Ethical traps in business

Small Steps to Big Fraud

Toby Groves grew up in Ohio believing that he was a good person with strong ethical values. After his older brother’s conviction of bank fraud in 1986, Toby vowed to conduct business in a transparent and ethical manner. Just over 20 years later, Toby Groves was sentenced to two years in prison for bank fraud, which had begun with small steps to cover financial obliga- tions resulting from poor management of his mortgage lending business.

In 1989, Toby founded Groves Funding Corporation, which would become Greater Cincinnati’s 19th largest home mortgage lender by 2007 (Watkins, 2007). The company had a strong values statement and espoused ethical conduct. Jim Cergol, a loan officer at Groves Funding, said, “Our culture was if you do things right, you know, you’ll be successful and there’s no need to ever be dishonest. You knew you don’t cross those lines” (Joffe-Walt & Spiegel, 2012, 03:48–03:59).

In 2004, Toby realized that his company was not as profitable as he had once believed. Small errors in mortgage loan calculations had accumulated to create a company fund shortfall of $250,000. To cover company financial obligations, Toby mortgaged his own home to gener- ate the necessary funds. In order to secure the loan, he inflated his income on the bank’s application form. It seemed like a small lie, and at that time, inflating income on mortgage applications was common practice, so the risk of detection was small. Toby rationalized that the funds would save his company and his employees’ livelihood. Unfortunately, the need for funds increased after Toby discovered greater losses from risky mortgages. To save his busi- ness, Toby began to secure false mortgages—loans on houses that did not exist. The complex- ity of loan applications meant Toby could not complete the false mortgages alone. He had to include his staff in the fraudulent activities, convincing them that it would be “just this once.” By his arrest in 2007, the mortgage fraud had grown to $5.2 million (Baverman, 2008).

What led Toby to lose sight of his values and engage in unethical business? Why would his employees perpetuate the fraud? Toby’s story illustrates that ethical misconduct is not the result of a few bad people. It can happen to any employee who fails to recognize the ethics of a decision. Pressures to follow orders, make business goals, and ignore bad news can lead to defective ethical reasoning. Signals of defective reasoning include ethical decisions with one or more of the following characteristics:

1. Few ethical alternatives are perceived, all possible alternatives are not considered. 2. Chosen unethical alternative is not reexamined; it is justified as being the only choice. 3. Rejected ethical alternatives are not reexamined—the decision made is final. 4. Rejection of dissenting opinions; stakeholder input is discouraged. 5. Selective bias of new information; research is conducted for data to support the