1. HealthSouth Presented by Section 4 Group 6: 074043 Ng Man Hon
Yip Ka Yu
Wong Hor Yan Una
HealthSouth

2. Content Background of HealthSouth Way of Fraud
Reason of Scrushy being acquitted
Ethical Issues
Effects on Stakeholders
Recommendation
What did we learn?
Conclusion

3. Background of HealthSouth

4. Found in 1984 by… Richard Scrushy – Chief Executive and Chairman
Aaron Beam – Financial Controller

5. Background of HealthSouth
1986
Went public in NYSE
1990s
Largest rehabilitation service provider
In 1989, earliest fraud described
2002
Fraud exploded…

6. Incident…
2002
2003
Aug - CFO Weston Smith whistled the SFC about manipulation of profits
Mar - FBI & SEC commenced actions against HealthSouth & CEO Richard Scrushy
1st CEO being charged under SOX
Sentencing started later

7. 2004 2005 Incident (cont’d)… 28th June Judgment Day
Fraud amount: US$2.5 billion
New estimated: US$4.6 billion
2004
28th June Judgment Day
2005

8. Incident (cont’d)… Richard Scrushy: Not Guilty and Dimissed
5 CFOs & 10 Accountant Staff: Fined & Imprisoned

9. How? Why? Alter contra value Falsify assets accounts
Meet analyst expectation
Maintain stock price

10. Way of Fraud

11. Way of fraud (1) Earnings Contra value Alter contra value
As “contractual adjustment”
Altering difference between gross charges to patients and the amounts insurers would reimburse afterwards
Earnings
Contra value

12. Way of fraud (2) AP Summary False journal entries
Falsify Fixed Assets Accounts
False supporting documents
AP Summary
Minimum suspicion from auditors

13. Break-down of figures

14. More of that…
Fraud done since late 1980s
Ex-employee

15. More of that… SFC gave up chasing back as evidence not available
Persuasion in 1997 by Aaron Beam  Rejected by Scrushy
Split Plan to hide fraud in 1999 and 2002

16. Reasons for Scrushy being acquitted

17. Reasons for Scrushy being acquitted
1. Documents
Overabundance of prosecution documents
but no clue to make Scrushy guilty
2.Location
The juries are not like those in metropolitan areas who are more skeptical
3.Figure
Scrushy was a respected figure in local
perceived as local boy made good

18. Reasons for Scrushy being acquitted (Cont’d)
focused on his religious devotion
he donated one million dollars to local congregation
as a white, he joined a black congregation
4.Defense strategy
5. The jury
7 blacks and 5 whites
All from working class
6. Defense team
Attacked the former CFOs’ credibility
by treating them as liars and cheats

19. Ethical Issues

20. Ethical Issues 1. Meeting Wall Street analysts expectations
Actual results vs. Expected results by Wall street analysts
If shortfall, Scrushy order management to ‘fix it’ by making false entries
Excuse to commit fraud
Lack of legality
(illegal & violated accounting standard)

21. Ethical Issues (Cont’d)
2. Conflicts of interest
Fraud -> kept good numbers to Wall Street
Stock price stay up
Made millions of profit by selling stock
For own interests
but harmed stakeholders’ interest
Public interest vs. self-interest

22. Ethical Issues (Cont’d)
3. Finding ways to hide the fraud, e.g.
Reduced some of the money which was not there by write downs during takeovers
Declared larger losses than it actually incurred in 1998
Looked for ways to reduce Wall Street expectations (no need to inflate profits as much in future)
Plan of Splitting the company up & sale of assets
Pushed HealthSouth deeper into fraud

23. Ethical Issues (Cont’d)
4. The five CFOs & Accounting executives
On a slippery slope (continue the fraud)
Persuade Scrushy to abandon the fraud
Scrushy refused, they quitted and left HealthSouth
Lack of integrity and fiduciary duty
Mistakenly use of competence
Should blow whistle on Scrushy and not just leave

24. Ethical Issues (Cont’d)
5. Mr. Scrushy (CEO)
Leader of the fraud
Demanded management to fix the number
Refused to abandon the fraud
Found ways to hide the fraud
Lack of fiduciary duty and integrity
When fraud broke out
Claimed no knowledge of the fraud
offered to give evidence in return for immunity
Unethical

25. Ethical Issues (Cont’d)
6. Ernst and Young Auditors
Failed to discover the fraud (even there were many warning signs)
E.g , growth of 143% in income before taxes and minority interest , but sales increased only 3%
7. KPMG Tax Accountants
Failed to discover the fraudulently claimed earnings when doing its tax returns
Lack of competency and fiduciary duty
Professionals must be due diligent and objective, and being alerted to special changes.

26. Effects on Stakeholders

27. Effects on Stakeholders - Directly
Shareholders
Capital Lost
Lost Confidence
Suppliers
Lost of the customer
Bad debts may be occurred
Customers (Patients)
Received improper treatment
Paid overcharged price
Spend time on finding new company

28. Effects on Stakeholders - Directly
Creditors
Might have bad debts
Employees
Dismissed
Might suffer penalty and/or sentences
Company
Deal with the court suit
Spend long time to re-build the customers’ confidence

29. Effects on Stakeholders - Indirectly
Investors
Capital Lost
Lost confidence for further investment decision
Government
Deal with the law suit
Set up more regulations
Regular review
Insurance Companies
Deal with over-paid insurance
Other Companies in the same industry
Lost of revenue

30. Recommendation

31. Recommendation Securities and Future Commission (SFC)
Pay attention to any abnormal movement of the shares’ price
Analyze company’s annual report
Require additional information if necessary
Other authorization (e.g. CPA)
Enhance the regulations
Set up examination to test whether the members performed properly
Establish workshops

32. Recommendation Internal Auditors External Auditors
Perform regular internal audit
Perform special internal audit when it is necessary
Reduce weaknesses
External Auditors
Perform external audit analysis
Additional audit analysis and testing
Provide qualified opinion if client refuses to co-operate

33. Recommendation Company’s Accountants The Board
Comply with code of ethics and other accounting principles
Top management support
Force employees to read
Review regularly
The Board
Set up independent team for investigation
The team members do not have relationship with suspected employee
Team members change regularly

34. What did we learn? The Slippery Slope

35. What did we learn? How dangerous a slippery slope could be
Once start a fraud -> continue -> find ways to cover the fraud
Push yourself deeper into fraud
Before making ethical decisions
think of Consequences and impacts
Public interest vs. Self-interest

36. Conclusion Want to sell stock at higher price  Human nature
2. Justify the value of company
3. Analyst expectation not a magic wand
Honest management environment
Non-selfish spiritual leader
Fearless, courageous and sensible staff

37. “You have to stand up - or you'll be the guy that goes to prison and pays the price.”

38. Reference
Sites:
photo of Aaron Beam searched through google and source from
for photo of Richard Scrushy

39. ~ END ~

40. Q & A