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| | MGT7019-8 | Dr. Janis McFaul | | | Ethics in Business | Assignment 8 | | |
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Faculty Use Only
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Layla:
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Paper- Health South: The Scrushy way Layla O. Mora Northcentral University MGT7109-8 Janis McFaul, PhD November 15, 2012

Table of Contents:
Introduction
1. Fraudulent activities perfumed by HealthSouth
2. Impact on stakeholders
a. Impact on internal employees
b. Impact on shareholders
c. Impact on government and other involved parties
3. Factors affected HealthSouth culture
4. Outcome
5. Fairness of the punishment
Conclusion
Reference selection

Early years of twenty-first century brought high wave of white-collar crime in financial world. Companies grew like a mushrooms; they slowly appeared, elevated up to certain degree, got involved in fraudulent activities, collected high revenues and varnished in the air making few people reliable for its loses. There are many great examples of promptly rich companies that raised its snowball empires over years and collapsed in a few days, like Enron, Lehman Brothers, WorldCom, HealthSouth and etc. These companies took advantage of deregulated markets and created complicated schemes involving upper management that helped them to achieve public look at their best and collect high revenues. When their empires collapsed, country went through depression that can be compared to the time of Great Depression. High unemployment, vast government injections and loosing USA positions on international markets are only a few examples. Who is responsible for all of these and did they get what they deserved? Many people disagreed with fairness of the punishments for white caller crimes that put our country through tough time of financial crisis. HealthSouth was not an exemption from all these fraudulent actions; it was one more company down the line who had greedy upper management. HealthSouth Corporation, founded in 1984, was the largest U.S. provider of outpatient surgery, diagnostic imaging and rehabilitative healthcare services, with approximately 1,800 locations in all 50 states, Puerto Rico, the United Kingdom, Australia and Canada (Mokhiber, 2003). List of crimes committed by HealthSouth goes far beyond simple misrepresentation of the truth. HealthSouth CEO Richard Scrushy created tight operation with 15 CFOs involved, who went “extra mile” in order for financial statements to meet expectations of CEO Richard Scrushy with constantly growing stock. In order to meet these expectations, CFOs committed following fraudulent actions: wires fraud, security fraud, falsification financials, failing false certification with Security Exchange Committee (SEC), bank fraud, overbilling insurance companies (overbilling Medicare scandal) and etc. Scrushy himself took advantage of HealthSouth and gained, “$278.7 million in property which Scrushy derived from proceeds of the alleged offenses, including several residences, boats, aircraft and luxury automobiles” (Mokhiber, 2003). He owned 34 automobiles including 2 Rolls-Royces and one Lamborghini (Jennings, 2012). Also, Scrushy operated HealthSouth as his own business. On his own, Schushy had over 10 businesses that had extensive business relationship with HealthSouth. G.G. Enterprises, company named after Scrushy parents, sold computers to HealthSouth, a contract that eventually resulted in investigation by the federal government for the overcharging of HealthSouth (Jennings, 2012). Scrushy took advantage of using company property as well; on a side from loaning corporate jet to politicians, he widely used it to flight rock band that he sponsored. HealthSouth culture put great impact on all envolved stakeholders: employees, shareholders, government and community at large. Corporate dishonesty affected all of these categories of people. Jennings provides testimonial of three formal employees of HealthSouth who had issues during their employment. The first testimonial is written by Diana Henze, she was promoted to be Vice President of financial department in 1998. Her responsibilities was not limited, but included running ad hoc, computer systems, preparing quarterly consolidations and assisting in the SEC filling. During 1998 in some quarterly reconsolidation process she noticed that earnings and earnings per share jumped up. From her experience, amount of raise seemed odd to her and she approached to her supervisor, Ken Liversay, who was assistant controller. Ken explained her that differences in earnings were results of some reversal entries of some over-reversals and over-accruals. This was the first time she noticed some thing went wrong, but explanation appeared to be pretty reasonable and she did not peruse issue further. Three months later, just before her maternity leave, she noticed changes again, but did not question Ken. After returning from maternity leave, Diana noticed that third quiater in row numbers were changing. She questioned Ken the second time, Ken admitted that she was right, and that he saw her point, he didn’t disclose her about what is going on, but ensured that she is not a part of wrong-doing. Few weeks later Bill Owens, the Controller, called Diana in to his office and explained her that company had to forge some reports in order to keep investors happy and save jobs for thousands of people. Diana was not satisfied with this response and went further and filled complain to the Compliance Department. Shortly after that incident, Ken was promoted to CIO position and two other people from his department took his place. Diana felt that she was overlooked and confronted controller Bill Owens about that. Bill’s response on why that they did not promoted her was because she, “would not do what they want her to do” (Jennings, 2012). With in few weeks Diana requested transfer and received it immediately.
