ACCA Strategic Business Leader (SBL) Practice Exam

According to the UK corporate governance code, what is the composition requirement for the audit committee?

1. Majority NEDS

2. 50% NEDS

3. 100% NEDS

4. Optional composition

The correct answer is: 100% NEDS

The most accurate requirement for the composition of the audit committee, according to the UK Corporate Governance Code, is that the audit committee should be composed entirely of independent non-executive directors (NEDs). This ensures that the committee operates with a high level of objectivity and independence, which is crucial for effective oversight of the financial reporting process and the relationship with external auditors. Having 100% independent non-executive directors minimizes potential conflicts of interest and helps in maintaining the integrity of the audit process. Non-executive directors, being independent of the company's management, are more likely to challenge decisions and provide oversight without any bias based on a management role. This composition supports the broader aim of the corporate governance framework to promote accountability and transparency within organizations. Other options suggesting a majority or 50% requirement do not align with the stringent standards set forth in the code, which emphasizes the need for full independence to enhance the credibility of the audit function. Therefore, the requirement clearly positions the audit committee as a crucial element in reinforcing confidence in the corporate reporting and governance structure.