What are the executive roles and responsibilities of the CEO?

This article titled ‘What are the executive roles and responsibilities of the CEO?’ discusses the roles and responsibilities of the CEO and provides an analysis of the Principles and Mechanisms of Control in a Corporate Organization.

I. Introduction

In his article, ‘Ethics in Accounting’, Paul Jaijairam has elaborated upon the responsibilities of the CEOs (Chief Executive Officers) in ensuring the compliance of ethical standards that promote the adoption of internal control mechanisms to run operational business activities of the firm in consonance with the fundamental principles of transparency, materiality, and reliability in preparing the financial statements for a certain period.

The role of the CEO is to eliminate personal and professional differences to avoid the incidence of apparent and actual conflicts between the employees, managers, etc.

The internal control mechanisms must aim towards standardization of the process of recording, reporting, and summarization of the financial statements by the GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).

The CEO is primarily responsible for the prevention of deliberate fraudulent activities by improving the degree of accountability within the organization and thus, he must guide his managerial discretion by the following principles of establishing accounting standards.

II. The Principles of the conduct of CEOs in a Corporate Organization

1. Prudence Principle: The CEO must exercise the prudence principle while verifying the details and nature of business transactions that must prioritize the practice of entering the possibilities of losses into account earlier than the possibilities of profits. Any overstatement of the actual financial position of the company may adversely affect the decision-making powers of the stakeholders leading to a decrease in the levels of public faith and confidence in the enterprise.
2. Full Disclosure Principle: The CEO must be motivated towards the full and frank disclosure of the assets and liabilities of the business to provide a clear picture of the operational activities by attaching comprehensive ‘notes to accounts to refer to the facts and details of the business transactions.
3. Consistency Principle: The CEO must refrain from a selective recording of the operational business activities and monetary transactions to promote a coherent and comprehensive recording of the books of accounts like ledgers, journals, trial balances, etc. The completeness and comparability of the financial statements are necessary for an objective evaluation of the current state of affairs of the company.
4. Reliability Principle: The CEO must ensure that the accounting standards followed by the company are at par with the internationally and statutorily recognized rules due to the concerns over gaining the trust and confidence of the shareholders, improving the public perception about the viability of the business, etc.
5. Materiality Principle: The CEO must ensure the complete disclosure of material information regarding the risks and liabilities of the company to maintain the relevancy and accuracy of the books of accounts when scrutinized by tax officials, international regulators, etc.
6. Substance over Form Principle: The CEO must adhere to the ‘substance over form’ conceptualization of the accounting standards which specifically mandate the proper adjustments to the financial statements to reflect upon the actual state of affairs or financial position of the company. A mere ‘error-free’ record of accounts can still be capable of concealing deliberate overstatement of assets, non-consideration of depreciation costs, etc.
7. Revenue Recognition Principle: The CEO must ensure that the accountants adhere to the ‘fair value’ approach and accrual-based accounting systems to incorporate the detailed entries of business transactions into the books of accounts of the organization. The recognition criteria for the processes of revenue generation must comply with the guidelines laid down under schedule -III of the Companies Act, 2013.

III. Institutional Mechanisms to control and guide the proper functioning of the CEOs in an organization

The specific design and structures of the internal control mechanisms are modified by the commitments and thresholds of the international regulations such as the IFRS, ICAEW’s Code of Ethics, etc. to maintain the credibility and reliability of the company in the public perceptions of the various stakeholders like promoters, investors, shareholders, etc.

In the given fact scenario, the CEO fails to recognize the multi-faceted roles of the managerial discretion in preventing the fraudulent activities that persist within an organization, and thus, it is contended that the CEO’s argument is flawed based on only considering the financial sentiments of the shareholders in the value creation and value protection of their financial interests in the organization.

It is the fundamental duty of the CEO to cultivate an ‘ethically accountable culture’ in the functioning of the management authorities by promoting the virtues of excellence, accountability, and truthfulness within the organization.

The CEOs must harmonize the interpersonal relationships within the organization by ensuring the election of a fair and unbiased board of directors, the presence of sufficient corporate governance measures in the service rules, prevention of accounting irregularities, etc.

Moreover, the CEO must prevent instances of dysfunctional management behaviours from being promoted within the managerial relations of the organization. For example, the CEO must limit the powers of the CEO in such a manner that he cannot exercise singular control and unfettered discretion over the decision-making processes like recruitment of new employees, mergers, operational activities, etc.

The differentiated role of the CEO is fundamentally necessary to protect the proper functioning and implementation of the internal control mechanisms of the organization.

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REFERENCES

1. Paul Jaijairam, Ethics in Accounting, Available Here.
2. CEO – Understanding the Roles and Responsibilities of a CEO (corporatefinanceinstitute.com), Available Here.
3. The Work Of Chief Executive Officer Business Essay, Available Here.
4. Stever Robbins, What do CEOs do? A CEO Job Description, Available Here.

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