Good Essay On The Scandal And How It Came To Surface
It seems that the early years of 2000’s were indeed the time of shame in the corporate history of United States. After the traumatizing scandals of Enron, the nation’s largest healthcare public listed firm, HealthSouth, was found to be involved in the accounting scandal, and was accused of inflating its earnings by $1.5 billion to meet the market expectations every quarter from 1999 to 2002. Interestingly, the regulators and the auditors could never caught the accounting dressing until the CEO, Richard Scrushy, sold stock worth $75 million just a day before the company reported quarterly loss during 2012, thus triggering SEC suspicions.
How the books were cooked?
The accounting scandal in HealthSouth was based on simple yet shrewd methodology. Just before the announcement of the quarterly results, unpublished financial results were presented to the management, and if the results were below than the market expectations, accounting staff were asked to fix the gap through false journal entries to inflate assets and net income. Finally, false documents were created to hide the false entries.
Another important aspect of this fraud was that since the management knew that auditors will look at accounting entries amounting more than $5000, the accounting staff was asked to dress up journal entries between $500 and $4999. Thus, to forge the financial data by $1.5 billion, more than a million journal entries were passed and also fabricated documents were prepared to avoid any detection by the auditors. Thus, it can be asserted that while ring leaders of the accounting scandal was the management itself, but with the volume of work and knowledge involved, it is clear that the fraud was widespread in the company where everyone in the organization knew that an accounting fraud was being cooked, except the auditors. Below is the snapshot of the actual and reported earnings by the company as disclosed by SEC in their investigation:
As we disclosed in the above discussion also, the fraud was not a single-handled task, but a series of employees of the company were involved, beginning from CEO, Richard Scrushy to the floor accountant and controller, Ken Livesay. The investigation report submitted by SEC disclosed that the CFO of the company, Aaron Beam, was scared of losing his job, and willingly participated in the accounting scandal at the instruction of CEO, Scrushy, and the foundation of the fraud was laid by him, when during 1996, using 2000 accounting ledgers, he made a series of entries to cover up the short fall of earnings by $50 million.
The floor accountant and assistant controller, Ken Livesay, was responsible for downloading the actual earnings, and then comparing them with market expectations to figure out how much adjustment (fraud) was needed to meet Wall Street expectations. The figures were then finally passed to the finance department, headed by CFO, Aaron Beam.
Hannibal Crumpler, VP & Division Controller for HealthSouth was found to be a willing participant from the very beginning. He organized the meetings to fill the accounting gaps to meet the market expectations, and once the co-conspirators would identify the accounting corner to hide the fraud, Crumpler framed the fake journal entries, and then handed over the same to the accounting staff to put on the company’s books.
Legislative action and the outcome
A series of civil cases were filed against the company’s executives by SEC. On March, 2003, CEO, Richard Scrushy was charged with the accounting fraud. In June, 2005, Scrushy was acquitted on all of the 36 accounting fraud charges, and also for bribing governor of Alabama. On June 28, 2007, after a series of appeals by his advocates, he was sentenced to 82 months in prison, three years on probation, $267,000 in restitution and a fine of $150,000. He was also ordered to perform 500 hours of community service, and was sent to the satellite camp of the U.S. Penitentiary in Beaumont, Texas.
The chief financial officer(CFO), Aaron Beam, was sentenced to three months in prison, was charged with penalty of $285000 in criminal fees and legal fees in excess of $750000. It was claimed that SEC showed a leniency against him for his testimony against Richard Scrushy.
The accounting fraud in HealthSouth, not only tarnished the company’s image, but also eroded millions of dollars of the investors as the stock prices of the company fell sharply after the accounting scandal was disclosed. On March 26th, 2003, the next trading day after the company was booked for probable delisting from New York Stock Exchange, the stock lost 97% of its value.
Since the financial statements were misrepresented, it was not possible for us to unearth the financial mishandling of the company. However, the misstated figures were disclosed by SEC, and the same are disclosed below:
HealthSouth's Share Price Sinks 97%. (2003, March 26). Retrieved March 30, 2015, from http://articles.latimes.com/2003/mar/26/business/fi-healthsouth26
Berry, K. (2009). Accounting Fraud at HealthSouth. Anderson School of Management.
Hamilton, C. (n.d.). HealthSouth: A Case Study in Corporate Fraud. Arxis Financial Inc.