Ethical Failures in Organizations Explained: How Enron, Volkswagen, Boeing, and Others Lost Their Way
On October 29, 2001, Sherron Watkins, a vice president at Enron, testified before a congressional committee that she had warned Enron CEO Kenneth Lay months earlier that the company was "an elaborate accounting hoax." Watkins had discovered that Enron was using complex off-balance-sheet entities to hide billions of dollars in debt and inflate profits. She had written a memo to Lay warning that the company could "implode in a wave of accounting scandals."
Lay did not act on the warning. Within weeks of Watkins's congressional testimony, Enron filed for what was then the largest bankruptcy in American history. The collapse wiped out $74 billion in shareholder value, destroyed the retirement savings of thousands of employees who held company stock in their 401(k) plans, and led to criminal convictions of senior executives including CEO Jeffrey Skilling and CFO Andrew Fastow.
Enron did not begin as a criminal enterprise. It began as a natural gas pipeline company that evolved into an energy trading company, then into a financial services company, and eventually into a company that manufactured the appearance of financial performance through increasingly elaborate accounting fraud. The ethical failure was not a single decision but a progressive deterioration--a gradual normalization of practices that, at each step, seemed like small deviations from standards but that collectively constituted massive fraud.
This pattern--incremental ethical erosion rather than dramatic criminal conspiracy--is the most common form of organizational ethical failure. Understanding how it happens, why it persists, and what enables it is essential for anyone who works in or studies organizations.
How Did Enron's Ethical Failure Happen?
The Mechanisms of Fraud
Enron's ethical failure involved several interconnected mechanisms:
Mark-to-market accounting. Enron adopted mark-to-market accounting for its energy trading business, which allowed the company to record the total estimated future value of long-term contracts as current revenue at the time the contracts were signed. A twenty-year natural gas contract worth an estimated $500 million over its lifetime could be recorded as $500 million in revenue in the year it was signed. This accounting treatment, while technically permissible under certain conditions, created an incentive to sign large contracts (to book immediate revenue) without regard for whether those contracts would actually be profitable over their full term.
Off-books entities hiding debt. CFO Andrew Fastow created a network of Special Purpose Entities (SPEs)--separate legal entities ostensibly independent of Enron--that were used to transfer debt off Enron's balance sheet. These entities borrowed money and assumed liabilities that, had they been on Enron's books, would have revealed the company's true financial condition. Fastow personally profited from these entities, earning tens of millions of dollars in management fees while concealing the company's deteriorating financial position.
Culture rewarding results over ethics. Enron's internal culture, shaped by CEO Jeffrey Skilling's aggressive management style, rewarded financial performance above all else. The company's performance review system, a forced ranking model called "rank and yank," created intense internal competition and pressure to produce results at any cost. Employees who met targets were rewarded extravagantly; those who did not were fired. This system created powerful incentives to hit numbers by any means available, including means that were unethical or illegal.
Auditors complicit in fraud. Arthur Andersen, Enron's external auditor, was supposed to provide independent verification of the company's financial statements. Instead, Arthur Andersen became complicit in the fraud, approving accounting treatments that obscured the company's true financial position. The auditor's independence was compromised by the enormous consulting fees Enron paid--Arthur Andersen earned $25 million in audit fees and $27 million in consulting fees from Enron in 2000, creating a financial dependency that made challenging the client's accounting practices professionally and financially dangerous.
Volkswagen Dieselgate: Engineering Ethics at Scale
What Was Volkswagen's Dieselgate Scandal
In September 2015, the United States Environmental Protection Agency issued a notice of violation to Volkswagen, revealing that the company had installed defeat device software in approximately 11 million diesel vehicles worldwide. The software detected when a car was being subjected to emissions testing (by monitoring steering wheel position, vehicle speed, engine operation duration, and barometric pressure) and activated full emissions controls during the test. During normal driving, the emissions controls were reduced or disabled, allowing the vehicles to emit nitrogen oxides at levels up to 40 times the legal limit.
The deception was sophisticated, deliberate, and systematic. It was not the work of a rogue engineer or a single decision. It was a program that involved software development, testing, deployment across vehicle platforms, and ongoing concealment over a period of approximately six years.
Engineering culture and pressure for results. Volkswagen's internal culture combined German engineering perfectionism with intense competitive pressure. The company's leadership had set aggressive targets for diesel vehicle sales in the United States, where diesel passenger cars had historically had minimal market share. Meeting US emissions standards while maintaining the performance characteristics (power, fuel economy) that made diesel attractive to consumers proved technically more difficult and expensive than anticipated.