This testimonial is a great example of unethical and criminal behaviors. Firstly, upper management forced Diana to comply with their internal culture of wrongdoing and when she resisted following they tried to get rid of her. They knew she would get upset because under-qualified people got higher up positions that she earned and deserved. In ideal world, Diana’s decision should be praised because she bravely risked her position in order to earn money through honest ways by providing accurate financial reporting. HealthSouth was using the same loopholes as Enron like fabrication of present information, showing great revenues, artificially raising its stock, but in reality going under the water.
Second testimonial came from Teresa Sanders, formal Chief Auditing Officer at HealthSouth. Back in 1996, Richard Scrushy asked her to develop a fifty (50) point checklist, which became know as a “Pristine Audit”. Miss Teresa disagreed about the idea, but was forced to establish this checklist anyways. This audit was nothing more but cosmetic, white glove, walk though of a facility. It was based on quality control and had nothing to do with financial reporting on internal/external environment of HealthSouth facilities. By the time she left HealthSouth, she didn’t have access to general ledgers of the field operation and as Audit department she needed direct access in order to do her job. She was manually looking though paper copies of the documents, but for company with over 1800 facilities it was impossible to fully trace all transactions.
Both testimonials are perfect examples of HealthSouth internal culture. Diana and Teresa were forced to comply with the system. Both of them disagreed with present rules. They were minority of the people. HealthSouth employed over 60 thousands people, of course for conspiracy reasons, not all 60 thousand people were exposed to fraudulent activities and only small group of people knew about what is going on. This small group of people included 15 CFOs who pleaded guilty, top management was aware about speculations. Rare examples of honest people like these two ladies from above were forced to resign: Diana was overlooked promotion vise and her reponsibilities significantly decreased over the time when she asked for a transfer – she received it immediately; Teresa was forced to leave the company as upper management made it impossible for her to perform job duties.
This internal culture did tremendous impact on its employees. Employees were worried about their jobs and paychecks a lot because and loosing employment is very stressful, especially in USA where government does not give strong financial support like, for example in Russia. In majority of cases in Russia unemployment checks are equal to the last paycheck for period of 3 to 12 months. In comparison, in USA it is very complicated to receive and in most of the time size of unemployment doesn’t cover even rental expense. In addition, it is an honor to work for constantly growing company whose business is expending, revenues are growing and shares are raising in stock market and who provides bonuses and extra benefits. In order to keep their jobs in HealthSouth, its employees closed their eyes on fraudulent activities and followed the flow. Employees were controlled and suppressed, they accepted things the way they are and didn’t want to change anything in order to save their jobs.
This structure affects its shareholders as well. Shareholders enjoyed see is constantly growing stock and were happy to keep investing in HealthSouth. From outside, HealthSouth seems like a great example of success. Company was in business for several years, kept growing with revenues higher year after year. According to Will (2003), HealthSouth revenues doubled from 1999 to 2001, its tock raised from $5 per share in 1998 to 16$ per share in 2002 (Jennings, 2003). HealthSouth was considered as a gold mine from their perspective. Upper management got wanted results, management wanted to have false impression that everybody will believe and mission was accomplished in every quarter. Nobody bothered to take a calculator and double check accuracy of its revenues. According to Weil, it was obvious: revenues double from 1999 to 2001, but its sales rose only by 8%. (Weil, 2003).
Besides great impact on its employees and shareholders, HealthSouth made great impact on government and public. One of the biggest trails of HealthSouth was an issue, that HealthSouth overbilled Medicare over several years. HealthSouth paid ransom of 8,6 million dollars to settle this case (Jennings, 2003). Other fraudulent activities, unable government to protect right of its investors. For example, in Diana testimonial, we can clearly see that financial reporting to SEC was fraudulently adjusted, this unable for SEC (government regulated facility) to double check accurate financial situation of publicly traded company.
According to Jennings, all these impact came from ethical climate of HealthSouth. Company was so money oriented, that it was missing the key companents like honestly, trust integrity and etc. HealthSouth was not the only example, at the begging in 21 century there were many more examples, such as Enron, Adelphia, WorldCom and etc. There are common trends that unite all these companies; according to Jennings these companies have “Yeehow culture” (2003).
