Business Ethics: Main Theories

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Part 1

According to the Consequentialist theory of ethics the outcomes of an action should justify whether the act was right or wrong. Melvin, H. (2005) stated that the good result should indicate the incensement of happiness or decrease of unhappiness that demonstrate the correctness of the act. So from this point of view the Merrill Lynch had to supervise the accounting procedures of its clients such as the Enron in this case to check whether it was going to increase its value or not.

Melvin, H. (2005) also added that the Deontological theory of ethics argues the person who is supposed to do anything should perform his/her duty and accordingly. It has been described that the will to perform a duty comes from obligation. Here, Merrill Lynch’s duty was not holding any type of illegal deal. US Securities & Exchange Commission (2003) quoted Cutler S. M, the Director of SEC mentioning that there is no direct responsibility of a party to check up or to supervise other parties’ accounting procedures and financial statements.

But if the first party already knew about the intention of the second client who has manipulated accounting procedures, financial statements he must be aware of that party. It is the first party’s responsibility to supervise the second party’s accounting procedures and financial statements. In this case, the Merrill Lynch’s acceptance of the unusual offer to purchase the three electrical generating barges in the waters of Nigeria was actually a fake offer. Here the Merrill Lynch’s obligation was to reject the deal as the intention to deceive the Enron’s stockholders and investors. According to the theory named the Deontological theory of ethics, the Merrill Lynch was supposed to comply with the obligation aforesaid and for the very reason it had to supervise the accounting procedures of the Enron.

According to Kohlberg’s theory of moral development, human usually acts not to get punishment but to avoid punishment. The direct consequences of any act justify the morality of the act. The theory also suggested that fair deals are defined based on their influences on interests of other people and gaining others’ authorization. Moreover acts those are approved by the society and those are built due to justice are to be made (Kohlberg’s Theory of Moral Development, 2001). For example in the case, the Merrill Lynch’s acceptance of the deal was supposed to be backed by a close analysis of others’ interests and a definition of the means of justice in the acceptance of the deal. To perform these obligations the Merrill Lynch had to supervise the accounting procedures of the Enron.

From the above discussion, it can be said that the Merrill Lynch’s responsibility to supervise the accounting procedures of its client (say the Enron) was to ensure the following:

  • Positive end result of the deal i.e., no punishment would be required;
  • Compliance with the obligation of its duty;
  • Compliance with rule of justice;
  • Compliance with social norms.

Part 2

From the fact, it can be found that Merrill Lynch was not in the electrical generating business that indicates memorandum of association was not specify it as an object of the company, therefore Merrill Lynch was liable for ultra vires activities. First, it should consider whether Merrill Lynch was unwittingly duped by agents at Enron and in order to assess this issue it should consider directors liability, constitution and code of ethics of both companies and whether It was act outside of its capacity or not.

Directors of Enron had misrepresented mentioning that Enron would guarantee to find a potential purchaser for the barges otherwise buy them back within a period of six months with an assured profit of 15% on Merrill Lynch’s expenditure which was $7 million. If Merrill Lynch had good faith on this statement, or the bone fide purchaser of barges, they would not be liable but if it had the opportunity to investigate the issues then it cannot claim misrepresentation.

On the other hand, the Merrill Lynch was a culpable participant in Enron’s accounting machination because it had not followed the code of ethics of its own and wittingly avoided its responsibility to check the deal closely. The acceptance of the offer though the Merrill Lynch knew that the offer had been designed to inflate fraudulently the yearly earnings of the Enron. If the code of ethics of the Merrill Lynch is considered then it will be clear how it was a culpable participant in the Enron’s accounting machination. According to the Merrill Lynch’s Code of Ethics, the company and its executives and employees should be abided by some ethical codes. Non-compliance with the following codes means its state of being a culpable participant in the deal.

Fair Dealing

Fair dealing means deal in a fashion that does not result in any kind of illegal gains to any party thereto. That means concealment of facts of the deal, illegal activities those are opposed to state laws, and manipulation of any dataset would not take place in fair dealings. Here the Merrill Lynch knew the fact that the offer of sale made by the Enron was not a real sale rather it was a disguised short-term loan. In addition, the Merrill Lynch knew that the Enron was doing the agreement with it only to inflate Enron’s yearly earning by $12 million fraudulently. Moreover though James A. Brown noticed about the Enron’s manipulated earnings but the Merrill Lynch did not reject the offer rather accepted it knowingly.

