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Prof Ethics

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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 chief executive Richard Scrushy, spent 30 years in prison and fined $5.5 million. Smith, one of the five former HealthSouth CFOs who pleaded guilty to fraud charges, sentenced 25 years in prison and fined $2.2 million.

• A whistle-blower is a person who tells the public or someone in authority about alleged dishonest or illegal activities (misconduct) occurring in a government...

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