Embezzlement, misappropriation, cheating or stealing – whatever name you give it, corporate fraud is rampant. There are television and newspaper stories nearly every day about all kinds of corporate schemes, scams and swindles. How is corporate fraud accomplished and who does it? Behind every fraud is a person -- or a group of people -- who has taken what is not theirs to take. Some of those people ntended to steal -- they just never thought they would get caught. Others were pulled into the original crime or some aspect of the cover-up and before they knew it they were labeled a co-conspirator. This case study will examine the people behind the much publicized fraud scheme at HealthSouth. Some did not set out to commit white-collar crime but found themselves as defendants in criminal trials for fraud. Where did those people go wrong? In the HealthSouth case, we observe real life examples of people who were "just doing their job" but at some point crossed the line from law-abiding citizens to law-breaking villains. Seemingly small compromises in ethics and morality led to larger compromise and, ultimately, a full-scale commitment to fraud. Finally, we will conclude with a discussion on whether "the law" is ultimately the proper criteria for evaluating the morality of our behavior or the ethics of our thinking. Nobody sets out in their career to end up in prison cleaning toilets and on the front page of the Wall Street Journal after they are arrested for fraud. At some point, though, many end up that way. How do they transition from new employee to a white collar criminal?
The Stage is Set
In the 1990’s there was a convergence in the United States of several forces creating economic growth and wealth at a pace never seen before. Exploding technological advances, ample supplies of capital, and a loosening of regulations created the “perfect storm” that allowed for lax oversight of financial reporting. As could have been predicted, that loose oversight gave room for fraudulent transactions and reporting. Investors and lenders became less concerned with profitability and seemingly more focused on revenue.If revenue was growing, investors seemed satisfied to provide the capital needed to fuel that growth. The market of investors also became accustomed to, and even demanded, “proforma” financial statements. These reports presented financial information “as if” certain factors would have happened rather than on actual results. The focus on sales volume and good economic news created a compelling incentive for companies to adopt aggressive accounting policies, as it related to the recognition of income. From that point, several companies took the leap to inflating and then fabricating revenue numbers. All of this took place in an environment of a strange legalism … if accounting policies and procedures didn’t violate Generally Accepted Accounting Principles (GAAP) then it was viewed as compliant with GAAP. Further, if it was GAAP, it must be legal – and if legal it must be morally and ethically acceptable. This slippery slope was used to justify actions that ranged from aggressive to illegal. HealthSouth was one of several publicly-held companies that made that transition. What follows is a brief overview of one of the largest corporate frauds in the history of the United States. This is not designed tobe a detailed look at the fraud but instead will be an overview of the people behind the fraud story of HealthSouth. Earnings Inflation Becomes Standard Practice
HealthSouth is one of the nation's largest healthcare services providers, with locations nationwide. Earnings at HealthSouth were overstated by anywhere from $3.8 Billion to $4.6 Billion over several years. This false information drove inflated market values for the firm, which attracted more capital investment. That capital flowed in from individual investors as well as institutional money. Once the market value was exposed as inflated by fraud, thousands of investors...
Please join StudyMode to read the full document