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ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches

Brandt Industries complies fully, to the letter, with every provision of its country's governance code. However, the board uses a series of complex structures to keep a significant liability off the reported position, meeting the technical wording but not its intent. Which weakness of a governance approach does this most clearly illustrate?

This illustrates a weakness of rules-based governance. Because requirements are specific and literal, a board can structure transactions to satisfy the wording while defeating the underlying purpose. Principles-based codes aim to prevent this by emphasising substance and the spirit of good governance over mechanical compliance.

  1. AA weakness of principles-based governance, because it lacks any enforcement
  2. BA weakness of rules-based governance, because compliance with the letter can be achieved while avoiding the intended outcomeCorrect
  3. CA weakness of principles-based governance, because it is too flexible for boards
  4. DA weakness of both approaches equally, because neither can detect fraud

Explanation

Rules-based regimes invite box-ticking and loophole exploitation, where wording is met but purpose is evaded. Principles-based approaches focus on substance. The case describes letter-compliance defeating the spirit, which is the classic rules-based weakness.

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