The seven factors of the Yeehaw Culture are:
a. Pressure to maintain extremely aggressive numbers and performance;
b. Fear and silence;
c. The young executives and bigger-than-life CEO;
d. Weak board of directors;
e. Culture of conflicts;
f. Culture of innovation like no other; and
g. Culture of social responsibility (Jennings, 2003). All these companies have massive pressure to mountain its high performance numbers regardless of curcusmstances. In April of 1998, Richard Scrushy decleared that HealthSouth matched expected growth 47Th quarter in row. During that time FBI already was doing investigation and got HealthSouth CFO Owens involved in its investigation. Owens wore wires during his meetings with Scrushy. FBI was able to record Scrushy instructing Owens o cook the book, his exact words were, “[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" or "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” (Jennings, 2012). During court heating Scrushy was in denial and claimed to be not guilty, but recording got him on tape.
Second factor that united companies with criminal and unethical behaviors were fear and silence. In case of HealthSouth, testimonials of its formal employees are already showed that fear for its employment was rose silent behavior. As well, Scrushy loved to have Monday morning meetings, which used to be called “Money morning beatings”. During these meeting Scrushy question everything and everybody, from hospital performance to cell phone bills (Jennings, 2003). Many employees of HealthSouth express opinion that Scrushy govern HealthSouth with top-down fear, he threated it critics and favored his loyal subordinates, like in case of Ken Liversay.
Another factor that affected HealthSouth was employment of young CEOs, who acted like they are bigger-then-life. Scrushy like to hire young advanced personal on top executive position. In a case of HealthSouth, education was main factor that played great role in getting employment, but ambition for power and strike for money and success. HealthSouth CFO, Mr. Owens who participated in FBI investigation was 28 years old. There is nothing bad in being young, but youth usually bring bright ideas and no experience. Young executives indeed have very bright ideas of how to make money carelessly managing by avoiding law and ethical standards. HealthSouth is very similar with Golden Sacks who used young professionals.
Another factors that played great role are high level of upper management turnover, especially for those employees who were over 50 years old. Young newcomers rapidly replaced these employees. By the year of 1998 HealthSouth no longer had older generation represented in upper management. Newcomers were working aggressively and their salaries and bonuses were rising rapidly.
Factors four and five that put its impact on unethical and criminal behavior and HealthSouth and other companies from above were weak board and directors and a cultures of conflicts. During criminal trials, one of the board directors Joel C. Gordon declared to the press, “We [directors] really don't know a lot about what has been occurring at the company” (Lublin, 2003). It seems very odd that directs didn’t know about what was going on with a company, but by digging deeper and seeing conflict of interests it was pretty clear why directs didn’t know what going on. May directs did not want to know or pretended to be unaware about criminal activities. These are example of reasons why directors were pink glasses: a. One director earned $250,00 per year in consulting services with HealthSouth. b. Another director had joined venture with HealthSouth. c. One director receive $425,000 donation to his charity prior joining board of directors. d. MedCenterDirect, a hospital supply company run online and which did business with HealthSouth, was owned by Mr. Scrushy, six directors, and one of those director's wives (Jennings, 2012).
In addition, HealthSouth had extensive loan program for its executives in order to “enhance equity ownership”. Nowadays, this is function is prohibited by Sarbaney-Oxles Act.
Another attribute of HealthSouth and other companies, who went under water in early 2000s, is that all these companies were very innovative. Enron created new ways of energy management, including its failed deal with Blockbusters, Golden Sacks created new aggressive stock trading strategies where they bet against their clients, HealthSouth was innovator in changing health care practices, outpatient surgeries, and wellness programs.
Last big factor of Yeehaw culture and that all companies including HealthSouth were really involved in social responsibility. Scrushy made thousands of dollars donation to local libraries, college where he graduated, churches. His charitable active life made him spot light figure. According to Jennings (2012), priests from the churches where Scrushy made big donation attended many of his trails and was very opinionated toward supporting Scrushy. T These factors demonstrated the ground that little by little prepared HealthSouth to go down. HealthSouth got rid of experienced associated by hiring young aggressive money oriented personal; created fear an silence culture; innovative ideas that sometime make money and sometime not; set up board of directors who had personal objective interests control by Scrushy; and created innocent successful image for external stakeholders by participating in social responsibilities.