Safeguarding the Assets of Merrill Lynch

In every of the fair dealing made by the Merrill Lynch, there should be enough safeguards for its invested assets. In the offer made by Enron to Merrill Lynch, the asset (a short-term investment of $7 million) was not safeguarded because of not having any kind of legally enforceable agreements. That means to manipulate the financial statements of the Enron and to inflate its earnings the Merrill Lynch willingly remained reluctant to form any kind of legal relationship with the Enron to safeguard its assets. In the same manner, it became a culpable participant to the Enron’s accounting machination.

Compliance with State Laws

It means no deal to be considered and held in good faith against state laws. Because doing the same is opposed to public policy. Here by veiling the information of the Enron’s manipulation of earnings and helping the Enron in the task (which was beyond public interests) further clarify the culpable engagement of the Merrill Lynch in the Enron’s accounting machination.

However, from the fact of the question, it is not possible to infer whether Daniel Bayly had signed on behalf of the Merrill Lynch or not, if Mr. Bayly had signed his own capacity then Merrill Lynch would not culpable participants in Enron’s accounting machinations. From the above discussion, it is clear that the Merrill Lynch accepted the offer willingly and knowingly. Therefore, the Merrill Lynch was culpable participant to the Enron’s accounting machination.

Non-accounting behavior

It means of holding fraudulent deal to manipulate earnings such as electricity trading fraud. In this case the Merrill Lynch was ignorant about the fact and hence failed to follow due diligence. Moreover, the Merrill Lynch did not even analyze the ultimate outcomes of the deal. The deal was also a means of manipulation of earnings. But knowingly the Merrill Lynch accepted the immoral offer and no diligence had been followed.

Behavior consequential to core accounting issues

It means profiting from accounting operations and fraudulent accountancy. It was related with insider trading through creating Special Purpose Entities (SPEs) and it also was related with falsification, no declaration of tax arising, money laundering, and avoidance of rule of justice. The Merrill Lynch was completely ignorant of practices of the Enron. When the Enron said that if not any third party came to buy the barge, one of the many off balance sheet partnerships or SPEs could be set up it was accepted. McBarnet, D (2006) argued that it was the Merrill Lynch’s job to be clear about class because in most of the cases the Enron completed its fraud by using these fraudulent entities.

Behavior incidental to executing the accounting or financial structuring practices

This means of conspiracy, helping in fraud and flex swindle. In this case, the Merrill Lynch also overlooked that it was going to sign a deal, which was eventually an accounting fraud. The Merrill Lynch thereto helped the Enron willingly and knowingly and therefore failed to follow the dictates of due diligence. Furthermore non-compliance of the Merrill Lynch with the ethics of banking business also was responsible for its failure to follow due diligence. Božovic, J (2007, p.176) mentioned various Ethics of Banking Business. As an investment bank the ways in which the Merrill Lynch was supposed to follow the dictates of due diligence are as following:

Good Intentions

It means each of deal, which has been done by a financial institution, should be driven by good intentions. It is also supported by the Consequentialist theory of ethics and the Kohlberg’s theory of moral development. In these theories, the end goal, which contributes positive values to the decision maker as well and right. In this case, the intention of the Merrill Lynch and the Enron was to inflate the Enron’s earnings fraudulently. Therefore there was breach of dictates of due diligence because the intention was completely immoral and did not justify the rightness.

Business compromise and business tolerance

It refers to the collaboration and equalization of interests of all the parties involved in a deal or a contract. This is also suggested by the Kohlberg’s theory of moral development. In the theory, socially desirable goals are said good and right. That means where social approval is present with due compliance of social rules and rule of justice that is the good behavior. In this case the deal was completely beyond the interests of the society and did not maintain the rule of justice and therefore was not carried out by following dictates of due diligence.

According to Božovic, J., (2007, p.177), when any financial institution takes too much risk at its business it violates the principles of business ethics. In this case, Merrill Lynch also violated this responsibility by accepting a very high-risk investment. The investment was risky because of not having legal enforcement capability. Besides uncertainty regarding the period of bearing the barges also made the investment risky.

