1. HEALTHSOUTH SCANDAL MIS5121-REAL WORLD CONTROL FAILURE INSTANCE-2003
DEEPALI KOCHHAR
TUG68426

2. 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 *

3. 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

4. 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.

5. 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

6. 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.

7. STOCK PRICE-BEFORE, DURING AND AFTER
Stock price fell from $80 to $5.30

8. 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

9. 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

10. 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

11. REFERENCES http://www.healthsouth.com/