Healthsouth Memo

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Memorandum
Date: 2/18/13
Re: HealthSouth Accounting Scandal

HealthSouth Corp., one of the nation’s largest healthcare services providers in the United States was involved in one of the largest accounting scandals in United States history. HealthSouth Corp and its officials overstated earnings in order to meet Wall Street earnings expectations. This memorandum will describe who was involved, how the operation was carried out, as well as a timeline documenting the resulting damages of the scandal.

On March 19th 2003, the Securities and Exchange Commission filed civil fraud charges against HealthSouth and CEO and Chairman Richard Scrushy of “allegedly duping investors into believing the company had met earnings targets” (washintonpost.com staff, 2004). The SEC’s complaint “alleges that since 1999, at the insistence of Scrushy, HealthSouth systematically overstated its earnings by at least $1.4 billion in order to meet or exceed Wall Street earnings expectations. The false increases in earnings were matched by false increases in HealthSouth’s assets. By the third quarter of 2002, HealthSouth’s assets were overstated by at least $800 million, or approximately 10 percent” (sec.gov, March 19th 2003). Leading officials at the healthcare giant became entangled in the scandal as well as auditors at the time of the scandal, Ernst & Young and investment bankers, UBS (Freudenheim, 2004).

At Scrushy’s instruction, the company began to artificially inflate its earnings to maintain the market price of company stock. “Between 1999 and the second quarter of 2002, HRC intentionally overstated its earnings, identified as "Income Before Income Taxes And Minority Interests," by at least $1.4 billion in reports filed with the Commission. HRC also overstated earnings, identified as "Income Before Income Taxes And Minority Interests," in the quarterly reports on Form 10-Q filed with the Commission during these years” (sec.gov, March 20th 2003). Senior officers of...
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