The Accounting Scandal of Healthsouth - Essay

One of the main defenses E&Y took during the early stages of the HealthSouth suit was the fact that the SEC had no well-defined rules with regards to audit-related practices. Another defense was the mere fact that E&Y never faced a criminal indictment for the HealthSouth fraud. This was mainly due to the statute of limitations placed on securities fraud. It sets it at the earlier of (a) 2 years after the discovery of the facts constituting the violation or (2) 5 years after such violation. Thus, the DOJ was unable to file criminal charges against the firm because the partner on the audit (G. Marcus Neas) was “unaware” of the fraud in 1993.

In 1984, Richard Scrushy founded HealthSouth in Birmingham, Alabama. Scrushy was the company’s Chairman and Chief Executive Officer (CEO) when the company went public in 1986. HealthSouth grew quickly over the next several years. Shortly after HealthSouth went public, it is alleged that Scrushy instructed senior staff to materially inflate the company’s earning to match expectations. In 2002, the first sign of troubles occurred when Scrushy sold $75 million of HealthSouth stock days before HealthSouth announced a large loss. After this the SEC began to investigate if any insider trading laws had been violated. In 2003,

Overview of the Case: The Securities and Exchange Commission claims Mark D. Begelman misused proprietary information regarding the merger of Bluegreen Corporation with BFC Financial Corporation. Mr. Begelman allegedly learned of the acquisition through a network of professional connections known as the World Presidents’ Organization (Maglich). Members of this organization freely share non-public business information with other members in confidence; however, Mr. Begelman allegedly did not abide by the organization’s mandate of secrecy and leveraged private information into a lucrative security transaction. As stated in the summary of the case by the SEC, “Mark D. Begelman, a member of the World Presidents’ Organization (“WPO”), abused

HealthSouth grew rapidly during the 1980’s and 1990’s. This growth was largely due to acquisitions. HealthSouth owned more than 330 hospitals worldwide. It was also during this time that Scrushy became known as one of the highest paid CEOs in the United States.

The story of HealthSouth begins with two of the most well know founders. Richard Scrushy was a bold, charismatic man of middle-class beginnings. He would rise from a mason to one of the highest earning CEO’s in the country due mainly to his ability to drive, charm, and manipulate those around him. Driven by the desire to attain wealth and status Scrushy was hired in at LifeMark where he rose through the ranks as a result of his unbridled competitive nature and workaholic tendencies.

George W. Jackson, a state operated mental health center became Mid-South Health in 1997, and in 2010 Mid-South merged with Counseling Services of Northeast Arkansas. It has been a part of Northeast Arkansas for over 3 decades and is the only non-profit community mental health center serving Northeast Arkansas out of 14 community health centers. Mid-South is a public entity governed by a 14 member board of directors from the 13 counties with a staff of 500 that includes full time grant writer, support staff, pharmacists, psychiatrists for both adults and children, clinical psychologists, licensed counselors, social workers, case managers and nurses. In 2008, Mid-South saw 72,300 patients and served 10,000 clients in 2010 at all of its locations. Mid-South accepts all insurances such as Medicare, Medicaid, AR Kids, private insurance, and they also offer an income based sliding scale for those who don’t have insurance. They have many services that include outpatient, child and adolescent, and community support systems; also, they have resources like the speaker’s bureau, people skills training, and DHS offices. The speaker’s bureau offers half hour presentations on a variety of mental health issues at no charge for business and civic groups, and the people skills training provides informative and entertaining educational services for business, industry, schools, and other organizations; one hour programs to day long seminars are available by contract on many topics. Since

HealthSouth Corporation was one of the largest publicly traded owners of rehabilitative hospitals within the Untied States and paved the way for its industry. However, prior to 2003 the company had a very dark secret: fraud. In 2003 HealthSouth was accused of making $2.7 billion in false journal entries in the company’s system (Helios, 2013). These false entries allowed the corporation to inflate its earnings and revenue. While the corporation was dabbling in a fraudulent, aggressive account system, auditors were unable to detect the extent of the fraud occurring. If not for Michael Vines and Weston Smith, HealthSouth Corporation might have continued its false entries and continued deceiving shareholders and even Wall Street itself. HealthSouth serves as a historical example of how corporate culture can use fraud and deception schemes to not only rationalize what it is doing, which is an element of the fraud triangle, but also encourage fraudulent financial statements.

