Healthsouth Fraud
HealthSouth Fraud Investigation
Table of Contents Table of Contents i Introduction and Background 1 Analysis 1 Why it occurred 2 Fraud Triangle 2 How it occurred 3 Red Flags of the Fraud 5 Why the Fraud Continued Undetected 6 The Auditors Roles and Responsibilities 7 Fate of Parties Involved 8 Effect of Fraud on HealthSouth 9 Conclusion 10 Appendix A 11 Appendix B 12 Appendix C 13 Appendix D 14 Appendix E 15 Appendix F 16 Works Cited 17
Introduction and Background
Richard Scrushy founded HealthSouth, formerly known as Amcare, Inc., in 1984 in Alabama. HealthSouth is a provider of medical rehabilitation services, as well as outpatient surgery and occupational medical services. The company experienced rapid financial growth and numerous mergers and acquisitions in the mid-1990s, which continued to escalate until the fraudulent activity surfaced in 2002. It was at this time that the Enron and WorldCom scandals were discovered and the Sarbanes-Oxley Act was created. Pressure to meet Wall Street expectations pushed Scrushy and other senior management to “cook the books”. Income was artificially inflated, numbers were manipulated, and false accounts were created. Numerous red flags occurred but were not investigated such as: disproportionate analytical ratios, exponential earnings growth, letters of concern sent to the auditors, and consistently meeting market expectations. Collusion, lies, employee unawareness, disregard for red flags, and hiring CFO’s from the auditing firm helped ensure the fraud remained undetected. Auditors failed to follow their legal duties and lacked professional scepticism in the process. When the scheme began to unravel, HealthSouth was faced with a financial crisis. An investigation took place and PwC was hired for audit and reformation. Alvarez and Marsals, a restructuring firm, was crucial to HealthSouth’s continued existence. Charges were made, jobs were lost, and many legal battles arose from
Table of Contents Table of Contents i Introduction and Background 1 Analysis 1 Why it occurred 2 Fraud Triangle 2 How it occurred 3 Red Flags of the Fraud 5 Why the Fraud Continued Undetected 6 The Auditors Roles and Responsibilities 7 Fate of Parties Involved 8 Effect of Fraud on HealthSouth 9 Conclusion 10 Appendix A 11 Appendix B 12 Appendix C 13 Appendix D 14 Appendix E 15 Appendix F 16 Works Cited 17
Introduction and Background
Richard Scrushy founded HealthSouth, formerly known as Amcare, Inc., in 1984 in Alabama. HealthSouth is a provider of medical rehabilitation services, as well as outpatient surgery and occupational medical services. The company experienced rapid financial growth and numerous mergers and acquisitions in the mid-1990s, which continued to escalate until the fraudulent activity surfaced in 2002. It was at this time that the Enron and WorldCom scandals were discovered and the Sarbanes-Oxley Act was created. Pressure to meet Wall Street expectations pushed Scrushy and other senior management to “cook the books”. Income was artificially inflated, numbers were manipulated, and false accounts were created. Numerous red flags occurred but were not investigated such as: disproportionate analytical ratios, exponential earnings growth, letters of concern sent to the auditors, and consistently meeting market expectations. Collusion, lies, employee unawareness, disregard for red flags, and hiring CFO’s from the auditing firm helped ensure the fraud remained undetected. Auditors failed to follow their legal duties and lacked professional scepticism in the process. When the scheme began to unravel, HealthSouth was faced with a financial crisis. An investigation took place and PwC was hired for audit and reformation. Alvarez and Marsals, a restructuring firm, was crucial to HealthSouth’s continued existence. Charges were made, jobs were lost, and many legal battles arose from
Cited: HealthSouth Press Release. (2003, March 20). Retrieved from HealthSouth: http://apps.shareholder.com/sec/viewerContent.aspx?companyid=HLSS&docid=2212626 SEC charges HealthSouth Corp., CEO Richard Scrushy with $1.4 Billion Accounting Fraud HealthSouth Press Release. (2005, July 27). Retrieved from HealthSouth Corporation - Annual Report: http://files.shareholder.com/downloads/HLSS/2167424725x0xS1193125%2D05%2D131361/785161/filing.pdf Alvaraz & Marsal Associated Press. (2009, June 2009). Scrushy Ordered to Pay Investors $2.9 Billion. Retrieved from MSNBC U.S. Business: http://www.msnbc.msn.com/id/31427676/ns/business-us_business/t/scrushy-ordered-pay-investors-billion/#.UKLag6X3Ds0 Atlas, R Barry, K. (2009, June 9). HealthSouth 's Corporate Accounting Scandal. Retrieved from Scribd.: http://www.scribd.com/doc/16379247/Accounting-Fraud-at-HealthSouth Bloomberg Businessweek Crawford, K. (2005, June 28). Former HealthSouth CEO Found Not Guilty on All Counts. Retrieved from CNN Money: http://money.cnn.com/2005/06/28/news/newsmakers/scrushy_outcome/index.htm Forelle, C., & Bandler, J Johnson, C. (2005, December 10). 5 Years for HealthSouth Fraud. Retrieved from The Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2005/12/09/AR2005120901890.html New Perspectives Stuart, A. (2005, June 1). How Five CFOs cooked the books at HealthSouth. Retrieved from CFO Magazine. Vogt, K. (2003, July 28). HealthSouth Working to Avoid Bankruptcy. Retrieved from amednews.com: http://www.ama-assn.org/amednews/2003/07/28/bisb0728.htm Vogt, K William, R. (2003, April 6). Searching for the Red Flags. Retrieved from The Birmingham News: http://www.al.com/specialreport/birminghamnews/index.ssf?healthsouth/healthsouth44.html