To comprehend the topic of business ethics, it is important to identify the voluntary and legally required aspects of institutional practices and the behavior that supports it. Aristotle (384– 322 BC) believed that a person’s good or bad character was developed by habituation. In other words a person’s goodness or wickedness is developed as the result of repeatedly engaging in acts that have a common quality. These repetitious acts rely on an individual’s natural aptitudes and tendencies to gravitate towards righteous or immoral behavior (Aristotle, 2012). In other words, the formation of a person’s character emerges by actions that are committed repeatedly in a certain manner and as a result of being guided or receiving direction externally to support these patterns. Once the behavior is understood by the individual, they can then choose to engage their free will. The continuation then, of the behavior, becomes a habit which over time translates into second nature. This demonstrates how a leader’s conduct and business practices cultivate a climate that is adopted by subordinates. During the Enron scandal for example, investigators discovered that Enron’s leaders developed a culture of deceit that was supported by their top executives, board members, and corporate attorneys, to gain the competitive edge and ensure capital gains.
The Enron collapse revealed deep failings that existed in the American accounting system and in the operation of corporate boards. Enron and other widespread corporate accounting scandals resulted in Congress establishing the Sarbanes-Oxley Act (SOX). It was designed to create a federal oversight system to monitor corporate accounting practices by making financial fraud reporting a criminal offense. Boatright (2009) reported that the SOX Act also increased the penalties for executives that engage in criminal activity. In addition, SOX addressed a wide range of provisions to require corporate transparency in three major areas: financial reporting, corporate boardrooms, and criminal law (Boatright, 2009). Poor business decisions alone however, did not result in Enron’s downfall. What was cleverly disguised from stakeholders was insider plundering. Because of this, Congress feels that Federal oversight is needed. Investors rely heavily on financial reports and in turn these reports can become the vehicles that lead to fraud. For example, by presenting a false image, executives can cover poor performance outcomes to maintain their lavish lifestyles. SOX changed the way corporations address problems with accounting and auditing. It requires that every publicly traded organization establish an independent auditing committee that is solely responsible for detecting fraud. It also supports internal whistle blowing by mandating all companies incorporate policies to support employees reporting acts of fraud without fear of retaliation.
CEOs careers are now on the line. They are required to sign off on company financial forms to ensure their processors have complied with all mandates. Many corporate chiefs complain about the amount of time and money that is invested to comply with SOX regulations, but most agree that it is worth the trouble to reassure investors. Ferrell et al. (2012) posit that in addition, the law requires corporations to design a code of conduct that includes transparency and accountability in financial reporting to stakeholders (Ferrell, Fraedrich, & Ferrell, 2013). Experts expect further misconduct to occur despite the regulatory laws because global competitors are not required to comply with these regulations. This means that more scrutiny is called for because the more integrated world markets become, the more difficult it is to compete on a global level when the playing field is uneven. In the meantime, only time will reveal the long term results.
Aristotle. (2012). Ethics. Seattle, WA: Amazon Digital Services, Inc.
Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.
Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.