Corporate Accounting Fraud

Adan, Irish
Bautista, Paul Andrei
Casupas, Ryan Axiel
Gutierrez, Kimberly
Marqueses, Brenrich
  Start-up costs – Non-recurring costs associated
with setting up a business, such as accountant’s
fees, legal fees, registration charges, as well as
advertising, promotional activities, and
employee training.
 Sarbanes-Oxley Act – is designed to oversee the
financial reporting landscape finance
professionals. Its purpose is to review legislative
audit requirements and to protect investors by
KEY TERMS improving the accuracy and reliability of
corporate disclosures.

AND  ERP Software – also called as the Enterprise

Resource Planning System. It is a business
process management software that allows an
CONCEPTS organization to use a system of integrated
applications to manage the business and
automate many back office functions related
to technology, services and human resources.
 Blackmailing – is the crime of threatening to
reveal embarrassing, disgraceful or damaging
information about a person to the public, family,
spouse or associates unless money is paid to
purchase silence. Most of the people do illegally
blackmailing for the profit.
HealthSouth Corporation

Based in Birmingham, Alabama. HealthSouth is the United States’ largest owner and
operator of inpatient rehabilitative hospitals.

The company was incorporated on February 2, 1984 by its founder Richard M. Scrushy.
The company was the largest publicly listed healthcare company in the US based on the
number of locations and the third based on Revenue.

Throughout the mid-1990s, HealthSouth expanded rapidly through mergers and

acquisitions. In 1995, the company changed its name to HealthSouth Corporation to better
reflect its diversified interests in healthcare.
 Founder, Chairman, and CEO. Richard M.
Scrushy, was accused of directing
company employees to falsely report
grossly exaggerated company earnings in
order to meet stockholder expectations.

Corporate
Accounting Top company officials reviewed quarterly

Fraud unpublished financial results and compared

the results to market expectations. If they
were short, managers were ordered to “fix
it”.

Accounting staff members then held

“family meetings” to manipulate the results
which they called “filling the gap”.
Persons Involved

RICHARD M. SCRUSHY
• CEO and founder of HealthSouth
BILL OWENS “The Architect of the Fraud”
• 3rd Chief Finance Officer
• A Certified Public Accountant (CPA), and worked for Ernst and Young for 5 years before
joining HealthSouth as Controller in 1986
• Coined as the leader of a group of executives who committed the fraud
WESTON SMITH “The CFO Turned Whistleblower”
• 4th Chief Finance Officer
• Worked for Ernst & Young before Owens recruited him to HealthSouth
• Credited with being the first-ever whistleblower to warn federal investigators
• He came forward after the US Congress passed the Sarbanes-Oxley Act of 2002
 …

KEN LIVESAY “The Assistant Controller”

• Assistant controller and Chief Finance Officer
• He would download the company’s true earnings into his computer, figure out how
much adjustment was needed to meet analyst’s earning expectations, and pass along
the figures to two superiors in the Finance department.
HANNIBAL CRUMPLER “The Controller”
• VP & Division Controller
• He attended meetings where the “gap” would be identified and found where to put the
fraudulent postings
• He would give the staff accountant’s fake journal entries to put on the company’s books
DIANA HENZE “The Voice That Went Unheard”
• Vice-President of Finance in 1998
• She confronted then-controller Owens, accused him of fraud, and later told her boss,
Ken Livesay, that she intended to report the fraud.
• Requested and received a transfer out of accounting and into the IT group.
Accounting Personnel

 The HealthSouth auditors were Ernst & Young

 Ernst & Young failed to uncover the $2.5 Billion systematic
overstatement of earnings
 They allowed the company to keep on its books $500
Million of overvalued accounts receivables to it by
financially distressed health technology firms
 The auditors did not insist on establishing adequate
reserves for these receivables
 How did they do it?

 Instead of expensing start-up costs, they would capitalize them

 They would manipulate ledgers to scheme auditors and keep
sold assets on the balance sheets
 They made multiple entries to inflate its perceived earnings and
push its shares to ridiculous heights
 They methodically added the extra non-existent money in
multiple small amounts
 These inflated figures were used to secure bank loans and raise
money from the market
 The inflated script was used to buy all its competitors which
further boosted its stock
 They also boosted its income stream by defrauding Medicare
and cheating on patient care
Detection of the Fraud
 In late 2002, Richard Scrushy sold $100 million in stock right before he
announced that profits were expected to fall. He claimed deceptively
that this was due to a change in Medicare funding.
 Scrushy was attacked, class actions by shareholders followed and the
SEC started investigating insider trading.
 Following the Enron Scandal, criminal investigators started looking at
accounting practices in other companies. HealthSouth became a target
towards the end of 2002.
 In February 2003 the SEC ordered documents which HealthSouth was
forced to give them.
 The recent Sarbanes-Oxley corporate reform law had increased
penalties. Senior accountants confessed to their involvement in the
fraud. (Smith & Owens)
 In the middle of March 2003, the FBI and the SEC raided HealthSouth’s
headquarters. The next day, civil actions were commenced against
Scrushy and HealthSouth. The company was delisted from stock
exchange.
 The Damage

 On March 19, 2003, the SEC charged HealthSouth and its

CEO, Richard Scrushy, with accounting fraud.
 Fifteen HealthSouth accounting and finance executives
pled guilty by the end of 2003, and Scrushy remained
under indictment in mid-2004 on 85 criminal charges.
 HealthSouth was the first company to violate Sarbanes-
Oxley
The Punishment

