1. Introduction

It was late fall 2002, and Aaron Beam, former CFO of HealthSouth Rehabilitation Corporation, had settled into his life as a retiree. He remembered that fateful day in 1996 when the top managers of the company realized that the organization would not meet the Wall Street analysts' forecasts and settled on what they believed would be a short-term plan to deal with the problem. They were all heavily invested in the company's stock and realized a failure to meet the forecast would cause the stock price to go downsinking their individual wealth. It was on that day that collectively they decided to "cook the books" to meet analysts' predictions. When Beam went home that night, he could not sleep and had not slept much since then. He had read in the paper about the passage of the Sarbanes-Oxley Act which clamped down on the kind of financial fraud for which his company had been guilty. Beam now wondered if he should do the right thing and come forward to some external authority such as the Securities and Exchange Commission (SEC) and admit the mishandling of funds and try to clear his conscience.

2. Background on Aaron Beam¹

Beam grew up in North Louisiana near Bossier City. His father was a businessman who started a restaurant and was a part owner of the K-9 bar. He also sold pinball machines and jukeboxes for other "honky-tonk" joints. The younger Beam acquired a similar appetite for working in and starting new businesses that became evident later in his life. His early experience in school was a struggle, in part due to an undiagnosed case of Attention Deficit Disorder. After fifth grade, school officials suggested Beam was not likely to graduate from high school. Motivated by his teachers' lack of faith in his abilities, Beam set out to prove them wrong with hard work; his determination paid off and he graduated with just under a B average from Bossier City High School. When he was 17, he entered LSU and got a degree in economics.

After LSU, he went into the Navy and served 18 months in Australia and one year in Vietnam during the war in Vietnam. When he got out of the Navy in 1972, he moved to Houston and worked in a start-up technology company, Control Automation Technology, which made control systems for chemical plants. He worked there for four years as the office and business manager, handling the business side of the enterprise while leaving the technology side of the business to engineers. Ultimately, problems with the technology led the company to close, but the broad experience he gained proved helpful in his role at the HealthSouth start-up. Beam then went to work as a controller for Johnson Cover, a low-tech company making loose leaf binders. It was during his time at Johnson Cover that he earned a degree in accounting at the University of Houston and passed the CPA exam in 1978.

In 1980, Beam was interviewed by Richard Scrushy for a CPA position at Lifemark, a hospital corporation headquartered in Houston, Texas. He was hired for the position, and that night he commented to his wife about his meeting with Scrushy:

Today I think I have met the most brilliant businessman I have ever metor the biggest con man.

Scrushy offered him the position as a controller in a division of Lifemark. Beam accepted and they both worked for the owner of the company. From the first day, Beam became concerned about Scrushy's character. On Beam's first day at Lifemark, Richard invited him into a meeting. At the meeting, Scrushy declared that:

Aaron and I stayed up all night working on these numbers and we think we need to sign this contract.

Less than an hour on the job and he was included in a lie. Beam wondered if it was a test of whether he would stand by his new boss. His loyalty and hard work was rewarded as within two years Scrushy was promoted to vice president of the division and Beam was brought along with him as his "finance guy".

Beam and Scrushy worked together at Lifemark until it was announced in 1983 that Lifemark and AMI would emerge. In the weeks that followed it was announced that staff in Houston would be phased out as the operations would be managed from AMI headquarters in California. Some staff would be retained and moved to headquarters, but those who were not going to make the move were enticed with the promise of a generous severance package if they stayed on until the expected closing in December.

3. Launching of HealthSouth Rehabilitation

The merger with AMI brought a sense of immediacy to an idea Scrushy had been rolling over in his mind and had presented to executives at Lifemark. His idea was a new hospital business model that would provide outpatient care for those who had an injury that would need rehabilitative care. Outpatient care in a setting outside of a hospital could be offered at a price lower than hospitals that had significant overhead and regulatory compliance costs. At that these outpatient facilities, patients would receive such services as rehabilitation, guidance in nutrition and psychological counseling if needed. Insurance companies that he had talked to thought the concept was outstanding because it moved patients out of the hospital much more quickly than traditional treatments and cut their costs.

When Scrushy presented his idea to investors, they were excited about the concept. He started working on the basis of a business with Gene Smith and Tony Tanner; he then offered Beam a job with the company as CFO and a stake in the company as the fourth co-founder. Beam commented:

I was reluctant because Richard worried me with his big ego, but he was very successful at what he did. When he offered me 100,000 shares of stock in his company for a nickel a share, it was too much to turn down.

