About the paper
Embezzlement, funds misappropriation, cheating! - Whatever the method or whatever the name you give it, corporate frauds are rampant and an ugly truth associated with the market around the world. As soon as the news of any such scandal is exposed, newspapers and social media turn aggressive on deciding what went wrong and who did it? Irrespective of the eventual outcome of such scandals, it is the shareholders that suffer the billion dollar losses and a lost faith in the Wall Street. Unfolding such events takes us to the traces of Enron and Wordlcom. However, there were also healthcare organizations which also duped the shareholders with the motive of greed and urge to gain illegitimate money at the cost of shareholder’s interest. Ironically, while the purpose of health care organizations is to rehabilitate the medical conditions in the society and doing social good altogether, organizations such as HealthSouth, which were once the largest publicly traded in the US, took the illegitimate path and amidst the ill- intentions of its CEO, Richard Scrushy, got trapped into the accounting scandal.
In this paper, we will examine the much publicized ‘HealthSouth Accounting Fraud’ and the people that set up the whole plot of the accounting fraud. HealthSouth case is a perfect example of how the employees who were ‘just doing their job’, crossed the line and eventually became the law-breaking villains and the producers of $1.4 billion accounting fraud. The paper will also include a comprehensive discussion of the aftereffects of the accounting fraud on the stock price of the company and the federal charges against the culprits.
The Scandal
Once the largest healthcare company and serving at more than 1800 locations around the US and international locations, HealthSouth was facing losses since the beginning of 1999. However, the market analysts were expecting strong and optimistic financial results from the company and this formed the basis of ‘accounting manipulation’.
In order to meet the market expectations and to ensure high capital investments from the shareholders, the top officials of the company reviewed the unpublished financial results and compared the results with the market expectations. If the results were short of analyst expectations, they were ‘fixed’ by creating false journal entries over months by the accounting staff on instructions by their immediate bosses.
Ironically, over the time of accounting fabrication from 1999 to 2001, HealthSouth overstated their earnings from $3.8 billion- $4.6 billion, however, knowing that the auditors will easily catch any transaction above $5000, a massive amount of fake journal entries ranging from $500 to $4999 and associated documents were recorded by the accounting staff to inflate assets and income. The volume and nature of the false transactions clearly indicate that the fraud was widespread around the company and everyone knew it except for the auditors. Even though the story of accounting fraud and methodology to hide it was simple, the auditors: Ernst and Young were unable to unearth it.
Main Players and Legal Prosecution
i) Chief Executive Officer- Richard Scushy
Charged as the ringleader and the mastermind of the accounting fraud and testified by everyone under him, Richard Scushy is the main culprit of the HealthSouth accounting fraud. He was charged by the Security and Exchange Commission(SEC) for orchestrating the $1.6 billion fraud and directing the executives and accounting officers to fabricate earnings in order to meet the analyst expectations.
The CEO was convicted and sent to prison and sentenced to 82 months in federal prison and was asked to pay $267,000 in restitution and $150,000 as fine.
ii) Vice President and Division Controller- Hannibal Crumple
He was the willing participant from the very beginning and was the real architect designing all the fake journal entries and documents to fix the earnings gap. By the time he left HealthSouth, he had already made fake entries amounting to $300 million. Even when he joined Source Medical, one of HealthSouth’s associate companies, he was again extorted into the fraud by the CFO and as part of this final transaction, he sent a letter overstating Source Medical’s debt to HealthSouth by 20 million. This was done to assist HealthSouth in documenting the ongoing fraud with an official and seeming to be legitimate justification.
iii) Assistant and Controller- Ken Livesay
Serving as the assistant controller at HealthSouth, Ken Livesay’s responsibility was to download the actual earnings report and then figure out how much adjustment was required to meet analyst expectations. He was then supposed to report to other senior officials who used Livesay’s report to fabricate the entries.
At the time of his prosecution, Mr.Livesay agreed of his wrongdoing and was sentenced to six months of house arrest and a fine of $7,60,000.
iv) Chief Financial Officer- Aaron Beam
Aaron Beam was the CFO of HealthSouth when the fraud initiated. He was aware of all the malfeasance in the company but in order to keep his job, he never resented. Owing to his cooperation during the investigation and testimony against Richard Scushy, federal courts showed leniency while convicting him as he was charged for only 90 days of imprisonment. However, he was charged with a fine of $2,85,000 and legal fees of $7,50,000.
The trajectory of his career in his own words is ‘’ From earning $500,000 per year to scrubbing urinals in prison’’
Impact on stock price
After reaching the peak position of $30/share in 1999, stock price of the company was largely hit because of insider trading and accounting fraud. From late 1999- 2002, executives of the company were continuously dumping their stocks and this was followed by the investigation of the company against the company. Post the announcement of $406.8 million loss in the fourth quarter of 2002 against the profit of $67.9 million during final three quarters of 2001, the stock price was down by 1% at $3.91/share and trading in the stock was suspended for two business days as soon as the company was charged by SEC suspecting a probable accounting fraud.
Conclusion
Even though HealthSouth Inc. survived the paranoia of its top management and is very much alive today, however, the losses suffered by investors and thousands of employees who lost their life savings due to the greed of few officials can never be justified. On the other side, the most massive health care fraud designed by HealthSouth Inc. does teach numerous lessons for the corporate community. First, small concessions and ignorance can lead to serious ethical lapses and accounting frauds. Secondly, collusion and collective effort of the members of management and accounting staff can hide the wrongdoing and make it impossible to catch by the auditors. Last, in the long-run, an entity is always known for the personal morality and ethics it carries. No matter how much revenue or profits are reported by the company at present, it will always be remembered as the company with a blot in the form of a billion dollar accounting scandal.
References
Andrejczak, M. (2003, March 19). HealthSouth and CEO charged. Retrieved February 5, 2016, from http://www.marketwatch.com/story/sec-charges-healthsouth-ceo-with-14-billion-fraud
Chuck Boguslaski, M. C. (2004, February 23). HealthSouth Scandal. HealthSouth Scandal.
Hamilton, C. (n.d.). HealthSouth: A Case Study in Corporate Fraud . California: Arxis Financial Inc.