Rather than acknowledging the technical limitation and adjusting their market strategy, engineers and managers chose to cheat the test. The defeat device allowed Volkswagen to claim compliance with emissions standards while delivering the performance characteristics the market demanded--an engineering solution to a problem that should have been addressed through honest disclosure and adjusted expectations.
Ethical blindness at scale. The number of people who knew about or contributed to the defeat device program remains unclear, but the software was deployed across multiple vehicle platforms over multiple years, suggesting involvement well beyond a small group. The scale of participation raises questions about organizational ethical blindness: how do large numbers of people participate in fraud without recognizing it as fraud?
The answer lies partly in the normalization of deviance--the same phenomenon that contributed to the Challenger disaster. When a practice begins and is not immediately punished or detected, it becomes normalized. The defeat device was initially a temporary measure, then a standard practice, then an accepted part of how business was done. At each stage, the practice became more normalized and the ethical violation became less visible to those involved.
Boeing 737 MAX: When Financial Pressure Overrides Safety
Why Did Boeing 737 MAX Crashes Happen
On October 29, 2018, Lion Air Flight 610 crashed into the Java Sea thirteen minutes after takeoff from Jakarta, killing all 189 people on board. On March 10, 2019, Ethiopian Airlines Flight 302 crashed six minutes after takeoff from Addis Ababa, killing all 157 people on board. Both crashes were caused by a software system called MCAS (Maneuvering Characteristics Augmentation System) that pushed the nose of the aircraft down based on faulty sensor data, and that pilots were unable to override because they did not know the system existed.
Cost-cutting and competitive pressure. Boeing developed the 737 MAX under intense competitive pressure from Airbus's A320neo, which offered significant fuel efficiency improvements. Rather than designing a new aircraft--a process that would take years and cost billions--Boeing chose to modify the existing 737 design by installing larger, more fuel-efficient engines. The larger engines changed the aircraft's aerodynamic characteristics, requiring the MCAS system to compensate.
Rushing certification. Boeing marketed the 737 MAX as requiring minimal additional pilot training compared to the existing 737 NG, which meant airlines could transition to the new aircraft without expensive simulator training for their pilots. This marketing promise created pressure to minimize the differences between the MAX and its predecessor, which led to the decision to conceal the MCAS system from pilots and from the aircraft's operating manual.
Hiding MCAS from pilots. The most consequential ethical failure was the decision not to inform pilots about MCAS. If pilots had known about the system--how it worked, what could trigger it, and how to disable it--both crashes might have been prevented. But disclosing MCAS would have required additional pilot training, which would have undermined the "minimal training" marketing promise and reduced the 737 MAX's competitive advantage.
Prioritizing financials over safety. Internal communications revealed that Boeing employees were aware of problems with the 737 MAX's development and certification. One employee wrote in a 2016 internal message: "This airplane is designed by clowns who in turn are supervised by monkeys." Another wrote: "I still haven't been forgiven by God for the covering up I did last year." These communications suggest that individuals within Boeing recognized the ethical failures but felt unable to stop them.
Cambridge Analytica: Data Ethics and Democratic Manipulation
How Did Cambridge Analytica Breach Ethics
In 2018, it was revealed that Cambridge Analytica, a political consulting firm, had harvested personal data from approximately 87 million Facebook users without their informed consent and used that data for political targeting in the 2016 US presidential election and the UK Brexit referendum.
The data was originally collected by researcher Aleksandr Kogan through a personality quiz app on Facebook. Approximately 270,000 users took the quiz, which collected not only their data but the data of all their Facebook friends--a feature of Facebook's platform at the time. This data was then transferred to Cambridge Analytica, violating Facebook's terms of service (but not, at the time, any law).
Harvested Facebook data without consent. The users whose data was collected through their friends' quiz participation never consented to data collection, did not know their data was being collected, and had no mechanism to prevent it.
Used for political manipulation. Cambridge Analytica used the data to build psychological profiles of voters and target them with tailored political messaging designed to exploit their psychological vulnerabilities. The firm's CEO, Alexander Nix, was recorded on hidden camera boasting about using honey traps, bribery, and fake news to influence elections.
