...Teaching Notes HealthSouth Corporation: Fraud, Greed and Corporate Governance Case Summary During the 1990s, Richard M. Scrushy, the former CEO of HealthSouth Corporation, engineered many acquisitions of rehabilitation clinics, outpatient surgical care operators, nursing homes and other health care companies. Mr. Scrushy had been a respiratory therapist who spotted a niche in the health care market and utilized his entrepreneurial talents, marketing skills, and super salesmanship to set up and run what became the third largest publicly held company in Alabama. Eventually, HealthSouth became the largest provider of ambulatory surgery and rehabilitative health care services in the United States with 1,700 facilities and 51,000 employees. In 2003, the Securities and Exchange Commission (SEC) accused the company and Mr. Scrushy of inflating earnings to the tune of $1.4 billion since 1999. In November 2003, a federal grand jury indicted Mr. Scrushy on 85 counts including conspiracy, securities fraud, money laundering and charges related to overstating HealthSouth’s earnings by nearly $3.0 billion. According to federal investigators, the company overstated earnings to meet analysts’ earning estimates, while hiding the accounting fraud from the auditors. However, questions were raised whether the auditors failed to find or simply overlooked the fraud at HealthSouth. Central to the investigation was the issue of what role Mr. Scrushy played in “cooking the books.” However, as the case...
Words: 362 - Pages: 2
...HealthSouth Corporation: Fraud, Greed and Corporate Governance Manmohan D. Chaubey, Ph.D. The Pennsylvania State University One College Place Du Bois, PA 15801 (USA) Tel: 814-375-4846 Fax: 814-375-4784 Email: mdc13@psu.edu Case for ICMC2006 International Conference on Management Cases 4-5 December 2006 IMT Ghaziabad, India HealthSouth Corporation: Fraud, Greed and Corporate Governance During the 1990s, Richard M. Scrushy, the former CEO of HealthSouth Corporation, engineered many acquisitions of rehabilitation clinics, outpatient surgical care operators, nursing homes and other health care companies. In 2003, the Securities and Exchange Commission (SEC) accused the company and Scrushy of inflating earnings to the tune of $1.4 billion since 1999. In November 2003, a federal grand jury indicted Scrushy on 85 counts including conspiracy, securities fraud, money laundering and charges related to overstating HealthSouth’s earnings by nearly $3.0 billion. According to federal investigators, the company overstated earnings to meet analysts’ earning estimates, while hiding the accounting fraud from the auditors. However, questions were raised whether the auditors failed to find or simply overlooked the fraud at HealthSouth. Central to the investigation was the issue of what role Scrushy played in “cooking the books.” However, as the case unfolded, it highlighted many other issues such as: The role of Board of Directors in corporate governance; the role of the auditors; the...
Words: 3975 - Pages: 16
...INTRODUCTION This paper discusses the HealthSouth Case including the activities and subsequent prosecution of its CEO, Richard Scrushy. “During the trial of former HealthSouth CEO Richard Scrushy, federal prosecutors argued that Scrushy must have known something was amiss with HealthSouth’s financial statements since there was a discrepancy between the company’s financial and nonfinancial performance.” Over a ten-year period from 1987 to 1997, HealthSouth enjoyed above–average growth at a rate of 31 percent per year. (Jennings, 2012, 2009, p. 183) This phenomenal growth was due, in part, to a series of mergers and acquisitions let by the efforts of the company’s CEO, Richard Scrushy who ran the company with an iron fist and has at least one recorded conversation directing a CFO to fix the numbers over time. The fraud lasted for seven years and totaled approximately $2.7 billion. Mr. Scrushy denied knowing anything about the fraud, claimed it was all done by the people around him and was ultimately found not guilty of the fraud at HealthSouth but was convicted on bribery and corruption charges. Mr. Scrushy was ordered to pay $2.9 billion in restitution in a civil suit. “From at least 1996 until 2002, HealthSouth senior management perpetrated a financial statement fraud primarily through the use of nonstandard journal entries.” (Carmichael, 2010, p. 64) “Scrushy, once a high school dropout, worked as a gas station attendant and a bricklayer before retuning (sic)...
