The HealthSouth scandal can be traced back to the late 1990s, more precisely to 1996 when Richard Scrushy, the owner of HealthSouth Incorporation decided to take the company public having been a beneficiary of various federal grants and loans to expand the national healthcare policy. Making the company public would be considered a marketing strategy for HealthSouth, more particularly Scrushy to tap into more public funds meant to promote healthcare in the united states of America. By the time the company was going public, it had a considerable market value standing at slightly 12 billion dollars although its growth and financial statements at the time had been doctored somewhat thanks to the incorporation's executives who had perpetrated by up to 2.7 billion dollars in fraud. This fraud is mainly attributed to the fact that at the time the incorporation was going public there was a lot of economic growth and lenient regulations that focused less on profitability and more on revenue. Such an environment would almost automatically lead HealthSouth's executives to capitalize on its revenue figures without necessarily having to reflect on the organization's profitability, provided the numbers looked convincing enough for the government and other investors and lenders Around this time, the government was giving large healthcare subsidiaries to hospitals that had patients eligible for Medicare. This move prompted HealthSouth to engage in the multiple acquisitions of rival organizations to increase its chances of benefiting from the program.
Although in 1997 when the government suspended Medicare reimbursements, which at that point accounted for 37% of HealthSouth's revenues, the organization was unable to expand via the acquisitions. This prompted Scrushy to find ways to secure HS’s floating over the next couple of years. The new strategy saw sales growing at a staggering 5% within three years, yet the organization's net income for the same period rose drastically to almost 500%. This meant that growth was a critical determinant when sourcing for capital for the company, prompting Scrushy and his team to find avenues to meet expectations by growing their company. Scrushy and five CFOs therefore resorted to altering their earnings numbers, which was explained as plugging holes in the balance sheet with dirt. In other words, the team factored on including improperly capitalizing company expenses, overvaluing their fixed assets and using faulty reserve accounting. This technique also entailed overestimating insurance reimbursements. To effectively achieve this motive, HealthSouth's executives followed some necessary steps to cover their tracks. The first step was comparing their internal financial records to ensure they met analyst expectations. The second step was fixing earnings that seemed to be of lesser value to reflect the results of desired values. Additionally, false documents were used to hide the invalid entries that were added to the financial records. A body that played a big part was the E&Y auditors who had a large stake at the organization's executive table ( Chaubey, 2006) . These auditors were strategically positioned to hide the fraud from the public domain by ensuring that the auditor's materiality threshold for evaluating fixed asset additions was maintained at $5,000. This meant the organization ensured they just raised amounts that were less than the threshold at any given point to ensure the auditing firm would not dictate the fictitious transactions.
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Even though officially the fraud went undetected until 2003 when Weston Smith, a former HealthSouth CFO revealed the fraud to the federal investigators, there had been numerous red lights raised by various bodies and persons that were closely affiliated to HealthSouth. For instance, Michael Vines who was the organization’s bookkeeper left his position at HealthSouth after unsuccessfully trying to warn several members of the management. Vines had been in charge of overseeing the purchase of equipment and had witnessed the moving of organizational expenses to capital accounts. Vines wrote a letter to the E&Y auditors with specific areas to look out for fraudulence activities, identifying three accounts that needed to be scrutinized by the auditing firm to discover the fraud. Another indicator of the scam was an email that was sent to the auditors from duped shareholders to express their concerns about the illegal activities within the organization. These shareholders pinpointed to specific areas of operations and management that needed to be investigated. Some of these areas included HealthSouth's policy of treating patients who had no precertification, some clinics not having lousy debt reserves and the company carrying millions in accounts receivable that were well over a year old. However, the catch came about after Weston Smith came forward with detailed information documenting the fraud, thereby tipping off the FBI to the organization's fraud (Sanchez & Zhang, 2012) . Soon after the tipoff, other HS employees who had taken part in the fraudulence activities turned themselves in too. Although Scrushy maintained at the time that he had nothing to do with the fraud and that it as the other executives. Smith included who engaged in the scam.
Following the discovery of the fraud, HS suffered immediate repercussions which included the conviction of Scrushy for accounting fraud despite his innocent pleas. He was consequently served a five-year jail sentence. Because of the role they played in encouraging the scam to take place for so long, the E&Y auditors were fired for their failure to provide the public with independently qualified financial records detailing all the activities of HS. The shares of HS sunk to 0.35 dollars a share at the SEC, costing the shareholders millions in dollars. Various individuals, shareholders, and organizations filed lawsuits against HS, Scrushy, and E&Y costing them millions. Even though Scrushy was not found culpable on criminal charges, he had to pay $81 million to the SEC to settle the civil charges related to the scandal. In 2009 Scrushy had to pay another $3 billion to HS shareholders in a class action lawsuit (Moynihan, 2003) . The auditing firm, E&Y, also had to settle the shareholders class action lawsuit for 109 million dollars, thereby reaffirming their gross negligence in HS audit.
To effectively solve the scandal, the company hired an outside law firm to review the former boss's stock sale of $75 million in late 2002, several days before the organization posted a massive loss in the SEC. Although the audit fir concluded that the sale and profit loss was not related, there was more still to be done by the company to get off SEC's radar. The board of directors convened an emergency meeting to discuss the way forward, in which it was agreed Richard Scrushy had to be terminated as the chairman and CEO. After appointing interim CFO, CEO, and chairman, the next step was to devise a means by which the company would obtain cash for interest payments of senior bonds and other principal payments that were due on a $344 million bond. The company, therefore, hired a restructuring firm, Alvarez and Marsal to bring its finances in order. These moves enabled the company by the end of 2003 to avoid Chapter 11 bankruptcy since it managed to have most of its investments reorganized in time, thanks to the appointing of Bryan Marsal as the Chief Restructuring Officer (Katz, 2003). Other measures that were taken by the company included the removal of Scrushy's name from the conference center to eradicate all signs of the prior existence of the former boss within the company.
References
Chaubey, M. D. (2006, December). HealthSouth Corporation: Fraud, greed and corporate governance. In International Conference on Management Cases (Vol. 4, p. 5).
Katz, D. M. (2003). More guilty pleas in HealthSouth scandal. CFO.com. Retrieved from http://ww2.cfo.com/2003/04/more-guilty-pleas-in-healthsouth-scandal/
Moynihan, R. (2003). Another US healthcare giant is hit by scandal. BMJ: British Medical Journal , 327 (7424), 1128.
Sanchez, M., & Zhang, S. W. (2012). The role of the expert witness in accounting fraud cases .
