Corporate Shenanigans at Healthsouth: Who

Corporate Shenanigans at HealthSouth: Who Did What and Why

The recent subprime mortgage meltdown was preceded in time by the corporate shenanigans that took place in Enron, WorldCom and HealthSouth, all of which are instances of accounting practices that were intended to mislead investors and auditors concerning just how much, where and how money was being made. In the case of HealthSouth, the accounting scandals that emerged from an investigation found numerous instances of such practices that were driven by pressure to perform in an increasingly competitive for-profit healthcare industry. To determine the key actors and what happened, this paper provides a review of the relevant literature concerning the accounting scandal at HealthSouth, followed by a summary of the research and important findings in the conclusion.

Review and Discussion

In his book, the Corporate Transformation of Health Care, Geyman reports that, "HealthSouth is the largest investor-owned chain of for-profit rehabilitation hospitals in the country. It is now besieged by federal investigations for longstanding accounting and tax fraud" (2004:25). These violations, Geyman suggests, are compounded by the flagrant hypocrisy that the corporation has demonstrated over the years. In this regard, Geyman notes that, "HealthSouth, with about 1,800 facilities in all 50 states and abroad, bills itself in its marketing materials as committed to providing high-quality, cost-effective care. Yet its claims are belied by a persistent story of predatory greed since its founding" (2004:25). One of the key players in the litigation that would follow was that corporation's founder, Richard Scrushy, described by Geyman as being "a former physical therapist" who "was the driving force in building a large chain of health care and rehabilitation facilities, including inpatient, outpatient, surgical, diagnostic, occupational, and other medical centers" (2004:25-26).

An analysis of the corporate shenanigans that took place at HealthSouth over the years by Jennings notes that, "Richard M. Scrushy, HealthSouth's CEO, began the company in 1984 with just $55,000 in capital he gathered from three friends. The company's stock climbed during the period from its first public offering as an obscure stock in late 1986 for about $1 per share to a darling of Wall Street selling at nearly $31 per share in 1998" (2004:7). What followed would likely amount to insider trading in anyone's book, but some of the key players in the HealthSouth scandal were apparently more culpable than others because not everyone who was caught was convicted. According to Jennings, "In September 1998, Scrushy and other executives, including the company's CFO, sold off their shares of HealthSouth just prior to announcing a reduction in forecasted earnings because of a change in Medicare rules; however, the change in the Medicare rules would have reduced forecasted earnings about $20 to $30 million, not the $175 million HealthSouth announced" (7). Although the company managed to recover from this financial setback in 1998 to increase its stock from $5 to almost $16 by mid-2002, HealthSouth's stock took another beating when the company announced that it was discontinuing its previous accounting practice of billing Medicare for the individual therapies that were being delivered to patients who were being provided group therapy, plummeting to less than $4 and finally delisted (Jennings 7).

At the time of her report, Jennings notes that, "Investigations by the SEC and the Justice Department have resulted in the indictment of nine former employees, eight have pled guilty (including the current and two former CFOs)" (8). Noticeably absent from the list was Scushy, who was clearly in a position to have known what was really going on in the company's accounting department, particularly in view of how long these spurious accounting practices were used to manipulate the books. In this regard, Jennings adds that, "The company's profits were restated to reflect $2.5 billion less actually earned, for periods dating back to 1994, with $1.1 billion occurring during 1997 and 1998. The stock was trading on pink sheets at $0.165 per share at the end of April 2003" (8).

As noted above, one of the key factors involved in what happened at HealthSouth was the enormous pressure to perform in the increasingly competitive for-profit healthcare industry, pressure that directly affected the decisions that were made concerning the types of accounting practices that were needed to "deliver the goods," at least on paper. Although absent from the foregoing list, Scrushy's name appears time and again in the investigation that followed. According to Jennings, "Like Enron, WorldCom, and Tyco, HealthSouth placed tremendous pressure on employees to 'meet the numbers.' In April 1998, CEO Richard Scrushy told analysts that HealthSouth had matched or beat earnings estimates for 47 quarters in a row" (8). The role played by Scrushy in engineering the corporate culture that would allow these estimates to be reported with a straight face became abundantly clear when the evidence was presented. For instance, Jennings reports that HealthSouth's CFO William Owens (who assisted FBI and SEC investigators in return for leniency) wore a hidden "wire" during his meetings with his former CEO, with the excerpt that follows being a portion of the recordings between Owen and Scrushy that were played in federal district court in Alabama:

[if you] fixed [financial statements] immediately, you'll get killed. But if you fix it over time, if you go quarter to quarter, you can fix it. Engineer your way out of what you engineered your way into. I don't know what to say. You need to do what you need to do. We just need to get those numbers where we want them to be. You're my guy. You've got the technology and the know-how. (quoted in Jennings at 8)

Indeed, even HealthSouth's own accounting firm, Ernst & Young, testified that the company had deceived it and even produced fraudulent documents that HealthSouth's management provided them as evidence that it had been duped. An article in the Wall Street Journal included this quote from an Ernst & Young representative: "The level of fraud and financial deceptions that took place at HealthSouth is a blatant violation of investor trust, and Ernst & Young is as outraged as the investing public" (quoted in Weil 2003 at C3).