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HEALTHSOUTH

SCANDAL
HA IDE R R A Z A
KHU R R A M A HMER
A D E E L HA SSA N A S K A R E Y
INTRODUCTION
• HealthSouth Corporation was founded in 1984, in Birmingham,
Alabama.
• HealthSouth Corporation is one of United States' largest providers of
post-acute healthcare services.
• At the company's height in 2003, it recorded nearly $4.5 billion in
revenue, dominated the rehabilitation, surgery and diagnostic
services market and employed more than 60,000 people at 2,000
facilities.
SCANDAL
• In 2002, HealthSouth was involved in an Accounting Scandal
regarding its earning reports and price of common stock.
• What was the scandal?
• In 2002, then HealthSouth CEO, Richard M. Scrushy, sold $75 million
in stocks, days before the company posted a large loss.
• The U.S SEC accused HLS of falsifying accounting information in
order to create a false aura of accomplishments and meeting
investor’s expectations.
• Who was involved in the scandal?
• HLS CEO Richard Scrushy & five other CFOs
• How was the scandal pulled off?
• Scrushy and HealthSouth officials met analyst expectations for 40
consecutive quarters, using creative accounting methods and
ultimately fraudulent accounting.
• They altered their earnings numbers; explained as: plugging “holes”
in the balance sheet with “dirt.”
• The fraud included improperly capitalizing expenses, overestimating
insurance reimbursements, overvaluing fixed assets, and using faulty
reserve accountings
• When did the scandal occur?
• The entire fraud was a culmination of works from the early 1990s.
• It went on, undetected, until 2003.
• Why did the scandal occur?
• The 1990s saw investors and lenders who were less focused on
profitability and more so on revenue.
• When looking for capital as a company, growth was key.
• This pressured CEOs, like Scrushy, to continue growing their
companies and meeting analyst expectations quarter after quarter.
•HOW DID IT GO UNNOTICED?
•EXECUTIVES FOLLOWED THREE BASIC STEPS WHILE
COMMITTING THE FRAUD:
•1) COMPANY OFFICIALS COMPARED THEIR INTERNAL
FINANCIAL STATEMENTS TO SEE IF THEY WOULD MEET
ANALYST EXPECTATIONS.
•2) IF EARNINGS APPEARED TO BE SHORT, MANAGERS
WERE TOLD TO FIX THEM AND MANIPULATE THE
RESULTS IN ANY WAY NECESSARY.
• 3) FALSE DOCUMENTS WERE CREATED TO CONCEAL
THE FALSE ENTRIES ADDED TO THE FINANCIAL
STATEMENTS.
• HealthSouth employees went above and beyond to conceal the fictitious
entries from the auditors, which was what allowed the fraud to exist for
so long.
• Where did all the money go?
• Greed also was a significant motive for HealthSouth management to
inflate earnings.
• By manipulating earnings and stock price, Scrushy was able to secure
stock options for himself on the lowest trading day of HealthSouth
stock, netting him the highest profit possible.
• In 1997, Martin (CFO) sold $3 million worth of HealthSouth shares while
Scrushy sold a hefty $100 million.
What were the shortcomings of the scandal?
•Michael Vines was a bookkeeper at HealthSouth who oversaw
the purchase of equipment.
•Upon leaving HealthSouth, Mr. Vines sent a letter to the E&Y
auditors which read:

“I know that HealthSouth based out of Birmingham, AL has


severe problems in the Accounting Department. In December
2001, HealthSouth moved expenses to capital accounts. The
following accounts need to be look at as of 12-31-2001: 7000,
7200 and 7995.”
•E&Y also received an e-mail from “Fleeced Shareholders”
expressing concern about fraud within HealthSouth.
•In 2003, Weston Smith, a former CFO, tipped off federal investigators
to the HealthSouth fraud.1 Soon after, many other employees who had
participated in the fraud turned themselves in as well.
How one should have pulled it off

o 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.
o Richard Scrushy was obsessed with increasing the status of
Healthsouth and increasing his own personal profit.
o 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
o this led him to pushing and manipulating his own staff members into
committing crimes for the 'benefit of everyone involved in the
company
Movies or Documentaries about it
• A Documentary by the name of ‘American Greed’ is also made on this
huge scandal (http://www.cnbc.com/id/100000081)
• A Personal Documentary on Richard Scrushy is also available and
there are also a couple of books about this scandal but no movie is
made about it so far.
Similar Scandals

• The Volkswagen Emissions Scandal


• Toshiba Accounting Scandal
• Valeant's Secret Division
• FIFA Corruption Scandal
WHERE ARE THEY NOW

• 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.
• Not dissimilar to Scrushy, Weston Smith also offers his services as a
public speaker. Choosing to focus on how fraud occurs within a
company. In addition to this, Smith also engages in corporate fraud
research.