Accounting Scandals

Anikate Rajiv
Jasraj Singh
Milan Rameswar Panigrahy
Vasu Atri
Vivek Singh
HealthSouth Scandal

• Richard Scrushy, the founder and CEO of HealthSouth, became the first person
indicted under the Sarbanes-Oxley Act of 2002 for his role in corporate financial
fraud.
• HealthSouth, initially incorporated as Amcare in 1984, went public in 1986 and
expanded rapidly through mergers and acquisitions to become a major healthcare
provider in the United States, with over 200 facilities and $4.4 billion in revenues.
• Scrushy was highly rewarded for expanding HealthSouth, receiving $260 million
between 1996 and 2002, mostly through stock options, which created a significant
incentive for accounting fraud.
• HealthSouth engaged in accounting fraud by adding fictitious items to its assets
and removing expenses from income statements to inflate profits and boost stock
value.
HealthSouth Scandal

• Signs of trouble emerged in late 2002 when Scrushy sold $75 million of
HealthSouth stock shortly before the company announced significant
losses.
• The SEC investigated HealthSouth for inflating earnings by over 10%
and overstating profits by nearly $2.5 billion between 1999 and 2002.
• HealthSouth's CFO, William Owens, became a government informant,
recording conversations with Scrushy as evidence of financial
wrongdoing.
• In 2003, Scrushy, Owens, and Ernst & Young (the auditor) were fired,
and HealthSouth faced financial turmoil, leading to the sale or closure
of poorly performing facilities.
HealthSouth Scandal

• Scrushy was later indicted on multiple counts, including falsifying

accounts and orchestrating a $2.7 billion fraud to benefit himself and
maintain an extravagant lifestyle.
• During the trial, former HealthSouth executives testified against Scrushy,
but their credibility was questionable as they had pleaded guilty and
agreed to testify for reduced sentences.
• Judge Karen Bowdre dismissed many of the charges against Scrushy due
to lack of independent evidence, and the jury ultimately acquitted him of
all remaining counts.
• Despite his acquittal in the HealthSouth case, Scrushy faced legal troubles
in a separate bribery and conspiracy case, resulting in his conviction,
imprisonment, and fines.
Tesco Scandal
• Tesco overstated its profits by £263 million due to irregularities in
revenue recognition in its half-year results.
• The supermarket initially predicted a half-year trading profit of
£1.1 billion but later revised it down by £263 million.
• The overstatement was discovered during preparations for the
latest interim results, leading Tesco to launch an independent
review by Deloitte.
• Deloitte's investigation found that profits were overstated by £118
million in the first half of the year, by £70 million in the 2013–14
financial year, and by £75 million before that.
Tesco Scandal
• The newly appointed CEO, Dave Lewis, emphasized the
importance of integrity and transparency and pledged decisive
action in response to the investigation.
• Tesco's market share declined due to competition from discount
chains like Aldi and Lidl, leading to challenging trading
conditions.
• The scandal involved aggressive accounting practices, including
booking supplier contributions conditional on sales targets that
couldn't be achieved.
• Some employees struck deals with suppliers to make payments in
the next financial period, keeping these arrangements secret.
Tesco Scandal
• The scandal highlighted the pressures faced by publicly traded
companies to meet short-term performance expectations from
investors.
• Tesco's reputation suffered significant damage, and it suspended
four senior executives, including the UK managing director,
pending investigations.
• Tesco may face a substantial fine from the Financial Conduct
Authority (FCA), and its auditor, PwC, could also be scrutinized
by the Financial Reporting Council (FRC).
Thank You!