Scrushy was able to put together venture capital funding, to launch the company with Citicorp as the lead investor. To encourage doctors to recommend outpatient centers, individual doctors also were allowed to invest in individual outpatient centers but not the corporation. The company began 1984 as Amcar but soon after was changed to HealthSouth and was headquartered in Birmingham Alabama. The narrow focus on rehabilitative outpatient care also gradually changed as executives recognized opportunities in the healthcare market. HealthSouth eventually acquired rehabilitation and acute care hospitals as well as surgery and diagnostic centers. Within three years, the company went public and expanded its facilities to operate in all 50 states. The total number of employees at HealthSouth expanded to 40,000 individuals.

Acquisitions by HealthSouth

By 1992, HealthSouth had become one of the two most successful outpatient rehabilitation centers in the United States. The other leading center was Continental Medical Systems. Thereafter, the company began acquiring other hospitals offering the same or related services. Below is a table showing the acquisitions of HealthSouth in the 1990s.

Table 1: Acquisitions by HealthSouth Rehabilitation in the 1990s
Date of Acquisition	Company Acquired	Outcome of Acquisition
December 1993	National Medical Enterprises which operated 31 inpatient and 12 outpatient facilities.	National Medical's facilities had a substantial improvement in performance in the 2 years following the acquisition.
September 1994	ReLife, Inc. which operated 31 inpatient and 12 outpatient centers.	Added $119 million to HealthSouth annual revenues.
February 1995	NovaCare, Inc. which operated inpatient rehabilitation services.	After this acquisition, the company's total network rose to more than 425 facilities in 33 states.
March 1995	Surgical Health Corporation which offered outpatient surgical services.	HealthSouth became the leader in outpatient surgery.
October 1995	Caremark International rehabilitation services whose operations consisted of 123 outpatient hospitals.	Gave HealthSouth 440 outpatient facilities and 40 percent of rehabilitation market.
Late 1996	Surgical Care Affiliates, Inc. which operated 67 outpatient surgery centers in 24 states.	Gained the major market share in inpatient, outpatient and surgical outpatient centers.

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Source: HealthSouth Corporation History,Funding Universe.http://www.fundinguniverse.com/company-histories/healthsouth-corporation-history/

New Challenges Facing the Company

Although the company had made a number of successful acquisitions and had extended their reach throughout the country, there were a number of troubling developments that the company had to deal with in the late 1990s. For one thing, the U.S. government's Balanced Budget Act of 1997 put additional restrictions on Medicare which led to lower reimbursements for some types of medical services. A very large share of the revenues that HealthSouth received were from Medicare, so this presented a new challenge to the company.

Furthermore, managed care companies and health maintenance organizations (HMOs) were becoming larger and more powerful each year. Much of that power was exerted in attempting to lower reimbursements to health care providers. At that time, HealthSouth was receiving about 60 percent of its revenues from managed care organizations.²

4. Financial Mishandling

With the growth of HealthSouth, Beam and the other top executives of the company were able to amass all of the trappings of success. He had purchased a beach house on the Gulf Coast, a condo in the French Quarter in New Orleans, planes, expensive cars and $30,000 worth of Hermes ties. Beam in commenting on his success, suggested:

I was a rock star. I could go into any restaurant and see people pointing out that they wanted to talk to me, meet me and tell me what a great job I was doing. That was pretty heavy stuff.³

As long as the company was hitting the Wall Street analysts' numbers, all was well at HealthSouth. Beam acknowledged that during this time they made accounting decisions to present their performance in the most positive light, but he asserted:

For the first 10 years at HealthSouth, we did not cook the books.

However, a time came in 1996 when the company could not hit the numbers any longer, and Scrushy announced to his inner financial circle that he did not want to report a bad quarter. The wealth that Scrushy, Beam and the other executives had amassed was dependent on keeping the stock price up by meeting the analysts' forecasts. Beam explained the situation:

We were promising too much to Wall Street to keep the price up. There just came a point in 1996 where my boss literally said, "Guys, we don't want to report bad numbers. The stock's going to crash, people are going to sue. There's Got to be something you guys can do. Fix the numbers!"

That's when my chief accountant suggested that, "We have 2,500 general ledgers. I can make small entries that the auditors won't look at, and I'll get the numbers where they need to be," and Richard said, "That sounds like what we ought to do. We'll only do this one time. Nobody will lose their job. The stockholders won't get hurt. And look, everybody does this kind of thing." And we did it. And the next day, I was like, "What have I done?"⁴

Unfortunately, this did not turn out to be a one-time occurrence. For the next year, the accountants continued to alter the financial statements. To keep Wall Street from lowering their estimates, they began lowering their reserves for bad debts; and when they had an acquisition, they would change the estimates of the companies they were acquiring so that they could apply those estimates to their earnings. It occurred to Beam that they had likely perpetrated fraud on the stockholders.