Božovic, J., (2007, p.177) further stated that when a financial institution failed to securitize its investment, it failed to follow business ethics. In this case, there was no written security for the Merrill Lynch’s investment. There was only a verbal agreement between the parties and the Merrill Lynch might loss the full amount of its investment. He also stated that each of the deal held by any financial institution has to follow strictly maintained procedures. That means strong obligations for duty. It is further reinforced by the Deontological theory of ethics where obligation of duty is given the highest priority. In this case, there were no formal procedures maintained and/or followed in the acceptance of the offer.

Moreover acceptance of the deal in good faith regardless of its inherent problems also paved the way of failure to comply with due considerations. The reliance more on the Enron’s mere statements was also a way to breach due considerations. The most importantly the Merrill Lynch’s values of being the Enron’s friend in the deal also was a way to breach due consideration. These were not in accordance with morals of ethics and were completely beyond social interests. Moreover, directors have duty of care towards the company and their duties to act bona fide in the interests of the company but the directors of Merrill Lynch has breached of that duty and they were also liable for negligence.

As the Merrill Lynch failed to comply with the norms of the theories of ethics, it failed to sustain according to the due considerations. From every perspectives of the case, the Merrill Lynch failed to comply with every single moral. The Enron was doing its business by doing fraud repeatedly. Non-detection of the fraudulent accountancy system of the Enron also was responsible for the Merrill Lynch’s failure. In short high risky investment, no legal enforcement, no legality, lack of securitization, lack of formal procedures of operations, and ignorance in decision making were the key ways how the Merrill Lynch failed to follow the dictates of due diligence in its evaluation of the offer from the Enron.

Answer to the question no. 3

According to Hall, J., (2004, p. 3-3) there are five conditions to be met by any act to be considered as fraud. These are falsification or exclusion of dataset, the excluded dataset is material in decision-making, has been desired and intended to deceive someone through the falsification, is justifiable if someone is affected due to the reliance on the falsification, and any kind of definable loss took place. In the case, there were all these fraud factors or conditions met. The deal held by the Merrill Lynch and the Enron was a complete falsification because of veiling actual amount of earnings. The falsification was also material to the decisions that the decision makers (the investors and its stockholders) could make. Such an inflated earning made the investors yearn for the Enron’s stocks and made the stockholders retain the Enron’s stocks. The illegal act that was intended to veil the Enron’s earning was also justifiable. Therefore, the accounting fraud was taken place by the two participants of the deal.

On the other hand, the Enron’s fraud of presenting fraudulent earnings to deceive investors made the Merrill Lynch responsible. It was Merrill Lynch’s duty to look at the accounting procedures of the Enron and to unveil such an illegal act in favor of the investors and stockholders of the Enron. But in contrast of being a prudent participant, the Merrill Lynch made intentional attempt for its mere benefit of gaining some money in short run and hence the Merrill Lynch was also deceiving the stakeholders of its own and that of Enron’s. The responsibility arose thereto was only confined to the extent the Merrill Lynch held the deal with the Enron. Unless the Merrill Lynch held the deal, the Merrill Lynch would not become responsible in this respect. Moreover, non-compliance with various ethical views also made the Merrill Lynch responsible for the engagement in the Enron’s accounting fraud.

According to Kantian Approach to Business Ethics (as described by Norman E. Bowie) there are various morals regarding business operations. The ethical views, which the Merrill Lynch had ignored:

Business is a Moral Community

According to the norm, it is thought that the business firm is like a state where no illegal and immoral job could be carried on. For further clarification of the view, it is thought that in making decision, the decision makers should consider interest of its stakeholders and no decision should be made to favor any specific stakeholder and/or any specific group of person. Moreover, business should be carried in such a way that it complies with strict and specific procedures for all of its tasks and it would maintain a relationship of justice between all stakeholders. Here, the Merrill Lynch did not comply with the norms, as it had not followed rule of justice and state laws. If the Merrill Lynch could consider all stakeholders’ interests in the acceptance of the deal, the deal could not be held. Here the Merrill Lynch did not consider its stakeholders’ interests and it had just agreed on the offer without exercising any due diligences and without showing any consideration about risks.

The Purity of Motive

It means the motive of doing anything has to be fair, pure and legal. There should not be any kind of fraudulent behavior exercised to make others suffer, that is not discounting others’ interests for own interests. In the case, the motive of the Enron in the deal with the Merrill Lynch was to deceive its stockholders by producing and providing fraudulent high earnings. In addition, the motive of the Merrill Lynch therein was to win a short run gain from the short-term investment. Moreover, the Merrill Lynch complied with the offer to act as a friend to the Enron. Merrill Lynch also accepted a speculative business where it did not consider business safety & stakeholders’ interests and therefore it was responsible for the accounting fraud made by the Enron.

