HEALTHSOUTH

SCANDAL
MIS5121-REAL WORLD CONTROL FAILURE INSTANCE-2003

DEEPALI KOCHHAR
TUG68426
HEALTHSOUTH
• Founded in 1984
• Largest publically traded health care company in the U.S.
• Headquartered in Birmingham, Alabama
• Operating in 33 states across the country
• PRODUCTS: Rehabilitation, Home Health, Hospice
• REVENUE: $ 4.5 Billion USD IN 2003*
• NUMBER OF EMPLOYEES: 60,000 in 2003*

* The figures are from year 2003 when the scandal happened
• *
 THE HEALTHSOUTH SCANDAL

• WHEN? 1.6
• It started in 1996 when CEO Richard M. Scrushy instructed: 1.4
• Company's senior officers and accountants to falsify company earnings reports in order to meet investor 1.2
expectations
1
• To control the price of the company's stock
0.8
• The fraud continued for seven years. The company's income was overstated by as much as
0.6
4700%.
0.4
• In 2002 CEO Richard M. Scrushy sold $75 million in stock several days before the company posted
0.2
a large loss
0
• Earning numbers were inflated $ 1.4 billion to meet stockholder expectations which represents In-
fl at ed
more than 10% of the company's total assets Earn-
i ng
• The corporate taxes exceeded the actual earnings (Bn)
 KEY PLAYERS
• In March 2003, HealthSouth's CEO Richard M.
Scrushy was charged with the accounting fraud
• Other fifteen HeathSouth employees which includes all
five former CFO’s Taddy McVay, Aaron Beam, Weston
Smith
• On March 18, 2003 FBI agents executed search
warrants at the company's headquarters after the
company's CFO William Owens agreed to accept a
failed attempt to get Scrushy to talk about the fraud.
 WHO WERE IMPACTED

• Stakeholders lost their money which they had invested into the company
• HealthSouth had to lay off many thousands of workers
• CUSTOMERS AND PATIENTS:
• Millions of families have had their health care disrupted

• Companies who invested or did business with HealthSouth lost their

money
 CONSEQUENCES
• In June 2005, Scrushy was acquitted on all 36 of the accounting
fraud and he was ordered to repay $ 2.8 Billion to the company.
• Richard Scrushy was terminated as Chairman and CEO.
• HealthSouth had to sell a lot of their centers' to get their
finances back on track.
• To monitor such scandals, new rules were enforced. Public
company Accounting reform, Investor Protection Act and
Auditing Accountability and Responsibility Act are the
government regulations which were established as a result of
the scandal.
STOCK PRICE-BEFORE, DURING AND AFTER

Stock price fell from $80 to $5.30

 CONTROL FAILURE
• Lack of leadership
• Improper accounting practice
• GAAP- Matching principle was broken
• Lack of full disclosure: Financial information must be complete
• Improper controls and monitoring in finance division
• An approximate $800 Million overstatement to company’s
property, plant and equipment
• Improper risk management and risk disclosure
 LIST OF CONTROL THAT MUST BE IN PLACE

• External oversight for management decisions

• Hiring third party committee to investigate past book keeping practices
• Segregation of duties to allow no conflict of interest in creation of transactions
and control and monitoring of transactions
• Reconciliation of accounting books, accounts and balances
• Integrity of audit function and clear audit reports must be maintained
• Putting in controls, standards and rules to monitor the accounting activities
 LESSONS LEARNED
• Things are not the same as seen especially when just reported by financial
reports
• Reports can easily be spoofed and changed by senior management hence
must be taken care of by putting in proper controls
• Analyst and Investors must pay attention to the ethical side when they are
reviewing the company’s financial statements. Example the salary and
bonus payed to top management and whether it matches with what they do
• Streamlining internal controls and following best audit practices is
extremely necessary
 REFERENCES

• http://www.healthsouth.com/
• http://www.wow.com/wiki/HealthSouth?s_chn=5#Accounting_scandal
• https://en.wikipedia.org/wiki/HealthSouth#Accounting_scandal
• http://www.peoplesworld.org/article/healthsouth-fraud-impacts-millions/