Unhealthy Accounting at HealthSouth
1. What are several red flags that E&Y either was or should have been aware of in the audit of HealthSouth?
Overall, there were three “red flags” E&Y was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. E&Y should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints.
2. What procedures can auditors perform to detect fraudulent entries made during the consolidation process?
Most of the time, fraudulent activity is found by mistake. It is not the auditor’s responsibility to detect fraud, although they must assess internal procedures to establish if they are aligned with the company’s goals and needs. Preventative measures for detecting fraud during the consolidation process are applying ratios’ analyses, verification of a sample of transactions tracing unusual and unjustified entries close to year-end, interviewing management, and analyzing “beyond the numbers” through analytical procedures.
3. How can auditors determine a company’s true “tone at the top?”
Auditors could determine a company’s true “tone at the top” by performing, what some professionals would call, a “cultural audit.” This would entail performing on-site observations of every level of management. Some questions that could be discussed are as follows: What is the degree of preoccupation with meeting analysts’ expectations within the organization? Are the shareholders’ and managers’ ideas and goals parallel? An auditor could also gauge the fear and pressure associated with meeting numerical goals and targets. If there is fear within the workplace, then lower level employees are going to be easier to manipulate. Another important
factor to investigate when determining a company’s
Overall, there were three “red flags” E&Y was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. E&Y should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints.
2. What procedures can auditors perform to detect fraudulent entries made during the consolidation process?
Most of the time, fraudulent activity is found by mistake. It is not the auditor’s responsibility to detect fraud, although they must assess internal procedures to establish if they are aligned with the company’s goals and needs. Preventative measures for detecting fraud during the consolidation process are applying ratios’ analyses, verification of a sample of transactions tracing unusual and unjustified entries close to year-end, interviewing management, and analyzing “beyond the numbers” through analytical procedures.
3. How can auditors determine a company’s true “tone at the top?”
Auditors could determine a company’s true “tone at the top” by performing, what some professionals would call, a “cultural audit.” This would entail performing on-site observations of every level of management. Some questions that could be discussed are as follows: What is the degree of preoccupation with meeting analysts’ expectations within the organization? Are the shareholders’ and managers’ ideas and goals parallel? An auditor could also gauge the fear and pressure associated with meeting numerical goals and targets. If there is fear within the workplace, then lower level employees are going to be easier to manipulate. Another important
factor to investigate when determining a company’s