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PROBLEM In 1996, key executives of HealthSouth, one of the nation's largest providers of health care ser- vices, began a massive fraud that eventually
PROBLEM In 1996, key executives of HealthSouth, one of the nation's largest providers of health care ser- vices, began a massive fraud that eventually amounted to $2.7 billion. HealthSouth is a textbook case of unbridled greed combined with a lack of corporate governance, which illustrates the dif ficult situation that auditors face when clients perpetrate a massive, collusive fraud 2 HealthSouth was founded in 1984 by Richard Scrushy and coworkers at Lifemark, a Houston-based company that owned and managed hospitals. They took HealthSouth public in 1986, and by 1996, the company's market value had grown to $12 billion. According to the government's complaint, Scrushy, the chief executive officer, insisted that the company meet or exceed earnings expectations established by Wall Street analysts. Senior officers would present actual accounting earnings to Scrushy, and if they did not meet the forecasts, he reportedly told them to "fix it." Unbeknownst to Scrushy (according to his testimony at trial), a team of senior accounting personnel, known as "the family," held "family meetings" to determine ways to increase accounting earnings. They would look for "holes" in the balance sheet to be filled. The fictitious accounting entries they used to plug those holes were referred to as "dirt." Methods: included overestimating insurance reimbursements, overstating fixed assets, improperly capitalizing expenses, and over- booking reserve accounts. The "family" members started by manipulating contractual allowances by consolidating entry adjustments after the end of each quarter. The allowances accounted for the differences between what HealthSouth charged patients and the amounts the company could collect from the patients health insurers By lowering the allowances improperly, HealthSouth improved its net revenue and bottom-line eamings. To offset the contractual allowances, the company increased inventory, intangible assets, fixed assets, and even cash. The fictitious fixed asset line item at each facility 15 was listed as "AP summary. The company's CFO, William Owens, a former Ernst & Young (EY) senior manager and one of five CFOs who eventually pleaded guilty to the fraud, also used the acquisition of Horizon/CMS to book $400 million worth of goodwill as part of the cover-up He pulled the trick off with the help of two HealthSouth colleagues and a finance executive from Horizon On paper, HealthSouth maintained impeccable corporate policies. The company established a confidential whistleblower hotline in 1997, developed a nonretaliation policy, which gave the
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