Richard Scrushy
 In June 2005, Scrushy was acquitted on all 36 of the accounting fraud counts
against him, most notably one count violation of the Sarbanes-Oxley Act
 In 2006, he got a bribery conviction for paying $500,000 to former Alabama
Governor Don Siegelman’s campaign for a state lottery in exchange for a
seat on a state hospital regulatory board. He spent about five years in
federal custody.
 In June 2009, he was sued for fraud by HealthSouth investors and ordered to
repay his company $2.8 billion.
 Permanent “officer and director ban”
Ernst & Young
 They were fined, sued, and required to pay $109 million by the stock holders.
 The suit contends that they were aware of fraud at the company even as
they signed its financial statements.
 Agreed to the settlement without admitting to or denying the allegations
Ethical Issues

False documents were created to

conceal the false entries added to
financial statements. For example,
the management knew that the
Ernst & Young's threshold for
examining fixed asset additions was
If the revenue appeared to be
$5000 and the HealthSouth
short, the managers were told to fix
employees only moved amounts of
them and manipulate the results.
money less than the threshold, the
HealthSouth employees went
above and beyond to conceal the
fictitious entries from the auditors,
which allowed the fraud to exist for
so long and impossible to stop it.
…
Proper checks and balances
were not in place at
HealthSouth. Their accounting
systems did not sync properly
with the corporate ERP
software.
HealthSouth executives
breach the Code. Every
time a corporate fraud is
committed, they disregard
the moral values in favor of
wealth and greed. There is
no honest relationship with
employees and company
members.
 The connivance with the
members of the management
team makes the overriding of
audit to continue and difficult to
Conclusion catch.

Blackmailing is also used by the

dominant officers to convince
several members and
participate to the fraudulent
act.

Small concessions lead to

greater compromises and, will
lead to serious unethical acts
and even crime.
 The personal morality and ethics of each

…
executives and employees sums up what
will be the culture of the company so if the
people refused to participate to the
crime, the fraud could have been
stopped and damages will be avoided.

Committing fraud will only destroy your life.

There is no secret that can't be revealed.
So, no fraud will not be caught and any
person who commits will be punished for
what they have done.
Recommendation

Investors and lenders should focus more on the operations of the business,
most especially on its profitability.

Scrushy and HealthSouth should be aware that they need to be in

compliance in the GAAP before implementing accounting policies and
methods.

Audit function is important because a management that is intent and

unified can override the audit easily.

Strict internal control procedures and strained relationship between the

company's management and the auditors.
…

Scrushy and HealthSouth shouldn't alter their earnings and profits. They also
have to capitalize their expenses properly and they should have forecasted the
best estimate for insurance reimbursements. Also, they should value their fixed
assets according to the IFRS. Through all of this, they can also meet their
analysts' expectations and be profitable in a clean way.

Personal morality and ethics make up the collective morality and ethics of the
company.
 Alternative Course of Action

Attention Establish Sell Execute

• Pay close • Establish a • Sell assets to • Execute Trend

attention to the stronger avoid Analysis,
increases/decrea
ses of stock price Sarbanes- bankruptcy which
as this determine Oxley- and seek measures
the financial compliant various changes of
stability of a system of agreements stock prices
corporation.
internal with lenders over time in a
controls. to refinance company's
its debt. financial
 …

Develop Start Perform

• Develop improved • Ethical organizational • Perform Ratio Analysis,

accounting and culture must start at the which can compare
reporting policies top management. different items in a
company's current
financials or contrast
them with similar items
in the financials of
competitors or other
companies operating
in similar industries.
QUIZ
 I. MULTIPLE CHOICE

1. HealthSouth accounting staff members then held “family meetings” to manipulate the results which
they called ________.
A. “family meetings” B.“filling the gap”
2. The company was incorporated on
A. Feb. 2, 1984 B. Feb. 4, 1982
3. The founder of HealthSouth Corporation is
A. Richard M. Scrushy B. Bill 77Owens
4. It is the United States’ largest owner and operator of inpatient rehabilitative hospitals
A. HealthSouth B. WealthSouth
5. He was “The Architect of the Fraud”
A. Richard M. Scrushy B. Bill Owens
…

6. “The CFO turned Whistleblower”

A. Weston Smith B. Ken Livesay
7. “The Assistant Controller”
A. Weston Smith B. Ken Livesay
8. Vice President and Division Controller
A. Hannibal Crumpler B. Diana Henze
9. “The Voice that went Unheard”
A. Hannibal Crumpler B. Diana Henze
10. The HealthSouth auditors were
A. East & Young B. Ernst & Young
 II. TRUE OR FALSE

11. HealthSouth accounting staff members then held “family meetings”

to manipulate the results which they called “filling the gap”.
12. The company was incorporated on Feb. 4, 1982.
13. The CEO and founder of HealthSouth Corporation is Bill Owens.
14. East & Young failed to uncover the $2.5 Billion systematic
overstatement of earnings
15. HealthSouth was the second company to violate Sarbanes-Oxley.
 …

16. Diana Henze is the Vice-President of Finance in 1988.

17. Based in Birmingham, Alabama. WealthSouth is the United States’ largest
owner and operator of inpatient rehabilitative hospitals.
18. On March 19, 2003, the SEC charged HealthSouth and its CEO, Richard
Scrushy, with accounting fraud.
19. The company was the largest publicly listed healthcare company in the
US based on the number of locations and the third based on Revenue.
20. In 1995, the company changed its name to HealthSouth Corporation to
better reflect its diversified interests in healthcare.
ANSWERS
I. MULTIPLE CHOICE II. TRUE OR FALSE
1. B 11. TRUE
2. A 12. FALSE
3. A 13. FALSE
4. A 14. FALSE
5. B 15. FALSE
6. A 16. FALSE
7. B 17. FALSE
8. A 18. TRUE
9. B 19. TRUE
10. B 20. TRUE