If the lawsuit regarding the deal is considered wittingly, it will be found further that the Merrill Lynch was responsible for the accounting fraud of the Enron. Eichenwald, K (2003) argued that the two transactions made by the Enron were completely bogus for being fictitious sales and the investment was to aid and abet the Enron to commit the accounting fraud. In the deals the Merrill Lynch plotted its position as “Friend to Enron” to help the Enron manipulating its earnings (, 2003, p.3). Being a friend of doing an illegal act added further insults to the injury of the Merrill Lynch and hence made it responsible for the accounting fraud of Enron. In the lawsuit, the Merrill Lynch agreed to pay a sum of $80 million to the SEC (Security and Exchange Commission) of USA where it neither agreed nor disagreed on the fact that it was guilty in relation with the deal. In an indictment it was found that the Merrill Lynch only agreed with the offer made by the Enron because the sale of assets was not a real sale of asset at all (, 2003, p.4).

That means when the Merrill Lynch knew that the sale of the asset was not a real sale rather was a means of furnishing wrong financial statements and falsification of the firm’s actual performance only then it engaged in the deal. In addition, by giving accent wittingly for such a deal the Merrill Lynch created liability for itself. Moreover to make regulators and auditors fool and to veil the fact, the Merrill Lynch and the Enron entered into a fraudulent agreement to project that the sale was a real one. By signing, the agreement the Merrill Lynch once again became liable for its “friend to Enron” status because both of the party eventually committed breach of fairness of dealing.

A company is a separate legal entity different from its members and it can therefore sue and be sued in its own name but the problem arises from lifting the veil of incorporation and here Merrill Lynch would be responsible for Enron’s accounting fraud if :

  • Court treat these companies as single economic unit,
  • If Merrill Lynch and Enron had formed LJM2 to perpetrate fraud or the entire dealings were to perpetrate fraud.

So in short, it is obvious that the helping hands of the Merrill Lynch helped the Enron’s and made the accounting fraud happen. The Merrill Lynch helped the Enron by giving disguised loan without considering the risks inherent. Moreover it helped by signing a falsified agreement to veil the illegal act. For these very reasons, the Merrill Lynch was responsible for the Enron’s accounting fraud.


  1. Božovic, J., (2007). Business Ethics in Banking. Web.
  2. Business Ethics: Utilitarianism, (2005).
  3. Business Ethics: Kantian Ethics (Deontology), (2005).
  4. Eichenwald, K. (2003), 4 at Merrill Accused of an Enron Fraud, New York Times.
  5. (2003), United States District Court Southern District of Taxas Houston Division: Superseding Indictment.
  6. Hall, J. (2004), Accounting Information Systems, Chapter 3: Ethics, Fraud, and Internal Control, 5th edition, USA: South-Western Publishing Co. Web.
  7. Kohlberg’s Theory of Moral Development, (2001).
  8. McBarnet, D., (2006), After Enron: Will ‘Whiter Than White Collar Crime’ Still Wash? Web.
  9. ML & CO. INC., (2009), Merrill Lynch’s Code of Ethics for Directors, Officers, and Employees, Merrill Lynch & Co., Inc. Guidelines for Business Conduct.
  10. Merrill Lynch, (2009), Merrill Lynch’s Guidelines for Business Conduct governs the way in which we do business.
  11. Merrill Lynch, (2009), Merrill Lynch, Pierce, Fenner & Smith Incorporated Investment Adviser Code of Ethics.
  12. Norman E. Bowie, (1999), Business Ethics and Normative Theories: A kantian approach to business ethics. Web.
  13. Trevino, K. L., & Nelson, A. K., (2006), Managing Business Ethics: Straight Talk about How to Do It Right, 4th Edition, John Wiley & Sons, Inc. Web.
  14. US Securities & Exchange Commission, (2003), SEC Charges Merrill Lynch, Four Merrill Lynch Executives with Aiding and Abetting Enron Accounting Fraud. Web.

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BusinessEssay. "Business Ethics: Main Theories." November 12, 2022.