Violated user trust at massive scale. The Cambridge Analytica scandal revealed that Facebook's platform architecture--which allowed apps to access not just a user's data but their friends' data--created a systemic vulnerability to data exploitation. Facebook's failure to enforce its own policies and to protect user data represented an ethical failure of platform governance.
| Organization | Ethical Failure | Root Cause | Consequence |
|---|---|---|---|
| Enron | Accounting fraud, off-books entities | Culture rewarding results, auditor complicity | $74B loss, criminal convictions |
| Volkswagen | Emissions test cheating | Engineering pressure, performance targets | $30B+ in costs, criminal charges |
| Boeing | Hiding safety system from pilots | Competitive pressure, cost-cutting | 346 deaths, $20B+ in costs |
| Cambridge Analytica | Mass data harvesting without consent | Platform architecture, lax enforcement | Company dissolved, regulatory reform |
| Purdue Pharma | Deceptive opioid marketing | Profit maximization over patient safety | $8B settlement, 500K+ deaths attributed |
Purdue Pharma and the Opioid Crisis
What Enabled the Purdue Pharma Opioid Crisis
In 1996, Purdue Pharma launched OxyContin, a time-release formulation of the opioid oxycodone, with an aggressive marketing campaign that minimized the drug's addiction potential and targeted physicians with financial incentives to prescribe it.
Aggressive marketing of addictive drugs. Purdue's marketing materials claimed that OxyContin had a lower addiction potential than other opioids because of its time-release formulation. This claim was not supported by adequate evidence and proved catastrophically wrong. The company spent hundreds of millions of dollars marketing OxyContin directly to physicians, including sending sales representatives to doctors' offices with branded merchandise, free samples, and financial incentives.
Downplaying risks. Purdue's marketing systematically downplayed the addiction risks of OxyContin. The company claimed that fewer than 1 percent of patients who took OxyContin would become addicted--a claim that had no scientific basis and contradicted emerging evidence from clinical practice and abuse reports.
Targeting doctors with incentives. Purdue identified and targeted physicians who were high prescribers of opioids, providing them with speakers' fees, consulting agreements, and all-expenses-paid conferences. These financial relationships created conflicts of interest that influenced prescribing behavior.
Profits over patient welfare. Internal documents revealed that Purdue was aware of OxyContin's abuse potential years before taking action. The company chose to continue aggressive marketing and resist reformulation because OxyContin was generating approximately $3 billion in annual revenue. The financial incentive to continue selling the drug overwhelmed the ethical imperative to address the harm it was causing.
The opioid crisis has killed more than 500,000 Americans since 1999, making it one of the deadliest consequences of corporate ethical failure in modern history.
Why Do Ethical Failures Happen in Good Companies?
Ethical failures in organizations rarely result from individuals who set out to do wrong. More often, they result from systemic and cultural factors that gradually erode ethical standards:
Incremental normalization of deviance. Diane Vaughan's concept, developed from her study of the Challenger disaster, describes how organizations gradually come to accept practices that would have been unacceptable when viewed from outside or from the beginning. Each small step seems minor--a slightly aggressive accounting interpretation, a small deviation from safety protocol, a minor misrepresentation to a client--but the cumulative effect is a culture in which significant ethical violations have become normal.
Pressure for results. When organizations create intense pressure to achieve specific targets--sales quotas, performance ratings, profit margins, production schedules--and the consequences of missing those targets are severe, employees face a choice between meeting targets and maintaining ethical standards. When the reward system punishes failure to meet targets more than it punishes ethical violations, the rational response is to cut ethical corners.
Diffusion of responsibility. In large organizations, individual responsibility for ethical decisions is diffused across many people, teams, and levels of hierarchy. No single person makes the decision to commit fraud or endanger safety; instead, many people make small decisions that collectively produce the ethical failure. This diffusion makes it psychologically easier for individuals to participate--"I was just doing my part"--and organizationally harder to assign accountability.
Culture not supporting dissent. When organizational culture punishes or marginalizes people who raise ethical concerns, the organization loses its capacity for self-correction. Whistleblowers at Enron, Theranos, Boeing, and Volkswagen all faced retaliation--termination, legal threats, professional marginalization--that discouraged others from speaking up.
How Can Organizations Prevent Ethical Failures?
Strong ethical culture. Culture determines what is actually acceptable regardless of what is officially stated. A company that claims to value integrity while rewarding people who cut ethical corners to hit targets has a culture that encourages ethical violation. Building an ethical culture requires that leadership consistently demonstrate, reward, and enforce ethical behavior--not just talk about it.