Exhibit 1: Definition of Fraud

According to Wells, there are four elements that constitute a legally-defined fraud:⁵

• 1.A materially false statement;

• 2.Knowledge that the statement was false when it was uttered;

• 3.Reliance on the false statement by the victim; and

• 4.Resulting damage.

Whittington and Pany suggest, "Legally, fraud is the misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured."⁶

Auditors of financial statements are primarily interested in acts that result in material misstatement of financial statements. Misstatements can be intentional, which is fraud, or unintentional, which is error. Two types of misstatements are relevant to the auditor's consideration of fraudmisstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.⁷

Based on the work of Donald Cressey, three elements generally play important roles in decisions to commit fraud. These elements are shown below:

5. The HealthSouth Culture

An organization's culture is the combination of shared assumptions, values, and stories that guide the work and interactions of organizational members.⁸Organizational culture develops over time as organizational members learn what works well for themselves and the organization or what the organization or members should avoid; these unwritten rules are then passed on to new members as ways to think and act.⁹Leaders are a particularly salient influence in creating and maintaining culture.¹⁰The culture of HealthSouth was much like its leader, Richard Scrushy. The company valued being bold, hardworking, assertive, and successful.

Scrushy was very charismatic, and the early success of HealthSouth reinforced his reputation as a leader worth listening to and following. Scrushy's ability to influence others was evident throughout the several rounds of raising venture capital as well as in taking the company public. On one occasion, Scrushy so mesmerized a gathering of potential investors that the normally reserved group responded to his presentation with a standing ovation.¹¹Scrushy loved the attention of others and relished being seen as important. He went out of his way to be seen with important people such as musicians and athletes and to promote his skills and accomplishments. Beam remembered a few examples,

Richard formed a band, Proxy, with the hope of getting in with the Nashville music crowd. When the band played in Birmingham, Richard sent out memos saying he was playing, and everyone knew they were required to show up. One night someone asked if they could come backstage, and Richard said to the person, "Are you important?"

Richard and I bought Hermes silk ties for $100 each. One year I bought Hermes ties for my direct reports as a Christmas gift, but when Richard found out he was furious. He told me, "Those ties are only for us."

Exhibit 2: "Pull the Wagon"

Source: Beam, A. (2009),Healthsouth: The Wagon to Disaster. Fairhope, AL: Wagon Publishing.

Scrushy influenced others through being persuasive as well as intimidating. In the early years of HealthSouth, his persuasive presentations and speeches gained him a following of eager investors and employees. During one meeting of employees, he presented the now infamous stick figure drawing of several people riding in or looking at two people pulling a wagon; his message was that everyone needed to start pulling. The motto of "Pull the wagon" became an ever-present motto and the image itself was reproduced and hung in every facility (See Exhibit 2 above). Although the motto was a compelling motivator, it also was wielded to criticize or condemn people Scrushy believed weren't doing what he wanted or performing up to his unrealistic expectations. As HealthSouth grew, it gained a great deal of notoriety among investors and in the community. Reportedly, Scrushy was protective of the company's image as well as his own and would publically berate anyone who challenged his instructions or questioned his judgment. This suggests a potential darkside of Scrushy's personality, if he demonstrated behavior consistent with the "Dark Triad" traits of Machiavellianism, Narcissism, and Psychopathy (See Exhibit 3 below). However, these character flaws were overshadowed by the success of HealthSouth.¹²Beam and other founders were literally now millionaires thanks in large part to Scrushy's efforts; they also had been around him long enough to know that it was potentially dangerous to cross him. He believed he should receive the accolades for HealthSouth's success because he started the company and he was the reason for its success. Beam remarked that,

Richard created a cult following. He was able to perpetuate the cult because of his personality and because we were so successful.

Under the leadership of Scrushy, HealthSouth made bold moves, grew, and became a darling of Wall Street. Internally, nothing but success was tolerated, it was known that employees should do whatever was necessary to deliver results, and the trappings of success were everywherefancy office spaces, expensive clothes, exclusive ties, fast cars, and more.

Exhibit 3: Research on the Dark Triad of Personality

The "Dark Triad" of personality is a set of traits - Machiavellianism, Narcissism, and Psychopathy - that has been ascribed to particular leaders, sometimes very successful leaders.

