...CAMPUS RECENT ACCOUNTING SCANDAL: “The HealthSouth Scandal of 2003” SERRAON, ABIGAIL E. Accountancy 4Y2-1 ENGR. ANTHONIO CHAN March, 2016 INTRODUCTION Embezzlement, misappropriation, cheating or stealing is a form of fraudulent act done with an organization. There are television and newspaper stories nearly every day about all kinds of corporate schemes and scams. 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 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. In the HealthSouth case in observation, 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 a full-scale commitment to fraud. Finally, we will conclude that 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. A. Background of the Study The study all about the recent accounting scandal that were...
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...use this as a reference. Table of Contents 1. Assignment cover sheet p. 0 2. Title page: HealthSouth and the Scrushy Way p. 1 3. Table of Contents p. 2 4. Introduction p. 3 5. Government Subsidies p. 3 6. Signs of Corruption p. 4 7. Ethical issues of HealthSouth p. 5 8. Management of HealthSouth p. 5 9. Intimidation and Cooperation p. 6 10. Culture of Corruption p. 7 11. Lavish Lifestyle and Philanthropy p. 8 12. Impact on Stakeholders p. 9 13. Charges p. 10 14. Outcome and Fairness of Punishment p. 10 15. Conclusion p. 12 16. References p. 13 HealthSouth and the Scrushy Way Richard Scrushy overcame challenging teenage years, dropping out of high school and later obtaining his GED to become one of the most successful executives in the United States. Scrushy did so by subsequently getting his respiratory therapist certification and opening his own rehabilitation center, an all-in-one medical facility that led many to copy his idea. Scrushy founded HealthSouth in 1996 using $1 million in seed capital and turned it into a hugely successful medical services empire worth over $4 billion at its prime (Haddad, Weintraub, & Grow, 2003). HealthSouth had become the largest provider of outpatient surgery, rehabilitation, and diagnostic and imaging services as well...
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...HealthSouth: The Scrushy Way Vonetta M. Henderson Northcentral University Introduction The Enron and Tyco scandals brought visibility to corporate scandals. The magnitude of these scandals resulted in the Sarbanes-Oxley (SOX) Act in 2002. Richard M. Scrushy and HealthSouth Corporation were the first CEO and company to be indicted under the SOX Act. HealthSouth was charged with filing false financial statements with the SEC to hid poor financial conditions from Wall Street. An audit conducted by PricewaterhouseCoopers concluded that HealthSouth overstated its cumulative earnings between $3.8 billion to $4.6 billion (Weld, Bergevin, & Magrath, 2004). Although Scrushy was charged with 85 counts, he pled not-guilty, claiming that he was unaware of the fraudulent activities that had occurred. Scrushy was later exonerated as the investigation into the company found no evidence that Scrushy orchestrated or participated in any financial wrongdoings. Five financial executives and 10 other company officials pled guilty to a variety of charges. Background Richard M. Scrushy founded Amcare, Inc. in 1984. The company opened its first facility in Little Rock, Arkansas and one year later opened a facility in Birmingham and changed its name to HealthSouth Rehabilitation Corporation (HRC). In 1986, HRC went public with its initial public offering (IPO) on the NASDAQ stock exchange (HealthSouth Corporation, 2010). In 1988, HRC moved to...
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...HealthSouth Corporation: Fraud, Greed and Corporate Governance Manmohan D. Chaubey, Ph.D. The Pennsylvania State University One College Place Du Bois, PA 15801 (USA) Tel: 814-375-4846 Fax: 814-375-4784 Email: mdc13@psu.edu Case for ICMC2006 International Conference on Management Cases 4-5 December 2006 IMT Ghaziabad, India HealthSouth Corporation: Fraud, Greed and Corporate Governance During the 1990s, Richard M. Scrushy, the former CEO of HealthSouth Corporation, engineered many acquisitions of rehabilitation clinics, outpatient surgical care operators, nursing homes and other health care companies. In 2003, the Securities and Exchange Commission (SEC) accused the company and Scrushy of inflating earnings to the tune of $1.4 billion since 1999. In November 2003, a federal grand jury indicted Scrushy on 85 counts including conspiracy, securities fraud, money laundering and charges related to overstating HealthSouth’s earnings by nearly $3.0 billion. According to federal investigators, the company overstated earnings to meet analysts’ earning estimates, while hiding the accounting fraud from the auditors. However, questions were raised whether the auditors failed to find or simply overlooked the fraud at HealthSouth. Central to the investigation was the issue of what role Scrushy played in “cooking the books.” However, as the case unfolded, it highlighted many other issues such as: The role of Board of Directors in corporate governance; the role of the auditors; the...
