updated 5/6/2007 4:36:09 PM ET 2007-05-06T20:36:09

Mix a business world where pay is often tied to performance with a generation of business students who cheat at alarming rates, and the outlook for corporate America sure looks grim.

No one is forecasting fraud-driven perp-walks galore as those new business leaders head into the workforce, but there certainly should be concern over their willingness to breach ethics to get ahead while they’ve been in school.

That’s why the cheating scandal rocking Duke University’s business school sends an important message to anyone pushing to ease the Sarbanes-Oxley corporate reform law: We’re not out of the woods yet, not anywhere close.

It isn’t that cheating hasn’t gone on at business schools before, but things were supposed to change after the corporate scandals earlier this decade, which led to the swift collapse of such business titans as Enron and WorldCom and jail time for some of the best-known business leaders.

Congress, for one, passed the Sarbanes-Oxley law in 2002, which forced companies to rethink how they handle everything from disclosing information to shareholders to running internal controls.

Business schools went the reform route by trying to instill a moral compass in their students though new ethics courses and honor codes. Students today were supposed to more clearly understand the idea of integrity in school and the workplace.

At Duke’s Fuqua School of Business, that effort apparently did not take hold. In its biggest cheating scandal ever, 34 students have been punished, most for working in groups on a take-home exam that was supposed to be done individually. Nine of those students face expulsion from its competitive two-year master’s in business administration program.

Duke, unfortunately, is hardly the exception. A survey released in September found that 56 percent of MBA students acknowledged cheating, compared with 47 percent of graduate students in other fields. The study, led by Rutgers University professor Don McCabe, included 5,300 students — 623 of them studying business — at 32 U.S. and Canadian institutions. Data was collected from 2002 through 2004.

The biggest force behind such ethical lapses seems to be the intensity of MBA programs, where there is competition among students not just for grades but the best post-graduate work. Add to that a school environment where faculty often doesn’t take action on cheating cases and students are hesitant to report their peers.

“Many students who cheat think business school is a game and not real. But if they are willing to cheat at a game, it makes me wonder if they will cheat when it is real, too,” said Rhonda Reger, associate professor and co-chairwoman of the management and organization department at the Robert H. Smith School of Business at the University of Maryland.

That question can’t be overlooked as these young people migrate into corporate America. The first stop for many will likely be in the trenches — with jobs that include associate-level positions at banks and brand management roles at consumer companies — where they will have some authority in how certain operations are run.

To get ahead in their profession and pay, they will have to perform by meeting or exceeding budgeted goals. Most will follow the proper protocols without question, but given the statistics, others may see no wrong in cheating.

Maybe that means pushing sales of a certain product forward to reach an earnings goals. Maybe that means booking expenses for something out of a budget for which it is not earmarked.

“My worry is how they might be tempted by a fairly minor situation, but that becomes the beginning of a slippery slope,” said E. Ralph Biggadike, professor at Columbia Business School’s Sanford C. Bernstein Center for Leadership and Ethics.

Chances are most ethical lapses wouldn’t destroy the companies where they work, but the ramifications of such behavior can only grow as the students climb the corporate ladder.

That’s why Sarbanes-Oxley is so important. It has created a deterrence culture, where employees are more aware of the consequences should they break the law.

Those who are calling for Sarbanes-Oxley to be scaled back — largely business trade groups and companies — claim that U.S. markets are now losing ground to competitors abroad due to the increased regulation.

They also focus on the time and expense needed to put the law’s policies and procedures in place. In particular, they don’t like Section 404, which is designed to ensure companies’ books are in order by forcing them to take on the laborious task of reviewing their internal controls.

If they think Sarbanes-Oxley is costly and time-consuming, try an Enron-sized fraud trial.

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