Healthsouth Corporate Accounting Scandal

Fall
10
[Management 3200 – Business & Society
08
Fall

I. Background Information a.) HealthSouth Corp. is the nation’s largest provider of rehabilitation, outpatient surgery and diagnostic services. Now however, it is the nation’s largest inpatient rehabilitation hospital. * At the company's height in 2003, it recorded nearly $4.5 billion in revenue, dominated the rehabilitation, surgery and diagnostic services market and employed more than 60,000 people at 2,000 facilities in every state of the U.S. * HealthSouth’s hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, orthopedic, cardiac and pulmonary conditions,
brain and spinal cord injury, and amputations. * The company’s mission is “to be the healthcare company of choice for patients, employees, physicians and shareholders by providing high quality care in the communities we serve.” b.) HealthSouth was involved in a corporate accounting scandal in which its Chief Executive Officer, Richard M.
Scrushy, was accused of directing company employees to falsely report grossly exaggerated company earnings in order to meet stockholder expectations. c.) In 2002 through 2003, Scrushy was accused of poor over-sight and leading an extravagant CEO life-style instead of running the day-to-day management of the company. * The company was also accused of rigging Medicare and Medicaid billing histories and investors were pushing for a change in overall management. * Scrushy was also nailed for not returning a $25 million loan he had received as an executive stock-purchase plan on time, and eventually paid it in stocks instead of cash like it was planned. * A lot of the scandal had to do with Scrushy’s need for self-affirmation and lead the company as if he was the king of an
empire.

II. Causes a.) The first of HealthSouth's accounting problems surfaced in late 2002 after Scrushy sold $75 million in stock several days before the company posted a large loss. HealthSouth was accused by the SEC of an accounting scandal where the company's earnings were falsely inflated by $1.4 billion. In 1996, Scrushy allegedly instructed the company's senior officers and accountants to falsify company earnings reports in order to meet investor expectations and control the price of the company's stock. In certain fiscal years, the company's income was overstated by as much as 4700 percent. The $1.4 billion represents more than 10 percent of the company's total assets. * Scrushy valued the extravagant life-style he led and focused more attention on his aspirations for fame then leading the company.
He was at a pre-conventional phase and was not ethically aware of his wrongdoings. He was not at all a moral person and a self-centered manager that valued his interests and not the stakeholders. b.) The SEC alleged that HealthSouth was able to increase its earnings while balancing its books by overstating assets and understating liabilities. This was done in a variety of ways, but certain accounts in particular were utilized most frequently in connection with the fraudulent reporting. A clear example of a faulty organizational structure and hypocritical leadership. * On the balance sheet side of the entries, the forensic audit report noted that slightly more than $1 billion of the fraudulent entries was related to nonexistent fixed assets, and also fabricated more than $400 million in income and assets through fraudulent acquisition
accounting. * HealthSouth had found a far cleverer way of defrauding the system and lining the pockets of Scrushy and his close associates. It knew the marketplace, the culture and the interdependency of the whole system. It banked on the fact that its auditors and its bankers who made a lot of money doing business with the company would not want to know, would not look and if they looked would not want to see. * This exaggerated income stream allowed HealthSouth to borrow money from bankers and raise money from the market by floats. It could use its inflated script in mergers and takeovers instead of cash. III. Conseguences a.) After the fraud was exposed in March 2003 events moved very rapidly. Fifteen past and present senior staff including all of the company's five Chief Financial Officers, and a 1984 co-founder pleaded guilty to criminal conduct. * A multitude of complex intertwined lawsuits engulfed the company, Scrushy, its past employees, its auditors, and its bankers. Civil law suits were lodged against thes by the SEC, The DoJ, shareholders, debt holders, insurers, etc. IV. Prevention a.) For one, improvements could be made to the Company’s contractual allowance accounting, the implementation of various policies and procedures related to journal entries, stronger controls over fixed assets, and a robust internal audit department that reports directly to the Audit Committee. b.) Secondly, more transparent and accountable management in place with the strict responsibility of looking out for the interest of the shareholders. c.) Finally, a more morally trained and coherent list of executives with the moral intentions of the company, and not themselves, in mind.