Unhealthy internal culture, strived for night revenue crossed ethical and legal borders and when revenues didn’t appear naturally, they were forced on papers. Little by little, everything month numbers were forced to grow. Srcushy even had his own audit firm Ernest and Brothers, who helped Scrushy with “creative accounting”.
Finally in 2005 empire of HealthSouth collapsed, it got caught with overestimating its assets, doing fraud and it shared fall from $31 to $0.16 (Jennings, 2012).
Fifteen of HealthSouth’s executives entered guilty pleas to various federal charges. HealthSouth formed CFOs testified against of Scrushy in his trial. Out of 15 CFOs there was only one with out blameworthiness, because he left HealthSouth based on his concerns about financial activities. All other CFOs plead guilty. Scrushy got sentenced in 6 years and ten month in prison. In July 2010 he appealed for earlier release. Ten of HealthSouth CFOs faces criminal charges, but only one of them was sent to 5 month in prison (Press, 2005).
It is very hard to clarify that Srushy and his team punishment was fair, because Scrushy created fake empire where he crossed all possible law: ethical, moral and legal. HealthSouth took advantage of employees, shareholders, government and public. At the end, when HealthSouth collapsed, employees lost their job and retirement plans, investors lost their investments, government were unable to regulate and catch illegal activities, general public lost trust in companies operating on public sharing markets. HealthSouth, Enron, Lehman Brothers, WorldCom created crisis that our country and world in general is till recovering from. These actions were not done by unintentionally, it was secretly planned, put in place little by little so no suspicion would arouse and used (Nussim, 2003). Scrushy intentional way to falsified financials and greed for money damaged lives of many honest Americans; his punishment was so little so it can be an example for future generations. These days, teenagers who shoplift receive more severe punishment, compare to grown man steeling millions of dollars.
In conclusion, white caller crime in America boomed in the begging of 2000s. Many companies like Enron, WorldCom, Adelphia, Golden Sacks, and HealthSouth went on market with its public shares and silently took advantage of internal employees and external stakeholders. Scheme was simple – “creative accounting”. They forged it financial statement by showing high profits and hiding its loses, that in many cases exceeded its profits. For many years scheme worked high till companies had enough cash flow to manage its appearances, but when snow ball of lies rose to the top, they collapsed, taking under water everybody who was involved. All these companies have similar ethical factors in place, but corrupted board of directors, creating fear as a way to govern internal culture, innovative ideas that “always” brought revenue accounting to their financial statements. White caller crimes in publicly traded companies already existed, but were not widespread. After all these crimes were the foundations of enforced legal regulation and, in particular, base for Sarbanes-Oxley Act. SOX is not an idea met that will protect our future and regulate legal procedures in publicly traded companies, but it is first approach to establish legal and ethical regulations for future generations and decrease corporate corruption internally and externally.

References:
Did punishments fit the crime at HealthSouth? (2004). Gainesville Sun. Retrieved from http://search.proquest.com/docview/390608097?accountid=28180
Jennings, M. (2003). The ethics lessons of HealthSouth. Corporate Finance Review, 8(1), 44-44. Retrieved from http://search.proquest.com/docview/198764075?accountid=28180
Jennings, M. (2012). Business ethics: Case studies and selected readings 7th Ed. Mason, OH: South-Western Cengage Learning
Lublin, J and Carrins, A. (2003) "Directors Had Lucrative Links at HealthSouth," The Wall Street Journal: B1, B3.
Mokhiber, R. (2003). Ill feelings at HealthSouth. Multinational Monitor, 24(11), 7-8. Retrieved from http://search.proquest.com/docview/208878914?accountid=28180
Nussim, J. (2008). (Non)regulable avoidance and the perils of punishment. European Journal of Law and Economics, 25(3), 191-208. Retrieved from http://dx.doi.org/10.1007/s10657-008-9045-y
Press, A. (2005). Prosecutors aren't finished with HealthSouth. Deseret News. Retrieved from http://search.proquest.com/docview/351451271?accountid=28180
Reeves, J. (2004). Healthsouth execs avoid jail - so far, only one defendant gets prison sentence. The Commercial Appeal. Retrieved from http://search.proquest.com/docview/394067982?accountid=28180
Terhune, C. (2005). HealthSouth files restated results for 2000 to 2002. Wall Street Journal. Retrieved from http://search.proquest.com/docview/398926218?accountid=28180
Weil, J. (2003). Did Ernst miss key fraud risks at HealthSouth? Wall Street Journal. Retrieved from http://search.proquest.com/docview/398835933?accountid=28180