Company Background: HealthSouth
is traded as a public company. It operates in the healthcare industry. It was
founded in 1979 and has headquarters in Birmingham, Alabama, USA. Its products
are: home health, rehabilitation and hospice. It is the largest publicly traded
health care company in the U.S.
What
Happened? HealthSouth got involved in a corporate accounting
scandal in which its founder, CEO, and chairman, Richard M. Scrushy was
criminated of directing company employees to falsely report grossly exaggerated
company earnings in order to meet stockholder expectations. These earnings were
allegedly inflated by $1.4 billion to meet shareholder expectations.
The
accounting fraud began in 1999 and lasted through the second quarter of 2002 (Andrejczak,
2003) .
By the third quarter of 2002, HealthSouth’s assets were inflated by $800
million, or 10 percent, the SEC alleges (Andrejczak, 2003) .
The
company’s in-house accountants made multiple false journal entries to the
Profit and Loss statement and Statement of Financial Position, to avoid
detection by outside auditors.
Main
Players: The main player was HealthSouth’s CEO; Richard Scrushy.
Another prominent figure in the scandal was HealthSouth’s then Chief Financial
Officer (CFO), Aaron Beam.
How
the scandal was unveiled: He sold $75
million in stock a day before the company posted a huge loss,
triggering SEC suspicions (The 10 Worst Corporate Accounting
Scandals of All Time, n.d.) .
Penalties
and Consequences: Scrushy was convicted of bribing the governor
of Alabama, leading to a 7-year prison sentence. In March 2003, HealthSouth’s
CEO Richard Scrushy was charged with account fraud but was later acquitted of
all 36 counts of fraud levied against him in June 2005. Four years later, he
was sued for fraud by HealthSouth investors and ordered to repay his company
Once the accounting scandal went public, HealthSouth’s share price
tanked to as low as $0.35 a share, costing their shareholders millions (Lupica, 2014) . Shareholders then
filed lawsuits against Scrushy, HealthSouth and Ernst & Young (E&Y),
who were the externalauditors
of HealthSouth. E&Y settled the shareholders’ class action lawsuit for $109
million, reaffirming their gross negligence in their audit of HealthSouth (Lupica, 2014) .
Aaron
Beam served a three months jail term in a federal prison for his role in the
$2.7 billion HealthSouth accounting fraud. Scrushy, his former boss and CEO of
HealthSouth was released from federal prison in July 2012.
Lessons
Learnt: A good number of lessons can be learned from the
HealthSouth accounting scandal. Such large-scale accounting scandals do not
occur out of the blues; multiple people are required to orchestrate such.
When
there is no ethical tone at the top management of a company or there is a
deviation from ethical standards, it should serve as a red flag to other units
of the company, to auditors, and the general public that there is a likelihood
for the occurrence of fraud.
It
may be very easy to get caught in the pressure of corporate fraud but employees
should not allow themselves to blindly follow a CEO who is ethically deficient
and become ethically deficient in their actions as well. Scrushy himself did
say, ‘The CEO is just a human; the mind can only absorb so much’ (Roberts, 2014) .
Fun/Irony
in the Scandal: Scrushy’s new job is motivational speaking
and he maintains his innocence meanwhile 15 of HealthSouth’s top executives
have pleaded guilty to crimes.
Works Cited
Andrejczak, M. (2003, March 19). HealthSouth and
CEO charged. Retrieved January 25, 2016, from marketwatch.com:
http://www.marketwatch.com/story/sec-charges-healthsouth-ceo-with-14-billion-fraud
Lupica, C. (2014, November 24). HealthSouth, Inc.: A Case
of Corporate Fraud. Retrieved January 25, 2016, from
stakeholder11.wordpress.com: https://stakeholder11.wordpress.com/2014/11/24/healthsouth-inc-a-case-of-corporate-fraud/
http://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-and-the-death-of-lehman-brothers
Roberts, D. (2014, June 11). Convicted Former HealthSouth
CEO Shares Lesson: 'Stay in the Driver's Seat'. Retrieved January 25,
2016, from Charlotte News.
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