Healthsouth Fraud

Topics: HealthSouth, Fraud, Richard M. Scrushy Pages: 10 (3596 words) Published: March 5, 2013
HealthSouth Fraud Investigation

Table of Contents
Table of Contentsi
Introduction and Background1
Why it occurred2
Fraud Triangle2
How it occurred3
Red Flags of the Fraud5
Why the Fraud Continued Undetected6
The Auditors Roles and Responsibilities7
Fate of Parties Involved8
Effect of Fraud on HealthSouth9
Appendix A11
Appendix B12
Appendix C13
Appendix D14
Appendix E15
Appendix F16
Works Cited17

Introduction and Background
Richard Scrushy founded HealthSouth, formerly known as Amcare, Inc., in 1984 in Alabama. HealthSouth is a provider of medical rehabilitation services, as well as outpatient surgery and occupational medical services. The company experienced rapid financial growth and numerous mergers and acquisitions in the mid-1990s, which continued to escalate until the fraudulent activity surfaced in 2002. It was at this time that the Enron and WorldCom scandals were discovered and the Sarbanes-Oxley Act was created. Pressure to meet Wall Street expectations pushed Scrushy and other senior management to “cook the books”. Income was artificially inflated, numbers were manipulated, and false accounts were created. Numerous red flags occurred but were not investigated such as: disproportionate analytical ratios, exponential earnings growth, letters of concern sent to the auditors, and consistently meeting market expectations. Collusion, lies, employee unawareness, disregard for red flags, and hiring CFO’s from the auditing firm helped ensure the fraud remained undetected. Auditors failed to follow their legal duties and lacked professional scepticism in the process. When the scheme began to unravel, HealthSouth was faced with a financial crisis. An investigation took place and PwC was hired for audit and reformation. Alvarez and Marsals, a restructuring firm, was crucial to HealthSouth’s continued existence. Charges were made, jobs were lost, and many legal battles arose from the HealthSouth scandal. Analysis

The fraud at HealthSouth began with small ethical compromises which grew into larger, more aggressive schemes that later became fully intentional fraudulent activity. HealthSouth had numerous areas of financial misstatement. Assets and income were immensely overstated, expenses were understated and the revenue account was subject to “fraudulent reporting of fictitious sales, inaccurate timing of revenue recognition, and improper valuation of revenue,” (Weld, Bergevin, & Magrath, 2004). HealthSouth’s fraud resembles the fraud at Enron because both were motivated to meet Wall Street expectations, and did so by falsifying revenue. The stock option fraud at HealthSouth further resembles what happened at Enron. Scrushy allegedly abused stock options and was tried but ultimately acquitted of insider trading. Why it occurred

HealthSouth attempted to meet Wall Street expectations by means of overstating income, which in turn created a snowball effect of other erroneous transactions. This type of fraud involved collusion between the CEO, Richard Scrushy, and other senior management who referred to themselves as “The Family” (Wang, Lin, & Ju, 2009). HealthSouth was growing and prosperous for the first decade. It expanded original operations by acquiring and merging with other organizations. Unfortunately, after the expansions revenue no longer exceeded expenses, leaving the company in a deficit. Management was determined to meet market expectations. HealthSouth was very important to Ernst and Young because they were a significant client. This provided management with control over the auditors. Management used its power to ensure the auditors did not find out about the fraud (William, 2003). Fraud Triangle

Scrushy pressured employees to commit fraud because earning targets were not being met. Wall Street expectations needed to be reached in order to uphold the company’s reputation. Scrushy told the accountants to do whatever...

Cited: HealthSouth Press Release. (2003, March 20). Retrieved from HealthSouth:
SEC charges HealthSouth Corp., CEO Richard Scrushy with $1.4 Billion Accounting Fraud
HealthSouth Press Release. (2005, July 27). Retrieved from HealthSouth Corporation - Annual Report:
Alvaraz & Marsal
Associated Press. (2009, June 2009). Scrushy Ordered to Pay Investors $2.9 Billion. Retrieved from MSNBC U.S. Business:
Atlas, R
Barry, K. (2009, June 9). HealthSouth 's Corporate Accounting Scandal. Retrieved from Scribd.:
Bloomberg Businessweek
Crawford, K. (2005, June 28). Former HealthSouth CEO Found Not Guilty on All Counts. Retrieved from CNN Money:
Forelle, C., & Bandler, J
Johnson, C. (2005, December 10). 5 Years for HealthSouth Fraud. Retrieved from The Washington Post:
New Perspectives
Stuart, A. (2005, June 1). How Five CFOs cooked the books at HealthSouth. Retrieved from CFO Magazine.
Vogt, K. (2003, July 28). HealthSouth Working to Avoid Bankruptcy. Retrieved from
Vogt, K
William, R. (2003, April 6). Searching for the Red Flags. Retrieved from The Birmingham News:
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