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

Which of the following is a recognised advantage of a rules-based approach to governance compared with a principles-based approach?

A rules-based approach offers certainty and easier enforcement, because the requirements are specific and mandatory, so compliance can be clearly tested. Flexibility to suit company circumstances and emphasis on the spirit of the provisions are advantages of principles-based codes, not rules-based ones.

  1. AIt allows each company to tailor governance to its own circumstances
  2. BIt gives greater certainty and easier enforcement because requirements are clear and mandatoryCorrect
  3. CIt encourages directors to consider the spirit rather than the letter of the requirements

Explanation

Rules-based regimes set specific mandatory requirements, so compliance is clear and enforcement is easier. Flexibility and focus on the spirit of governance are advantages of the principles-based approach instead.

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