Soon after, many other employees who had participated in the fraud turned themselves in as well. After the accounting scandal went public, HealthSouth’s stock price plummeted down to as low as 35 cents per share, which costed their investors millions. Lawsuits were soon filed by shareholders against HealthSouth, as well as E&Y. In June 2005, Scrushy was acquitted on all 36 of the accounting fraud counts against him, most notably one count in violation of the Sarbanes-Oxley Act which holds CEO’s personally responsible for financial misreporting (Piotrowski 2003). However, four years later, he was sued for fraud by HealthSouth investors and ordered to repay his company $2.8 billion.

The HealthSouth Fraud ACCT 480: Forensic Accounting Emily Bauer 2/7/2016   At the time when the HealthSouth fraud was discovered in 2003, HealthSouth was the largest owner and operator of inpatient rehabilitative hospitals as well as a provider of surgical and diagnostic services. Employing more than 60,000 people at their 2,000 locations, this billion dollar company had locations in all 50 states as well as operations in the U.K., Canada, Australia, Puerto Rico and Saudi Arabia. In 2003, they were the third largest healthcare company based on revenue.

Fifteen former executives of HealthSouth, including all five of its recent Chief Financial Officers pleaded guilty to various charges of falsifying accounts. However, the CEO, Mr. Scrushy’s assets were freeze temporary by the court and also forfeiting his passport and keys to his private jet. Lastly, he was acquitted of all 36

From the 2 million journal entries under $5,000 recorded to source documents fabricated, HealthSouth went to great lengths to commit and conceal its fraud. In addition, employees were closely monitored to ensure that they were not arousing suspicion to HealthSouth’s fraud. The leading force of HealthSouth’s culture was the

Humana, Inc. is a health insurance company from Louisville, Kentucky that started in 1961 by Lawyers Wendell Cherry and David A. Jones, Sr. Humana started as a nursing home where it later became the largest nursing home company in the nation. After the nursing homes, they soon began to purchase hospitals entirely for expansion. The name of the company changed to Humana, Inc. two years later. Cherry and Jones continued to expand by purchasing other companies. In 1984, the company began focusing on Health Insurance where it remains to focus on even today. Since 2014, Humana has had over 13 million customers and over 52,000, and a revenue of $41.3 billion that was reported in 2013.

Humana, Inc. is a health insurance company from Louisville, Kentucky that started in 1961 by Lawyers Wendell Cherry and David A. Jones, Sr. Humana started as a nursing home where it later become the largest nursing home company in the nation. After the nursing homes they soon began to purchase hospitals entirely for expansion. The name of the company changed to Humana, Inc. two years later. Cherry and Jones continued to expand by purchasing other companies. In 1984, the company began focusing on Health Insurance where it remains to focus on even today. Since 2014, Humana has had over 13 million customers and over 52,000, and a revenue of $41.3 billion that was reported in 2013.

The HealthSouth Corporation was started in 1984 by Richard Scrushy with hopes of becoming one of the largest healthcare companies in the country. It was doing quite well by 1996 with a market value of nearly $12 billion and was one of the United States largest healthcare firms. This all fell apart in 2003 when it was discovered that Scrushy and his employees had committed fraud in the estimated range of almost $2.7 billion (Daigle, Louwers and Morris 887). Scrushy, over the years, had brought on many new faces to the company. Many of these employees were friends of Scrushy from previous business ventures and business meetings. These employees and the others involved in the fraud were given the name ‘family’; highly due to the fact that they all knew what was happening and not one wanted to go to the authorities to confess. It was after the fraud had gone on for nearly six years that the former CFO Weston Smith tipped off federal investigators.

Richard Scrushy (Scrushy) had a vision and was driven by his leadership and entrepreneurial abilities. Scrushy was the mastermind and major creator of HealthSouth Corporation (HealthSouth). Scrushy served as chairman and Chief Executive Officer (CEO) of the corporation for more than 20 years. A Biographical Sketch: Richard Scrushy and HealthSouth. Retrieved March 22, 2005, from the World Wide Web: http://www.richardscrushy.com/biography.aspx. The U.S. Securities and Exchange Commission charged HealthSouth Corporation and CEO Richard Scrushy with fraud, alleging the earnings of HealthSouth have been extremely overstated since