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...HealthSouth: Fraud, Greed & Corporate Governance Marilyn J. Bordeaux HCS 5339 Rachael Kehoe HealthSouth: Fraud, Greed & Corporate Governance During the 1990s, Richard M. Scrushy, the former CEO of HealthSouth Corporation, engineered many acquisitions of rehabilitation clinics, outpatient surgical care operators, nursing homes and other health care companies. In 2003, the Securities and Exchange Commission (SEC) accused the company and Scrushy of inflating earnings to the tune of $1.4 billion since 1999. In November 2003, a federal grand jury indicted Scrushy on 85 counts including conspiracy, securities fraud, money laundering and charges related to overstating HealthSouth’s earnings by nearly $3.0 billion. According to federal investigators, the company overstated earnings to meet analysts’ earning estimates, while hiding the accounting fraud from the auditors. However, questions were raised whether the auditors failed to find or simply overlooked the fraud at HealthSouth. Central to the investigation was the issue of what role Scrushy played in “cooking the books.” However, as the case unfolded, it highlighted many other issues such as: The role of Board of Directors in corporate governance; the role of the auditors; the effect of conflict of interest between an accounting firm and its consulting arm on auditing; whether the relationship between an investment bank and a company affects the quality of the bank’s research reports on the company; whether the executive...
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...INTRODUCTION This paper discusses the HealthSouth Case including the activities and subsequent prosecution of its CEO, Richard Scrushy. “During the trial of former HealthSouth CEO Richard Scrushy, federal prosecutors argued that Scrushy must have known something was amiss with HealthSouth’s financial statements since there was a discrepancy between the company’s financial and nonfinancial performance.” Over a ten-year period from 1987 to 1997, HealthSouth enjoyed above–average growth at a rate of 31 percent per year. (Jennings, 2012, 2009, p. 183) This phenomenal growth was due, in part, to a series of mergers and acquisitions let by the efforts of the company’s CEO, Richard Scrushy who ran the company with an iron fist and has at least one recorded conversation directing a CFO to fix the numbers over time. The fraud lasted for seven years and totaled approximately $2.7 billion. Mr. Scrushy denied knowing anything about the fraud, claimed it was all done by the people around him and was ultimately found not guilty of the fraud at HealthSouth but was convicted on bribery and corruption charges. Mr. Scrushy was ordered to pay $2.9 billion in restitution in a civil suit. “From at least 1996 until 2002, HealthSouth senior management perpetrated a financial statement fraud primarily through the use of nonstandard journal entries.” (Carmichael, 2010, p. 64) “Scrushy, once a high school dropout, worked as a gas station attendant and a bricklayer before retuning (sic)...
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...| #8| || Faculty Use Only TABLE OF CONTENTS PAGE Abstract --------------------------------------------------------------------------------------4 Introduction ------------------------------------------------------------------------------5 & 6 The role of Auditors at HealthSouth ---------------------------------------- 7 & 8 SEC Investigation ----------------------------------------------------------------------------9&10 Impact on Stakeholders ---------------------------------------11, 12, 13 & 14 Outcome and Fairness In Punishment ---------------------------------------- 15, 16 & 17 Conclusion -----------------------------------------------------------------------------------------18 References-------------------------------------------------------------------------------19, 20 & 21 ABSTRACT This paper will investigate the financial reporting scandals of the past decade at HealthSouth and the resulting U.S. legislative attempts to impose ethical behavior and control the incidence of new reporting problems via Sarbanes-Oxley legislation. This paper begins with a brief historical perspective followed by assertions of...
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...Intro to HealthSouth Fraud Case Review In 2003, HealthSouth was accused of one the largest accounting fraud cases in healthcare history and those involved are still being tried today, nine years later. HealthSouth was founded in Birmingham, Alabama in the year 1984 by a respiratory therapist name Richard Scrushy. By the year 1999, HealthSouth had grown to house 230 surgical centers, 120 inpatient hospitals, 5 medical centers, 129 diagnostic centers and 1379 outpatient rehab centers and was worth an estimated billion dollars. It was revealed that HealthSouth started their downward spiral in the year 2002, which paralleled the timeframe that Scrushy sold of ~ $100,000 in HealthSouth Stock Options. Within the following 6 plus months to follow, the FBI announced allegations against HealthSouth and opened a criminal investigation for probable SEC violations. The FBI investigation initially uncovered wrong doings from the years 1999-2002 where Scrushy had overstated his salary 1 million + dollars to meet expectations of shareholders and Wallstreet. Unfortunately, this was just the beginning, and as forensic accountants dug deeper, the FBI soon found that HealthSouth’s corporate accountants were adjusting entries to offset liabilities, reduce expense accounts and state elevated salaries to balance their bookkeeping. It was reported ~$373 million dollars of cash on the books was fictitious. It was eventually revealed that all four Accounting Statements were incorrect and that...