• Machiavellianism refers to the willingness to manipulate and persuade others for selfish purposes without regard for others interests or well-being.
• Narcissism refers to an inflated ego and delusions of grandeur that manifests in an excessive focus on oneself and a heightened concern about how others view you.
• Psychopathy refers to a blatant disregard for others and a lack of restraint or remorse in harming others. These traits are often found together and are manifest in selfish and self-absorbed behavior.

Research demonstrates that these traits are related to high levels of counter productive work behavior such as abusive interactions, lying, theft, etc., which ultimately, lead to low levels of job performance.¹³The Dark Triad in the workplace may result in initial success as the willingness to manipulate and self-promote contributes to influencing others and the leader or employee with these characteristics getting their way. Overtime, the motivations and manipulative behavior is normally exposed.

6. The Sarbanes-Oxley Act

As a result of several high-profile accounting frauds perpetrated by such respected companies as Enron and WorldCom, the United States Congress passed the Sarbanes-Oxley Act in 2002. The goals of Sarbanes-Oxley were to increase the transparency of financial information, reaffirm auditor independence, and define corporate governance. The Act required major changes in the regulation of financial practices and corporate governance. Named after Senator Paul Sarbanes and Representative Michael Oxley, the legislation was arranged into11 sections. The following sections were considered to be the most important in assuring compliance:

• Section 302 - "Corporate Responsibility for Financial Reports"
• Section 401 - "Disclosures in Periodic Reports"
• Section 404 - "Management Assessments of Internal Controls"
• Section 409 - "Real Time Issuer Disclosures"
• Section 802 - "Criminal Penalties for Altering Documents"

(See Exhibit 4 below for a complete description of these sections of the Sarbanes-Oxley Act.)

Exhibit 4: Important Provisions of the Sarbanes-Oxley Act
SECTION	PROVISIONS
302	Periodic statutory financial reports are to include certifications that: The signing officers have reviewed the report. The report does not contain any material untrue statements or material omission or be considered misleading. The financial statements and related information fairly present the financial condition and the results in all material respects. The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their findings. A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities. Any significant changes in internal controls or related factors that could have a negative impact on the internal controls. Organizations may not attempt to avoid these requirements by reincorporating their activities or transferring their activities outside of the United States.
401	Financial statements published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information. These financial statements shall also include all material off-balance sheet liabilities, obligations or transactions. The Commission was required to study and report on the extent of off-balance transactions resulting in transparent reporting. The Commission is also required to determine whether generally accepted accounting principles or other regulations result in open and meaningful reporting by issuers.
404	Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. The registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.
409	Issuers are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. These disclosures are to be presented in terms that are easy to understand supported by trend and qualitative information of graphic presentations as appropriate.
802	This section imposes penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. This section also imposes penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly and willfully violates the requirements of maintenance of all audit or review papers for a period of 5 years.

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Source: The Sarbanes-Oxley Act,http://www.soxlaw.com/

Although U.S. Federal Sentencing Guidelines had existed since 1984, they did not prevent the type of unethical behavior that existed in companies such as WorldCom and Enron. The Sarbanes-Oxley Act requires the Federal Sentencing Commission to "expeditiously consider the promulgation of new sentencing guidelines or amendments to existing sentencing guidelines to provide an enhancement for officers or directors of publicly-traded corporations who commit fraud and related offenses."¹⁴

7. Decision Time

Only a short time into his retirement the new Sarbanes-Oxley Act came to Beams attention. He typed into his computer the web sitehttp://www.soxlaw.com. He read through the description of the various sections, but he was most troubled by Section 802 entitled "Criminal Penalties for Altering Documents". He wondered if it was too late to come forward and make a deal with the government over the financial fraud with which he had been involved at HealthSouth. Had there been a better option than retiring? Were there any options now? He also wondered if he would be able to sleep again at night if he did not come forward an

After reading the HealthSouth article above, complete additional research on what happened to Aaron Beam by examining at least three additional sources.

1. Provide a summary of the fraud triangle and its impact on fraudulent behavior. Describe how the fraud triangle helps to explain how Aaron Beam could allow himself to become implicated in this accounting fraud.
2. Identify and evaluate the options Aaron Beam had available to him in 1996 when the accounting fraud was first discussed.
3. Describe the culture at HealthSouth under Richard Scrushy and how his personality contributed to an environment that would lead to unethical activities.
4. Identify the options available to Aaron Beam in 2002 and evaluate the possible outcome of each.
5. Explain what happened to Aaron Beam and the lessons you have learned from this case that will inform your future work.