In order to teach ethics, Eric Lewis has to show students at Union Graduate College the dark side: how to commit fraud at a company.

It’s often the only way Lewis, dean of the Schenectady, New York, school, can make idealistic students comprehend how attractive unethical decisions can be, and teach them how to avoid such traps.

“It’s important to make them understand the slippery slope when an unethical decision is the easy way out. We have to get them in that mind-set and help them understand when their character kicks in,” Lewis said.

The divide between understanding ethics and acting on that knowledge is the next step in the evolving process of how business schools and MBA programs teach ethics. It’s a subject that has grabbed headlines since last year when the Wall Street meltdown hit and Bernie Madoff became a household name.

Lewis and other professors rush to defend business schools against critics—including BusinessWeek—who blame poor teaching as a cause of the crisis on Wall Street. Business schools and MBA programs have been changing the way they approach ethics long before the financial crisis, professors said.

“I don’t think any of us said, ‘Oh, my gosh, we were lacking, and we need to revamp the whole system,’” said Aine Donovan, who teaches ethics and business at Dartmouth College. “We were doing pretty well to begin with.”

Professors pointed to the Enron Corp. scandal of 2001 as a turning point that helped provoke business schools and MBA programs to rethink how they taught ethics.

Most schools, but not all, have abandoned the philosophy of only requiring students to take a onetime class on ethics that only covered general topics.

Instead, schools have focused on weaving practical ethics lessons into every course, highlighting ethical dilemmas in specific professions. The Wall Street crisis has magnified and accelerated that process.

Still, there’s only so much a business school can do, professors said.

“It tends to be cyclical. When things were going very well, people just get turned off if you begin to talk about complex ethical problems, ” said Jonathan Story. He is a global business professor at Rensselaer Polytechnic Institute’s Lally School of Management & Technology in Troy, New York.

“I’m not taking business schools off the hook; I’m just saying there’s a limit to what they can do,” Story said.

At Union Graduate College, Lewis sees a difference between teaching students to recognize ethical dilemmas and then having them act appropriately.

“I don’t think the people at Enron, if they’d take 10 ethics courses, would have behaved any differently,” Lewis said.

“It’s a character question. We can teach ethics, but not character. And that’s where we can do better—by trying to give students the tools to act on their ethics education.”

Donovan, the ethics professor at Dartmouth, believes it’s time for business schools and MBA programs to act more like medical schools. She teaches classes in both areas and directs the college’s Ethics Institute.

“The emphasis on ethics in medical school is overpowering. Business schools aren’t as attentive to that need,” Donovan said.

“We’re getting there,” she added. “All we need are a few more Bernie Madoffs, and we’ll definitely get there.”