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...The five basic types of financial statement fraud are ("Detecting financial fraud," 2011): -Fictitious sales -Improper expense recognition -Incorrect asset valuation -Hidden Liabilities -Unsuitable disclosures If any of these are committed it can have drastic effects on a company’s stock price. This makes it attractive for CEO’s who are paid in stock to commit fraud. The CEO’s job is to look out for the best interest of its companies stockholders. But by giving CEO’s stock options it encourages them to look towards the next quarter rather than the long-term. For example Apple’s new CEO Tim Cook received a base salary of $900,000 in 2011, but due to stock options he will receive 376.2 million dollars in shares (Satariano, 2012). Now as the company grows those stock options will increase drastically, making his yearly salary look like chump change. This is what encourages CEO’s to commit financial fraud by altering the company’s books to drive the stock price up, which drives his pay up. In 2002 the CEO of HealthSouth sold $100 million dollars in stock just days before the company posted a huge loss. HealthSouth over the course of seven years beginning in 1996 overstated their income by 2.7 Billion dollars ("Sec charges healthsouth," 2003). The CEO was accused of having senior accountants inflate the earnings of its facilities in order to drive up the company’s value. In addition they also misreported the sale of technology to a related party resulting in 29 million...
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...INTRODUCTION AND HISTORY HealthSouth Corporation is the nation’s largest provider of inpatient rehabilitative healthcare services1; it was founded in 1984 by Richard M Scrushy along with four other people as Amcare, Inc., it opened its first facility in Little Rock Arkansas and another one a year later in Birmingham Alabama. In 1986 the company went public and was listed on the NASDAQ Stock Exchange under ticker symbol HSRC. Throughout the 1980’s and 1990’s the company expanded rapidly through mergers and acquisitions. By 1992 the company had $400 Million in annual revenues and by the end of 1999 the company’s annual revenues exceed $1 Billion and it had expanded to 118 inpatient rehabilitation hospitals, 5 medical centers, 1,379 outpatient rehabilitation centers, 230 surgery centers, 129 diagnostic centers and 124 occupational medicine centers.2 HealthSouth has always participated actively in the Medicare program and they’ve received Medicare reimbursements since the eighties and nineties, to extent that over 40% of their revenues came from the Medicare program and beneficiaries in that time period, and in their more recent filings this percentage has increased to a whopping 70% in 2010.3-4 HealthSouth’s stock trades on the New York Stock Exchange (NYSE) under the ticker symbol HLS, with a December 9, 2011 closing price of $16.94, a market capitalization of roughly $1.61 Billion. In 2010 their revenues were $1.99 Billion and their Net Income $899 Million.5 From 1996...
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...HealthSouth Corporation Case Study Managerial Communication Dr. Ben Busbee Dwight Frazier December 12, 2013 A. Executive Summary: The paper highlights the case analysis on one of the big financial fraud which occurred from 1986-2003. The case of HealthSouth is based on fraud, greed and corporate governance. The HealthSouth case shows that unethical management cannot succeed; sooner or later the truth comes out. The case highlights many key points and the major reason for the fraud was the result of failures of various standard mechanisms of control including the external auditors, the underwriters, and the board of directors, the financial market regulators and the analysts. HealthSouth was one of the country's largest providers of outpatient surgery, diagnostic imaging, and rehabilitation services, operating over 1,800 locations and reporting revenues of $4 billion. The company's management improperly accounted for some $2.7 billion of assets and earnings. Seventeen HealthSouth executives agreed to plead guilty to various charges in connection with this massive accounting fraud. B. Statement of the Problem: Thus, in the HealthSouth case, the research shows that it was close to the real life examples of the people who were “just employed”; however at the same time their transformation from the line of law-abiding citizens towards the law-breaking villains. Apparently the small compromises in morality and ethics led towards the greater compromises and as a result...