Psychological safety. Amy Edmondson's research demonstrates that organizations where people feel safe raising concerns without fear of retaliation are better at identifying and correcting problems before they become crises. Psychological safety is not about being nice; it is about creating an environment where honest communication about risks, mistakes, and ethical concerns is possible.
Accountability at all levels. Ethical accountability must extend to senior leadership, not just front-line employees. When Wells Fargo's fake accounts scandal was revealed, the company initially blamed individual employees for creating unauthorized accounts--ignoring the aggressive sales targets set by management that incentivized the behavior. Genuine accountability holds the people who design the systems responsible for the outcomes those systems produce.
Whistleblower protection. Organizations that protect and reward people who report ethical concerns internally create an early warning system that can detect and correct problems before they become catastrophic. Organizations that punish whistleblowers ensure that problems remain hidden until they explode.
Ethics over short-term profits. The most fundamental prevention is institutional commitment to ethical behavior even when it conflicts with short-term financial performance. This commitment requires leadership that genuinely prioritizes ethical conduct, governance structures that enforce accountability, and compensation systems that do not create perverse incentives.
Every major organizational ethical failure involves a period during which the ethical violation was known to some people within the organization and could have been stopped. Enron had Sherron Watkins. Boeing had engineers who documented their concerns in internal communications. Volkswagen had engineers who knew the defeat devices were illegal. In each case, the organizational system--its culture, incentives, power dynamics, and communication channels--prevented the internal warning from producing corrective action. Preventing ethical failures is not primarily about hiring ethical people. It is about building organizational systems that enable ethical behavior and correct ethical violations before they become catastrophic.
References and Further Reading
McLean, B. & Elkind, P. (2003). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. Portfolio. https://en.wikipedia.org/wiki/The_Smartest_Guys_in_the_Room
Ewing, J. (2017). Faster, Higher, Farther: How One of the World's Largest Automakers Committed a Massive and Stunning Fraud. W.W. Norton. https://wwnorton.com/books/Faster-Higher-Farther/
Robison, P. (2021). Flying Blind: The 737 MAX Tragedy and the Fall of Boeing. Doubleday. https://www.penguinrandomhouse.com/books/646497/flying-blind-by-peter-robison/
Cadwalladr, C. & Graham-Harrison, E. (2018). "Revealed: 50 Million Facebook Profiles Harvested for Cambridge Analytica." The Guardian. https://www.theguardian.com/news/2018/mar/17/cambridge-analytica-facebook-influence-us-election
Keefe, P.R. (2021). Empire of Pain: The Secret History of the Sackler Dynasty. Doubleday. https://en.wikipedia.org/wiki/Empire_of_Pain
Vaughan, D. (1996). The Challenger Launch Decision. University of Chicago Press. https://press.uchicago.edu/ucp/books/book/chicago/C/bo22781921.html
Edmondson, A.C. (2018). The Fearless Organization. Wiley. https://fearlessorganization.com/
Bazerman, M.H. & Tenbrunsel, A.E. (2011). Blind Spots: Why We Fail to Do What's Right and What to Do about It. Princeton University Press. https://press.princeton.edu/books/hardcover/9780691147505/blind-spots
Ariely, D. (2012). The (Honest) Truth About Dishonesty. Harper. https://en.wikipedia.org/wiki/The_(Honest)_Truth_About_Dishonesty
Milgram, S. (1963). "Behavioral Study of Obedience." Journal of Abnormal and Social Psychology, 67(4), 371-378. https://doi.org/10.1037/h0040525
Trevino, L.K. & Nelson, K.A. (2016). Managing Business Ethics: Straight Talk About How to Do It Right. 7th ed. Wiley. https://www.wiley.com/en-us/Managing+Business+Ethics-p-9781119194309
Zuboff, S. (2019). The Age of Surveillance Capitalism. PublicAffairs. https://en.wikipedia.org/wiki/The_Age_of_Surveillance_Capitalism
US Senate Permanent Subcommittee on Investigations. (2002). "The Role of the Board of Directors in Enron's Collapse." https://www.govinfo.gov/content/pkg/CPRT-107SPRT80393/pdf/CPRT-107SPRT80393.pdf
National Transportation Safety Board. (2019). "Safety Recommendation Report: Assumptions Used in the Safety Assessment Process and the Effects of Multiple Alerts and Indications on Pilot Performance." https://www.ntsb.gov/