressed to the reader.
  5. Check that every point uses a fact from the scenario.

Common mistakes in Governance Failures, Scandals and Their Causes

  • Retelling Enron or WorldCom without applying it to the scenario

    Students know the stories well and feel safe writing them out.

    Fix: Use scandals as one-line comparisons at most. Spend the answer on the scenario facts.

  • Listing generic causes with no link to the case

    Students memorise a list of causes and reproduce it.

    Fix: Quote or paraphrase a scenario fact for each cause, then explain its effect.

  • Identifying problems but giving no recommendations

    Students run out of time or read the requirement as only 'assess'.

    Fix: Pair each weakness with a specific fix. If the requirement asks for advice, this is where many marks sit.

  • Assuming one governance fix solves everything

    Students recommend 'more non-executives' for every problem.

    Fix: Match the fix to the cause: split roles for domination, audit committee for control weakness, pay redesign for incentive issues, whistleblowing for culture.

  • Blaming only management and ignoring the board, auditors and shareholders

    Fraud is seen as an executive problem.

    Fix: Ask who should have challenged: non-executives, audit committee, internal audit, external auditors and investors.

  • Ignoring professional skills and the audience

    Students focus on technical content only.

    Fix: Use the requested format, a clear structure, balanced judgement and practical, commercial advice.

Worked examples

Example 1

Kavya Textiles is a listed company. Its founder, Mr Rao, is both chair and chief executive. The board has six directors, four of whom are his relatives or long-standing friends. The only audit work is done by one internal auditor who reports to the finance director. Executive bonuses depend entirely on annual profit. Last year, a junior accountant raised concerns about inventory valuation, but was told to 'trust the numbers'. Requirement: Assess the governance weaknesses and recommend improvements. (10 marks, written for the investor relations committee)

Show the solution
  1. Identify the dominant individual: Mr Rao holds both chair and CEO roles, so no one balances his power. Risk: decisions go unchallenged and the board cannot properly monitor him. Fix: separate the roles and appoint an independent chair.
  2. Identify weak board independence: four of six directors are related or close to him. Risk: they are unlikely to challenge him. Fix: appoint independent non-executive directors, ensure they form a majority over time, and create an audit committee made up of them.
  3. Identify weak internal audit: one auditor reporting to the finance director. Risk: little independence, and reporting to a person who may be affected by findings. Fix: have internal audit report to the audit committee and extend its resources.
  4. Identify bad incentives: bonuses depend only on annual profit. Risk: pressure to overstate profit, for example by inflating inventory. Fix: add long-term and non-financial measures, and set up a remuneration committee of independent directors.
  5. Identify poor culture: the accountant's concern was dismissed. Risk: wrongdoing stays hidden and staff stop speaking up. Fix: a formal whistleblowing policy with a route to the audit committee, and protection from retaliation. The inventory concern should be investigated now.
  6. Conclude: the most urgent items are the combined chair/CEO role and the unresolved inventory concern. The pattern resembles typical scandal warning signs, so investors will want visible change.

Answer: The main weaknesses are a dominant founder in both chair and CEO roles, a non-independent board, a weak and non-independent internal audit, profit-only bonuses and a culture that ignores concerns. Recommend separating the roles, adding independent non-executives and an audit committee, reporting internal audit to that committee, redesigning pay, introducing whistleblowing protection and investigating the inventory concern immediately.

Example 2

A board member asks you: 'Our competitor's chief executive was charged after earnings were overstated for several years. The finance team says the auditor also earned large consulting fees from that competitor. What causes of governance failure does this suggest, and what should we learn for our own company?' (8 marks)

Show the solution
  1. State the caution: you only have limited facts, so treat these as possible causes, not proven ones.
  2. Cause 1: Management pressure and weak control. Overstated earnings over several years suggests controls did not detect or prevent manipulation. Lesson: review our own controls over revenue and estimates and have internal audit test them.
  3. Cause 2: Compromised audit independence. Large consulting fees create a self-interest threat, since the auditor may not wish to lose lucrative work. Lesson: our audit committee should review and limit non-audit services and assess auditor independence.
  4. Cause 3: Likely weak board oversight. If the problem lasted several years, directors or the audit committee probably did not challenge enough. Lesson: ensure our non-executives are independent, informed and willing to ask difficult questions.
  5. Cause 4: Possible incentive pressure. Where earnings are overstated, pay may have been linked to reported results. Lesson: check our bonus design for short-term distortion.
  6. Conclude with a priority: start with an audit committee review of auditor independence and a controls review, then report findings to the board.

Answer: The facts suggest weak controls, compromised auditor independence, inadequate board and audit committee challenge and possibly distorting incentives. For our company, review controls over reported earnings, have the audit committee limit and monitor non-audit fees, strengthen independent challenge on the board and test whether pay encourages short-term reporting.

Exam tips

  • Treat the scenario as the source of marks. Quote or paraphrase facts and tie each to a cause and a fix.
  • Use scandals as brief supporting examples only, and only where you are sure of the facts. Avoid long histories.
  • Always give recommendations unless the requirement says otherwise. 'Assess' and 'advise' usually reward both diagnosis and fix.
  • Write for the named reader in the format requested. Short headed points with clear judgement help your professional skills marks.
  • Consider other angles such as stakeholders affected, ethics and whether the proposed fix is practical for the company's size and country.

Practice questions from Governance scope and approaches

Governance Failures, Scandals and Their Causes: frequently asked questions

What are the main causes of corporate governance failure for SBL?

The common causes are a dominant individual, a weak or non-independent board, poor internal controls, weak audit oversight, short-term incentives and a poor ethical culture. In the exam, you must find evidence of these in the scenario. Do not simply list them.

Do I need to know Enron and WorldCom in detail?

No. Know a one- or two-line summary of each and what governance lesson it shows. SBL tests your ability to analyse a fictional case, so the scenario facts matter more than scandal history.

How do I answer governance failure questions in SBL?

Identify the weaknesses shown in the scenario, explain the risk each creates and recommend a specific fix. Use the format and audience requested. Prioritise the most serious issues and end with a clear conclusion.

How are governance failures linked to ethics?

Many failures involve a culture that tolerates pressure to misreport or silence concerns. Ethical leadership, codes of conduct and protected whistleblowing are therefore part of the solution. Link these points to the fundamental principles if the requirement involves accountants.