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...HealthSouth, the nation's largest provider of outpatient surgery and rehabilitative services, was founded in 1984 by Richard Scrushy and co-founder Aaron Beam. HealthSouth was involved in a corporate accounting scandal in which Richard Scrushy was accused of directing company employees to falsely report grossly exaggerated company earnings in order to meet stockholder expectations. Revenues continued to grow to more than $3.5 billion allowing Scrushy and Beam to enjoy the lifestyle that accompanies corporate success. Then everything changed when, in 1996, the company’s earnings fell slightly short of its goal. According to Beam, Scrushy ordered the books to be fixed. Beam explained, "HealthSouth was a very viable company," Beam explains (2012), "Our earnings projection was just shy of what Wall Street was expecting in 1996 - we were 90-95% there. When it got to the point that we couldn't legitimately make our numbers, Richard couldn't accept that. He's such an intimidating person and led the company as a maniacal dictator. He convinced us to fudge that 5-10% so we would make our numbers. He made us believe that we’d make it up in the next quarter. Unfortunately, my lead accountant said he thought he could make the entries and hide them from the auditors, and Richard said, ‘Let’s do it.’ The correct thing to do was to say no to him, stand up to him, but I didn’t. Obviously, I was weak of character.” Beam’s actions were not uncommon to say the least. Many business professionals...
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...HealthSouth was one of the largest provider of outpatient surgeries in the United States. Not only the largest provider of outpatient surgeries in the United States but also the largest diagnostic and rehabilitative health care service in the United States. This was until March 19, 2003, when the Securities and Exchange Commission charged the company and Richard Scrushy with fraudulent account reporting of company finances. Scrushy and other executives from the finance and accounting departments (15 total) were later indicted in November 4, 2003. Richard Scrushy became the first CEO of any Fortune 500 company to be tried under the Sarbanes-Oxley Act of 2002 for any accounting fraud. During court proceedings other practices involving HealthSouth were uncovered. Things such as unethical behavior and corporate governance involving the Board of Directors (banks and creditors were suspected to be involved but were not indicted, only civil suits). Richard Scrushy was charged with money laundering, conspiracy, securities fraud, overstating HealthSouth's earnings, and 81 more counts. "The Commission's complaint, which was filed in the federal district court in Birmingham, Ala., alleged that since 1999, at the insistence of Scrushy, HealthSouth systematically overstated its earnings by at least $1.4 billion dollars. This was because they needed to meet or exceed Wall Street earning expectations" (n/a, 2013). Prosecutors believed that Scrushy intentionally allowed...
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...3) How, in accounting terms, did the manipulation of HealthSouth’s financial statements take place? • This manipulation primarily consisted of reducing a contra revenue account, called “contractual adjustment” in accounting terms, which is decreasing expenses and correspondingly increasing assets or decreasing liabilities, either of which increased earnings. • The contractual adjustment is a revenue allowance account that estimates the difference between the gross amount billed to the patient and the amount that various healthcare insurers will pay for a specific treatment, where this in reality never to be received by HealthSouth. • HealthSouth falsified its fixed asset accounts at a numerous of its facilities to match the fictitious adjustments to the income statement. The fictitious fixed asset line item at each facility was listed as “AP Summary”. • HealthSouth accounting personnel designed the false entries to the income statement and balance sheet accounts to avoid detection by auditors. For example, instead of increasing revenue account directly, HRC inflated earnings by decreasing the “contractual adjustment” account. 4) Why did all the people who knew about the manipulation keep quiet? • The two whistle-blowers in the accounting fraud at HealthSouth (Bill Owens and Weston Smith) got the stiffest sentence for any executive involved in the fraud. Owens, who was among the first to blow the whistle and who testified against former...
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...INTRODUCTION…….…………………………………………………………………. 4 B.) Defining the Ethical Issues Involved with HealthSouth…………………………………. 5 1.) HealthSouth Founder and CEO Richard Marin Scrushy………...………………. 5 a.) Trailer Park to Charismatic Leader……………………………………. 5-7 b.) Leadership Tactics……………………………………………………….. 7 2.) Corporate Culture at HealthSouth………………………………………………... 8 c.) Following Directions for Failure……………………………………........ 9 d.) Faking corporate profits………………………………………………… 10 C.) The Impact on Stakeholders…………………………………………………………….. 10 3.) Employees and Executives……………………………………………………... 10 e.) Many Lost Jobs as a result……………………………………………… 10 f.) Top Level Management Complacency.………………………………… 11 4.) Investors and HealthSouth Stock……………………………………………….. 11 5.) HealthSouth Patients and Customers….………………………………………... 11 D.) Outcome and Fairness of Punishment…………………………………………………... 12 6.) 2003 SEC Civil Law Suit against HealthSouth………………………………… 12 g.) Charges of Fraud………………………………………………………... 12 h.) Inflated Earnings on Financial Statements ...…………………………... 13 7.) Punishment: Does it fit the crime? ...................................................................... 13 i.) CEO Richard Marin Scrushy’s sentence...……..………………………. 14 j.) Other HealthSouth executives sentence ………………………......... 14-15 E.) Conclusion …………………………………………………………………………....
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