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? It started in 1996 when CEO Richard M. Scrushy instructed: Company's senior officers and accountants to falsify company earnings reports in order to meet investor expectations To control the price of the company's stock The fraud continued for seven years.  The company's income was overstated by as much as 4700%. In 2002 CEO Richard M. Scrushy sold $75 million in stock several days before the company posted a large loss Earning numbers were inflated $ 1.4 billion to meet stockholder expectations which represents more than 10% of the company's total assets The corporate taxes exceeded the actual earnings

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/