1. Chapter 1
Why Study Ethics?

2. Discussion Case:
Bernard Madoff’s Ponzi Scheme
• Bernard Madoff: one of the largest financial frauds in
history: 2008
• Ponzi Scheme: fraud that attracts investors with
promise of high returns, which are initially paid out
form investments made by subsequent clients
• Madoff fraud important: not only because of the size
but because involved his family (prominent family),
Madoff former chairman of NASDAQ stock exchange,
involved famous philanthropists
• Victims: prominent people, friends, charitable
organizations

3. • Another aspect, lack and failure of gov’t
regulations
SEC ( Securities and Exchange Commission)
had received complaints, but didn’t investigate.
• Identify ethical issues and questions are
involved in the Madoff case.
• Identify all the people you think have been
harmed and how they were
• Do you think this is the result of unethical
individuals
• How do you think they could have prevented
it

4. FINSEPRO/INSPERO
• What do you know of this case?

5. Sec. 1-1: Why Study Ethics?
• Goals of Business Ethics:
1. Teach and learn about what happens in business
2. Help us become more ethical and to help us all create and
promote ethical institutions
• How can we achieve these goals?
1. By developing a better understanding of ethical issues
2. By developing analytical skill with which to evaluate ethical
issues
3. Developing a refined sensitivity to appreciate the
significance of leading an ethical life.

6. • In the mid 1990’s in major publications as the Wall Street Journal, the
Harvard Business Review and others questioned the value of teaching
Business Ethics
• Beginning 2001, with collapse of Enron and Arthur Andersen
• The Enron scandal, revealed in October 2001, eventually led to the
bankruptcy of the Enron Corporation, an American energy company based
in Houston, Texas, and the de facto dissolution of Arthur Andersen, which
was one of the five largest audit and accountancy partnerships in the
world. In addition to being the largest bankruptcy reorganization in
American history at that time, Enron was attributed as the biggest audit
failure.[1]
• Enron was formed during 1985 by Kenneth Lay after merging Houston
Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was
hired, he developed a staff of executives that, by the use of accounting
loopholes, special purpose entities, and poor financial reporting, were
able to hide billions of dollars in debt from failed deals and projects. Chief
Financial Officer Andrew Fastow and other executives not only misled
Enron's board of directors and audit committee on high-risk accounting
practices, but also pressured Andersen to ignore the issues.

7. • Shareholders lost nearly $11 billion[citation needed] when Enron's stock
price, which achieved a high of US$90 per share during mid-2000,
decreased to less than $1 by the end of November 2001. The U.S.
Securities and Exchange Commission (SEC) began an investigation, and
rival Houston competitor Dynegy offered to purchase the company at a
very low price. The deal failed, and on December 2, 2001, Enron filed for
bankruptcy under Chapter 11 of the United States Bankruptcy Code.
Enron's $63.4 billion in assets made it the largest corporate bankruptcy in
U.S. history until WorldCom's bankruptcy the next year.[2]
• Many executives at Enron were indicted for a variety of charges and were
later sentenced to prison. Enron's auditor, Arthur Andersen, was found
guilty in a United States District Court, but by the time the ruling was
overturned at the U.S. Supreme Court, the company had lost the majority
of its customers and had closed. Employees and shareholders received
limited returns in lawsuits, despite losing billions in pensions and stock
prices. As a consequence of the scandal, new regulations and legislation
were enacted to expand the accuracy of financial reporting for public
companies.[3] One piece of legislation, the Sarbanes-Oxley Act, increased
consequences for destroying, altering, or fabricating records in federal
investigations or for attempting to defraud shareholders.[4] The act also
increased the accountability of auditing companies to remain unbiased
and independent of their clients.[3]

8. • First five years of 21st century: wave of ethical
scandal, in the corporate worked: fraudulent
and dishonest practices:
WorldCom, Tyco,, Merrill and Lynch, Citigroup
Salomon Smith Barney, New York Exchange
• The question is not about why ethics should
be part of business, but which ethics should
guide business decisions and how ethics can
be integrated within business.
• Students unfamiliar with ethical issues:
unprepared for careers in business

9. • What caused this change? The phrase “too big to
fail” justified the need for trillions of $’s of the US
government used to avoid a more significant
economic collapse in 2008-2009
• Ethical Failures: responsible for business failures
last decade
• Ethical failure jeopardize economic well being of
the entire country.
• 2002 US Congress passed the Sarbanes Oxley Act:
Code of Ethics for Senior Financial Officers
require corporations have code of ethics
applicable to principal financial office and
accountin officer.

10. • The code promotes:
1.honest and ethical conduct, including ethical
handling of actual or apparent conflicts of
interest between personal and professional
relationships
2. full, fair, accurate, timely, and understandable
disclosure into the periodic reports required to
be filed by the issuer
3. Compliance with applicable governmental
rules and regulations

11. • Unethical behavior: create legal risks for a
business, financial and marketing risks
• Ethical behavior and reputation: provide
competitive advantage in marketplace and
with customers, suppliers, and employees.
• Consumer boycotts: Nike, MacDonald's Home
Depot, Gap, K-Mart, Dona Karen, Wal-Mart
• Business student need to study ethics: be
prepared for career in contemporary business.
Business must integrate ethics into its
organizations' structure.