Warning signs for choosing a company

Warning Signs

Danger! Danger! What were the warning signs for choosing this company as a client?

One of the most publicized corporate ethical scandals in recent memory has been that of HealthSouth Corporation's accounting misdeeds. Over the course of the company's six-year financial fraud, the company recorded 2.7 billion of fake revenues upon its ledges. To accomplish this feat, the company routinely overestimated insurance reimbursements, inflated corporate revenue, adjusted fixed-asset accounts, and improperly booked capital expenses and reserve accounts to create a picture of financial health. Members of HealthSouth's accounting staff also provided the CFOs with false depreciation schedules, which were then used to create fictitious assets on the company's general ledger. One corporate Vice-President, Jason Brown, even created documents to indicate that HealthSouth sold $27 million worth of stock in another company in 2002 rather than in 2001.

How could this go on for so long, with no one the wiser, or at least, with no one willing to reveal the extent of the crimes that were being perpetuated? The corporate climate at HealthSouth that fostered such illegal activities also created a climate of secrecy and fear amongst the criminals. Breathing a hint of dissent was considered to be a betrayal, not an ethical qualm. The major actors, even those who were friends, lived in a constant atmosphere of suspicion, fear and intimidation. One of CFOs who eventually agreed to inform upon the CEO of the corporation said he was threatened that he would become the 'fall guy' should the company's activities come to light when he wished to quit.

Ironically, many of the employees outside the financial loop of the company believed that they were working for an ethical firm. But within the upper ranks of the financial personnel, there was a constant 'circle the wagons' mentality as if these individuals belonged to a unique elite, as if their decisions were allowed to transcend conventional ethical standards, so long as profits could be recorded on paper for the good of the company. The same CFO who feared becoming a 'fall guy' stated that even though he knew he was committing a fraud, he felt it was important to keep the stock price up for at least a year, out of loyalty to his fellow CFOs and to the company's leader. At HealthSouth, group loyalty rather than ethical responsibility to the public, much less a higher moral code, held sway.

In addition to a corporate climate within the higher echelons of the firm, another clear giveaway that the firm was suspect was the close personal relationships between the members of the firm, which forestalled ethical judgment in an objective fashion regarding professional, work activities. For example, one CFO, William T. Owens, was godfather to one of Weston Smith's children, another of the CFOs involved in the fraud. Additionally, Weston Smith's wife Susan Jones-Smith, was also a finance executive at the company, a further example of the incestuous relationships that characterized the financial leadership of HealthSouth. A failure of the company meant the failure in the financial future of the family of one's friends and spouses.

Another warning sign should have been the nature of the company's assets. The firm was able to conceal its financial shenanigans for so long from outside auditors because of its multiple and constant stream of acquisitions of a variety of inpatient and outpatient facilities. The nature of the acquisitions should have been a clear warning sign to be wary of HealthSouth's spiraling profits. The volume of transactions meant there was great difficulty in keeping track of the 'real' value of the different operations, despite the company's alleged revenues on paper.

Also, the existence of such superficial nods to ethical practices, such as a whistleblower's hotline, rather than a real codified ethical methodology should have been another indication of the fact that the company's actual practices and philosophies were held to two very different standards. While the hotline might have created an appearance of a commitment to ethics, all ethical queries had to go up the chain of company command. This meant that there was no outside body to vet ethical conundrums that did not have a stake in the leadership of the company.

Now, the newly chastened company has hired an outside firm to handle whistle-blower calls. Additionally, to lessen the 'groupthink' mentality that once pervaded HealthSouth, members of executive board must meet independently with auditors, rather than in a collective, so if one member has reservations about the company's activities, he or she will be able to explain them to an outside authority.