Professional competence and business ethics
| DOI | https://doi.org/10.1108/JFC-02-2021-0024 |
| Published date | 23 April 2021 |
| Date | 23 April 2021 |
| Pages | 215-232 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Maryna Murdock,Nivine Richie,William Sackley,Heath White |
Professional competence and
business ethics
Maryna Murdock
University of North Georgia, Dahlonega, Georgia, USA, and
Nivine Richie,William Sackley and Heath White
University of North Carolina Wilmington, Wilmington, North Carolina, USA
Abstract
Purpose –The purpose of this paper is to determine if the failure of the Securities and Exchange
Commission (SEC) to persecute Madoff is, in fact, an ethical failure. The authors turn to the extension of
Aristotelian theory of moralvalues, virtue epistemology, to identify specific failures. Theauthors generalize
this study’s conclusions to an overall responsibility of regulatory agencies to exercise epistemic virtues in
their decision-making process. The authors explore how behavioral biases confound the execution of
epistemic duty, and how awareness of behavioral biases can alleviate epistemic failures. The authors
concludethis study with recommendations to prevent futurefrauds of Madoff proportions.
Design/methodology/approach –The authors rely on recent advances in virtue epistemology and
behavioral finance. The authors combine these two theoretical approachesto better understand the duty of
competence inherent in being a finance professional, and even more so in being a regulator entrusted with
overseeingfinancial industry, and psychological biases that may prevent finance professionalsand regulators
from performingthis duty.
Findings –The paper concludes that the SEC employees failed to exercise epistemic virtues in their
handling of the complaints implicating Madoff’sfirm of fraud. This failure reveals a consistent pattern of
behavioral biases in decision-making. The authors posit that knowledgeof ethical theory, specifically virtue
epistemology, as well as awareness of behavioral biases, which inhibit epistemically virtuous cognitive
process, can improve the functioning of both finance industry and its overseers. The authors suggest that
future finance professionals and regulators need to acquire this knowledge while pursuing their
undergraduateeducation: it is the duty of business schools to facilitatethis progress.
Originality/value –This paper combinesthe theory of virtue epistemology with the current knowledgeof
behavioral biases, which distort rational decision-making, to explain the failures of regulators to analyze
fraud reports. The authors extend this finding to recommend the inclusion of the theory of virtue
epistemologyin business schools’ethics curriculum.
Keywords Regulatory agencies, Investments, Fraud, Behavioral finance, Virtue ethics,
Epistemic ethics
Paper type Research paper
1. Introduction
For years, those charged with supervising the safety and soundness of the financial system have
relied on motive, opportunity and rationalization to identify ethical violations. This well-
documented “Fraud Triangle”introduced by Cressey (1953) seeks clues to the financialpressures
faced by would-be perpetrators (motive) that can be solved secretly by violating a positiono f trust
(opportunity) and that are justified by the fraudster (rationalization). Further clues can be used to
Maryna Murdock wants to thank the Mike Cottrell College of Business (MCCB) and the BB&T Center
for Ethical Business Leadership at MCCB for their research grant to support this project.
Competence
and business
ethics
215
Journalof Financial Crime
Vol.29 No. 1, 2022
pp. 215-232
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2021-0024
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
anticipate ethical violations, such as poor workplace conditions and job dissatisfaction (Hollinger
and Clark, 1983). Wolfe and Hermanson (2004) add capabilityas a fourth leg to the fraud triangle,
and they contend that without capability to carry out or conceal a crime, many will not succumb
to the fraud triangle. In fact, Albrecht et al. (1995) conclude that capability is a critical element for
large-scale fraud or fraud on a continuing basis.
Despite countless clues,regulators failed to identify and stop Bernard L. Madoff in one of
the most spectacular frauds ever committed. In Nobel (2016), conversations with Eugene
Soltes of the Harvard Business Schoolsuggest that Madoff’s fraud was seemingly motivated
by rationalization, and to some degree, by opportunity. Moreover, Madoff is described in
Nobel (2016) as a “smart guy”and confident, which supports the fourth requirement of
fraud, namely, capability.So, though the traditional clues existed, those entrustedto protect
the public either failedto or chose not to see them.
Accusations of fraud had been leveled against Madofffor years but had been ignored or
mishandled by regulators. When Madoff’s Ponzi scheme was finally uncovered, many were
not surprised. Who was to blamefor billions lost by investors? Was it Madoff alone? Or can
the circle of blame be expanded to include the regulators who supervised him and the
fiduciaries who benefitedfrom the artificial values Madoff created?
Madoff’s actions are a clear violation of ethics under any school of thought. Less obvious,
however, are the ethical violations of other financial market participants, namely, regulators
and fiduciaries. We posit that the behavioral biases of financial market participants in
supervisory roles caused them to miss the signals associated with Madoff ’s long-standing and
large-scale fraud, a clear demonstration of incompetence. We further submit that incompetence
is itself an ethical violation. A study of epistemic virtues should allow financial market
participants to overcome the behavioral biases that lead to incompetence, and allow them to act
in a more ethically responsible manner that can prevent future frauds of Madoff proportions.
Following de Bruin (2013,2015), we extend Aristotelian virtue ethics to the process of
acquisition of knowledge and discovery of truth, or virtue epistemology, and apply virtue
epistemology as a necessary tool to the field of finance. We posit that regulatory agencies,
such as the Securities and Exchange Commission (SEC), owe the public the duty of
competence and expertise, and that possession of epistemic virtues is an indispensable tool
in executing that duty. In the sections that follow, we examine the failures of the SEC
through the lens of behavioral biases that lead to incompetence. We review the theory of
moral philosophy and then apply virtue ethics to the behaviorsof regulators in the Madoff
case. We conclude with a call to action for ethics education to overcome the behavioral
biases that lead to the ethicalviolation of incompetence.
2. Behavioral biases and ethical failures
The fundamental attribution error is described by Prentice (2007, p. 17) as, “The tendency to
conclude that other people make mistakes because they are bad people, whereas we make
mistakes because we are trapped in a difficult situation.”Prentice describes the cognitive biases
that lead to “ethical traps”from the perspective of those who commit financial fraud –criminals
such as Madoff, among many others –but these same behavioral biases can be applied to the
regulators who were charged with protecting the public. We review several behavioral biases
and show how they apply equally to the ethical failures by the SEC in the Madoff case.
Obedience to authority is the cognitive bias whereby people are predisposed to please
their superiors. Building on the famous work of Milgram (1974),Prentice (2007) points out
that employees may not even need to be explicitly commanded to do something; they can
often infer what is expected of them by interpreting incentives and punishment. In the
investigation of Bernie Madoff by the SEC Northeast Regional Office (NERO), Madoff’s
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