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Dear Professor,
“The Code does not set out a rigid set of rules; instead it offers flexibility through the application of principles and ‘comply or explain’ provisions and supporting guidance.”
what does this “comply or explain”provisions and supporting guidance mean?
If you download our notes you can search “comply or explain” – so on page 12 it simply means that either the entity complies with the provisions of the Code or the directors must explain (in the annual report) why they have not done so.
So, for example, a listed entity would be expected to have an internal audit (see on page 14, the audit committee is responsible for reviewing the effectiveness of internal audit). But as there are cost/benefit implications of any internal control, internal audit is not mandatory. So if the directors decide that the company does not need an internal audit function, the reason for not having one must be explained in the annual report. And the audit committee will report each year in the annual report that the need for internal audit has been considered.
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