HealthSouth Impact on Stakeholders
HealthSouth’s fraud impacted many of their stakeholders. Some of the stakeholders discussed below are the Directors and Management Team, external auditors Ernst & Young, the employees, the patients, and Chief Financial Officer Weston Smith. The Board of Directors and Management team engaged in several conflict of interest actions. They were the first company to be charged under the Sarbanes Oxley Act of 2002; which holds financial executives more accountable by making them review and sign the financial statements. The SEC charged and found guilty, fifteen executives with accounting fraud they also admitted that they were a part of the fraud. If they had co-operated with the authorities the fraud would have been detected. Nobody wanted to decrease their wealth that occurred due to their unethical practices. According to (Lublin & Carms, 2003 para1) one of the directors, made a statement that they were not aware of what was going on. Their loss of accountability and transparency is obvious. They became oblivious to the fact that they were cheating investors of millions of dollars. Confusion is apparent because they did not know what was ethical anymore.
Richard Scrushy was the mastermind behind this fraud. The Board of directors attested to the fact that Scrushy, should be held accountable. They eventually figured out his intentions and became aware that his scheme was not in the best interest of the company and the shareholders. Ms. Diane Henze, who was the former Vice President of finance realized what was going on and reported her suspicions to HealthSouth’s compliance department. Due to her suspicion and whistle blowing she was transferred to another division (Reeves, 2005).
HealthSouth Board of Directors were not treated the same. Board leaders such as Larry D, Striplin Junior were treated favorably. He received contracts for millions of dollars, to install glass at a HealthSouth in 2002. According to Striplin his company had the lowest bid of 5.9 million dollars. Scrushy acted surprised when he heard about this and stated that if he was aware of this, it would not have occurred. Within a few months after winning the bid, Striplin resigned from the litigation panel of which he was member. He was awarded, the chairmanship of the board of directors committee and resigned from the auditing committee. (Lubin, 2003.) This was definitely a tactic constructed via Scrushy and his longtime pal Stiplin, since he benefited financially from this as well.
HealthSouth's auditor knew of the accounting fraud five years, before it became public. They were tipped off, by an anonymous HealthSouth shareholder. A memo dated November 1998, was sent to the accounting firm, concerning a possible accounting fraud. The memo consisted of information regarding bookkeeping violations at the rehabilitation services company. Questions such as: "How can some hospitals have NO bad debt reserves? How did the E&Y auditors in Alabama miss this stuff? Are these clever tricks to pump up the numbers, or something that a novice accountant could catch? How can the company carry tens of millions of dollars in accounts receivable that are well over 360 days?" the shareholder asked in the letter.
Ernst & Young stated they conducted a review at the time the allegations were made and did not see were the issues raised affected the presentation of HealthSouth’s financial statements. HealthSouth employees were also affected. According to Rossbacher, “The business of HealthSouth certainly seems as if it was based on cheat and fraud, not health care. The employees were working for years on designing and implementing the company’s criminal structure and layout.” The frauds were obvious and the crimes were apparent (Rossbacher, 2006, p.203). Fraud, bad attitude, hypocrisy, disrespect, frankness and deceit were a common and day to day practice among HealthSouth employees. Employees became scared of losing their jobs,...
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