Scrushy's Business Model

Founded in 1984 by Aaron Beam, former CFO, and Richard Scrushy, the company’s former chairman and CEO, HealthSouth Inc. was on the rise and went public two years after Scrushy impressed a group of Wall Street investors with a presentation on the company’s potential. By 1990, HealthSouth expanded to a $1 billion corporation of hospitals and health care centers offering diagnostic services and rehabilitation therapy. By 1995, the company had health centers in all fifty states, plus 40,000 employees, ten to twelve company jets and a spot on the Fortune 500 list. Behind the scenes, however, senior executives including Scrushy and Beam were manipulating the financials to meet investor expectations. Weston Smith started at HealthSouth in 1987 and
Since HealthSouth could no longer grow through acquisition, a light started to shine on many of its operational flaws. Scrushy attempted to keep HealthSouth profitable from operations alone by increasing the number of patients at each of its facilities, but HealthSouth still took an 86% blow to net income in 1998. In years 1999-2001, sales grew by 5%, which is decent considering the reevaluation they had to undergo in their business model due to the Medicare cuts. However, HealthSouth’s net income miraculously increased by about 500%, despite the small increase in sales. The earnings reported for HealthSouth from 1999-2003 were completely fictitious, despite Scrushy’s claim that HealthSouth increased efficiency in its operations and that brought about the miraculous rebound in net income. Earnings at HealthSouth were inflated by anywhere from $3.8 Billion to
$4.6 Billion over several years. The misstated financial statements forced inflated market values for the company, which drew more capital investment. That capital came in from individual investors and institutional money. Once the market value was discovered to be overestimated by fraud, money was lost by thousands of investors as the stock price
Michael Vines, a bookkeeper with HealthSouth, attempted to warn several members of management about how the asset-management division was recording transactions. He was an employee overseeing the purchase of equipment. He believed that the assets were being fraudulently overstated on the HealthSouth’s balance sheet. Vines “told his immediate supervisor, Cathy Edwards, that he would not make such entries unless she first initialed them. She signed off on the entries and Vines posted them. Mr. Vines justified his participation in the fraud by forcing someone else to take the responsibility for his actions. He also reports that