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ACCA Applied Knowledge · Business and Technology · Governance in business organisations

A country introduced a detailed, legally binding governance regime after a major corporate scandal, with fines and criminal penalties for directors who certify misleading accounts. A critic argues it has led to 'box-ticking' and high compliance costs, deterring smaller companies from seeking a listing. Which conclusion best fits the critic's argument about this regime?

The critic's argument illustrates the weaknesses of a rules-based approach. A legally binding, penalty-backed regime encourages box-ticking, meaning compliance with the letter rather than the spirit, and imposes high costs that can deter smaller companies from listing.

  1. AIt illustrates the weaknesses of a rules-based approach, namely cost and a focus on the letter rather than the spiritCorrect
  2. BIt illustrates the weaknesses of comply or explain, namely lack of any enforcement
  3. CIt shows that principles-based approaches always produce higher compliance costs
  4. DIt shows that governance rules cannot influence director behaviour

Explanation

Legally binding detailed requirements with penalties are characteristic of a rules-based approach. Box-ticking and high cost, particularly for smaller firms, are its recognised drawbacks. Comply or explain is not described, and the argument does not claim principles-based approaches are costlier.

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