INTRODUCTION

HealthSouth Corporation, based in Birmingham, Alabama, is the nations largest owner and operator of inpatient rehabilitative hospitals. Operating in 26 states across the country and in Puerto Rico, HealthSouth serves patients through its network of inpatient rehabilitation hospitals, outpatient rehabilitation satellite clinics and home health agencies. HealthSouths hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, orthopedic, cardiac and pulmonary conditions, brain and spinal cord injury, and amputations. HealthSouth Corporation is a large, public healthcare company that operates 93 inpatient rehabilitation hospital, 49 outpatient rehabilitation satellites, six long-term acute care hospitals, and 25 home health agencies. According to the company websites, it is one of the nations largest healthcare providers specializing in rehabilitation. At the company's height in 2003, it recorded nearly $4.5 billion in revenue, dominated the rehabilitation, surgery and diagnostic services market and employed more than 60,000 people at 2,000 facilities in every state of the U.S. along with its facilities in the United Kingdom, Canada, Australia, Puerto Rico and Saudi Arabia. The company was the largest publicly listed healthcare company in the United States based on the number of locations and the third based on revenue.

FRAUD SCANDAL
HealthSouth was involved in a corporate accounting scandal in which its Chief Executive Officer, Richard M. Scrushy, was accused of directing company employees to falsely report grossly exaggerated company earnings in order to meet stockholder expectations. The first of HealthSouth's accounting problems surfaced in late 2002 after CEO Richard M. Scrushy sold $75 million in stock several days before the company posted a large loss. HealthSouth was accused by the U.S. Securities and Exchange Commission (SEC) of an accounting scandal where the company's earnings were falsely inflated by $1.4 billion. In 1996, Scrushy allegedly instructed the company's senior officers and accountants to falsify company earnings reports in order to meet investor expectations and control the price of the company's stock. In certain fiscal years, the company's income was overstated by as much as 4700%. The $1.4 billion represents more than 10% of the company's total assets.

The company went public in 1986 and in order for the company to meet Wall Streets expectation, the company began to artificially inflate its earning in order to maintain the market price for their stock, this was a credulity problem because the management knew that if they did not fix the earning when they fall short of wall street, their stock will fall and they had to organized meetings to discussed ways which the accounting staff would falsify the HealthSouths books to fill in the gap and meet desired earning. In 2003, a massive accounting fraud was discovered that almost let to the companys bankruptcy. The major problems of the fraud are lack of credulity, lack of integrity on the management part, lack of independence on the auditor part, and negligent of the auditors played role in the fraud. In March 2003, the SEC announced it was investigating whether Scrushy's stock sell was related to HealthSouth posting a large loss. HealthSouth hired an outside law firm to review Scrushy's stock sale, with the firm concluding that the sale and profit loss were not related, although this did not take the company off the SEC's radar. On the evening of March 18, 2003 FBI agents executed search warrants at the company's headquarters after the company's Chief Financial Officer William Owens agreed to wear a wire in a failed attempt to get Scrushy to talk about the fraud. In June 2005, Scrushy was acquitted on all 36 of the accounting fraud counts against him, most notably one count in violation of the Sarbanes-Oxley Act

The lesson of HealthSouth offers a powerful reminder that, when it comes to financial reporting, things are not always as they seem. Whether the fraud should have been uncovered sooner is an open question. Regardless, analysts and investors should always be careful not to review companies financial statements with an uncritical eye, nor should they take management assertions about company health and various forward-looking projections at face value: there are simply too many incentives and pressures on public companies to report favorable results and give them a positive spinand sometimes people cross the line as a result. And although, for practical reasons, considerable degree of reliance on independent audit opinions is absolutely necessary, the HealthSouth experience, like Enron and many others, shows that auditors do not always do their job as well as they should. But can a fraud of this magnitude, scope, and duration still occur now that we are in the era of Sarbanes-Oxley? Will anybody even try? Only time will tell

LESSON LEARNED FROM HEALTHSOUTH FRAUD SCANDAL

RECOMMENDATION

HEALTH SOUTH TODAY

LIST OF QUESTION
1. Is it fair to hold a CEO responsible for any and all actions of Company? Consider that Scrushy was not an accountant and that the outside auditors, Ernst & Young, did not detect the fraud. If he were not involved, should he still be held accountable? 2. Would have it been appropriate for employees to blow the whistle in this case? Was there imminent harm to people? What would be an appropriate motive for whistleblowing, and how much proof do you believe the employee would have needed to be credible? 3. From your research and reading, what dynamics set the moral tone at HealthSouth? Do you feel that employees were influenced by the corporate culture? 4. There seems to have been a significant amount of wrongdoing at HealthSouth. A number of executives were involved in fraud, but there also appears to have been a great deal of complicity on the part of more rank-and-file workers. How would you assign moral culpability in a case like this? 5. For a long time, HealthSouth posted profits, and Scrushy was a darling of Wall Street analysts. At what point, if any, should there have been greater regulatory oversight? Do you believe the outside auditors or the board should have acted more like bloodhounds than watchdogs?

Bibliography
Ghillyer, A. W. (2012). Chapter 5 : Corporate Governance | Thinking Critically 5.3 HealthSouth. In A. W. Ghillyer, Business Ethics NOW (pp. 105-106). McGraw-Hill International. Hamilton, C. (2005). Fraud Health South Case. Retrieved December 17, 2012, from Arxis Financial: http://www.arxisfinancial.com/images/pdfs/Fraud-Health_South_Case.pdf Johnson, C. (2005). 5 Years for HealthSouth Fraud. Retrieved December 18, 2012, from The Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2005/12/09/AR2005120901890.html US Securities and Exchange Commissions. (2005). COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF : HEALTHSOUTH CORPORATION. Retrieved December 19, 2012, from US Securities and Exchange Commissions: http://www.sec.gov/litigation/complaints/comphealths.htm Usatoday.com. (2005). Accountant Describes How HealthSouth Fraud Happened. Retrieved December 17, 2012, from USA Today: http://usatoday30.usatoday.com/money/industries/health/2005-01-28scrushy_x.htm?csp=34