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  1. 1. Chapter 1Why Study Ethics?
  2. 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. 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. 4. FINSEPRO/INSPERO• What do you know of this case?
  5. 5. Sec. 1-1: Why Study Ethics?• Goals of Business Ethics:1. Teach and learn about what happens in business2. Help us become more ethical and to help us all create andpromote ethical institutions• How can we achieve these goals?1. By developing a better understanding of ethical issues2. By developing analytical skill with which to evaluate ethical issues3. Developing a refined sensitivity to appreciate the significance of leading an ethical life.
  6. 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 Enrons board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.
  7. 7. • Shareholders lost nearly $11 billion[citation needed] when Enrons 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. Enrons $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldComs bankruptcy the next year.[2]• Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enrons 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. 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. 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. 10. • The code promotes:1.honest and ethical conduct, including ethicalhandling of actual or apparent conflicts ofinterest between personal and professionalrelationships2. full, fair, accurate, timely, and understandabledisclosure into the periodic reports required tobe filed by the issuer3. Compliance with applicable governmentalrules and regulations
  11. 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, MacDonalds 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 itsorganizations structure.