Health South Scandal PDF

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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 intended 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 article 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? HealthSouth Corporation Background    

Based in Birmingham, Alabama. Large public healthcare company that operates 93 inpatient rehab hospitals, 49 outpatient services, 6 long term acute care hospitals & 25 home health agencies. Spread across 33 states and Puerto Rico. February 22, 1984 by Richard M. Scrushy.

Summary Washington, D.C., March 19, 2003 -- The Securities and Exchange Commission today charged HealthSouth Corp., the nation's largest provider of outpatient surgery, diagnostic and rehabilitative healthcare services, and its Chief Executive Officer and Chairman Richard M. Scrushy with a massive accounting fraud. The Commission's complaint, filed in federal district court in Birmingham, Ala., 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. The complaint further alleges that, following the Commission's order last year requiring executive officers of major public companies to certify the accuracy and completeness of their companies' financial statements, Scrushy certified HealthSouth's financial statements when he knew or was reckless in not knowing they were materially false and misleading. The Commission alleges that HealthSouth and Scrushy's actions violated and/or aided and abetted violations of the antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. For these violations, the Commission is seeking a permanent injunction against HealthSouth and Scrushy, civil money penalties and disgorgement of all illgotten gains or losses avoided by both defendants, and an order prohibiting Scrushy from ever serving as an officer or director of a public company.

Hicks, W. (2014). Complaint: Healthsouth Corporation and Richard M. Scrushy. Countryman, A. (2003). SEC charges HealthSouth rigged profits by $1.4 billion

How did HealthSouth overstate earnings? When the Financial accounts started to get weaker at HealthSouth, Scrushy instructed accountants and senior officers to falsify the company earnings to meet the investors’ expectations. The earnings of the company show a true reflection of how the company is performing. If Scrushy had allowed the earnings to drop, the market price of the shares would reduce, which would ultimately reduce the value of the company. As a result of this, the CEO forced underlings to make up financial transactions in the books, telling them to inflate the earnings to the expected predictions from Wall Street. HealthSouth were able to increase its earnings, by overstating assets and understating liabilities which kept the books balanced. They managed to fraudulently overstate the assets within the company by over 800 million dollars. This was done by increasing the value of property, plant and equipment under a certain threshold, so that it wouldn't cause any suspicion to the auditors checking the accounts. Over the years they managed to increase the value of the assets within the company to more than 50% of its actual worth. Following on, they also managed to overstate the cash amount by 300 million dollars causing an impact the financial statement. The senior accountants created meetings called “Family meetings” within the company. They were called “Family meetings” in the hope to keep suspicions low within the company, that nothing fraudulently was going on within the company. These meetings would involve members discussing how the accounting staff would falsify the financial books, in a way which they were able to cover up the fraud, so the auditors checking the financial statements would not notice anything wrong with the accounts. The main way in which they managed to fraud the company was by making financial transactions between the values of 500 to 5,000 pounds because auditors were not able to check every transaction within the company as this would become too time consuming. This enabled the company to make countless fraud transactions without them being detected by the auditors. Resulting in a substantial amount being fraudulently transacted over the years, which has a massive effect on the earnings of the company. On top of all of this, the company went to such extremes that they produced false documents to present to the auditing teams to try and prove that the fake transactions were legitimate. Cathy Edwards one of the three bookkeepers overseeing expenses and the purchases of equipment, falsified many invoices to please the auditors who were checking the accounts. In one example, it shows how she scanned an invoice changing the numbers on the invoice to relate to the asset which the auditors were questioning.

Where are they now? Name: Richard Scrushy Role: Chief Executive Officer Recent publisher of “When Building a Billion Dollar Company: Here are a few things to think about” as former HealthSouth CEO, Scrushy currently offers his services as a public speaker providing presentations to a variety of institutes including universities discussing his entrepreneurial experiences, issues that may arise in large firms and the implications of fraud.

Name: Weston Smith Role: Chief Financial Officer Not dissimilar to Scrushy, Weston Smith also offers his services as a public speaker. Choosing to focus upon the importance of ethical conduct within the workplace with specific focus on how fraud occurs within a company. In addition to this, Smith also engages in corporate fraud research.

Name: Aaron Beam Role: Chief Financial Officer As the founder and first CFO of HealthSouth, like his peers Beam also offers talks and publications upon the importance of ethics within a workplace as he educates others on ethical practice drawing upon his experience within HealthSouth Corporation.

Recommendation HealthSouth could have prevented this fraud was if the company had implemented internal controls. These controls would include the separation of duties and prescribed procedures as we had discussed in chapter five. Allowing the companies records to be checked between multiple people instead of just one individual would prevent fraud, this separates the job so that fraud is harder to commit. HealthSouth could have hired an external expert to analyze their procedures and recommend a more efficient and safer way to run the company to prevent things like theft and fraud from occurring. These actions could have been taken to prevent fraud but the CEO Richard Scrushy operated with poor ethical accounting principles. Scrushy could have done things differently. It is known that “organizational culture is known to influence the behavior of employees.” in particular within HealthSouth “The culture in that part of the company was ‘you have to do this for the family.’ therefore “people were duped into doing it and they paid the price.” McAdory, J. (2013) Therefore modifying organizational culture, gearing it towards ethical practices by integrating the importance of education of such ethical practices within the workplace.

Conclusion The downfall of Healthsouth under the reign of Richard Scrushy can be pin pointed down to 3 main reasons, greed, lack of morals throughout the company and failure of internal controls. Richard Scrushy was obsessed with increasing the status of Healthsouth and increasing his own personal profit, this drove him to do whatever he could to preserve the company’s reputation and keep the shareholders happy. This led him to pushing and manipulating his own staff members into committing crimes for the 'benefit of everyone involved in the company', this showed a lack of morals by the all those who were involved....