Words: 2339 - Pages: 10
...HealthSouth Corporation Case Study Managerial Communication Dr. Ben Busbee Dwight Frazier December 12, 2013 A. Executive Summary: The paper highlights the case analysis on one of the big financial fraud which occurred from 1986-2003. The case of HealthSouth is based on fraud, greed and corporate governance. The HealthSouth case shows that unethical management cannot succeed; sooner or later the truth comes out. The case highlights many key points and the major reason for the fraud was the result of failures of various standard mechanisms of control including the external auditors, the underwriters, and the board of directors, the financial market regulators and the analysts. HealthSouth was one of the country's largest providers of outpatient surgery, diagnostic imaging, and rehabilitation services, operating over 1,800 locations and reporting revenues of $4 billion. The company's management improperly accounted for some $2.7 billion of assets and earnings. Seventeen HealthSouth executives agreed to plead guilty to various charges in connection with this massive accounting fraud. B. Statement of the Problem: Thus, in the HealthSouth case, the research shows that it was close to the real life examples of the people who were “just employed”; however at the same time their transformation from the line of law-abiding citizens towards the law-breaking villains. Apparently the small compromises in morality and ethics led towards the greater compromises and as a result...
Words: 1093 - Pages: 5
...use this as a reference. Table of Contents 1. Assignment cover sheet p. 0 2. Title page: HealthSouth and the Scrushy Way p. 1 3. Table of Contents p. 2 4. Introduction p. 3 5. Government Subsidies p. 3 6. Signs of Corruption p. 4 7. Ethical issues of HealthSouth p. 5 8. Management of HealthSouth p. 5 9. Intimidation and Cooperation p. 6 10. Culture of Corruption p. 7 11. Lavish Lifestyle and Philanthropy p. 8 12. Impact on Stakeholders p. 9 13. Charges p. 10 14. Outcome and Fairness of Punishment p. 10 15. Conclusion p. 12 16. References p. 13 HealthSouth and the Scrushy Way Richard Scrushy overcame challenging teenage years, dropping out of high school and later obtaining his GED to become one of the most successful executives in the United States. Scrushy did so by subsequently getting his respiratory therapist certification and opening his own rehabilitation center, an all-in-one medical facility that led many to copy his idea. Scrushy founded HealthSouth in 1996 using $1 million in seed capital and turned it into a hugely successful medical services empire worth over $4 billion at its prime (Haddad, Weintraub, & Grow, 2003). HealthSouth had become the largest provider of outpatient surgery, rehabilitation, and diagnostic and imaging services as well...
Words: 3288 - Pages: 14
...wisdom, that they were “like unto a foolish man, which built his house upon the sand: and the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it” (Matthew 7:26-27, King James Version). The character of the individual who cheats, or takes advantage of others, gets bent out of shape and distorted, until it is no longer strong enough to provide a sure foundation, and without that they fall and they hurt themselves and those around them. Impact on Stakeholders In the house that Scrushy built, this author identifies several stakeholders impacted by the dishonesty, including: Richard Scrushy, his management team, his board of directors, his employees, the patients of HealthSouth, and the U.S. Government. This author will discuss the contributions and ramifications of the actions, or inactions of each. Richard Scrushy Richard Scrushy was a self-made man, a high school drop-out, who completed his GED, and then went on to get his degree in respiratory therapy from the University of Alabama at Birmingham (UAB) (Heylar, Cherry, & Neering, 2003). Between...
Words: 3537 - Pages: 15
...Analyze the accounts impacted and / or accounting guidelines violated and the resulting impact to the business operation. According to generally accepted accounting principles (GAAP), rises in earnings must be equaled to increases in net assets always, so that shareholders’ equity moves forward appropriately and the balance sheet balances. That was the reason that the SEC suspected why HealthSouth was able to increase its earnings while balancing its books by overstating assets and understating liabilities. This was prepared in a variety of methods, but certain accounts were operated most frequently in connection with the fraudulent reporting. If HealthSouth was continues to do so, the way to operate the business will be more difficult. Because of the previous data that the company has is unsuitable to predict the future trend of the company. Moreover, forecasting the future number will be incorrect because the data in their records are wrong. As a CFO, recommend which measures could have been taken to prevent this ethical breach and how each measure should be implemented in the future. As a CFO, there are many ways to prevent the ethical breach to not happen within the company in the future. First, the most basic but important thing is being a model of the behavior you wish to see because your staff will see how you act and they will act the same way as you do. If you say but act different from what you do, no one will focus on you in the future and ignore to watch...
Words: 421 - Pages: 2
...INTRODUCTION…….…………………………………………………………………. 4 B.) Defining the Ethical Issues Involved with HealthSouth…………………………………. 5 1.) HealthSouth Founder and CEO Richard Marin Scrushy………...………………. 5 a.) Trailer Park to Charismatic Leader……………………………………. 5-7 b.) Leadership Tactics……………………………………………………….. 7 2.) Corporate Culture at HealthSouth………………………………………………... 8 c.) Following Directions for Failure……………………………………........ 9 d.) Faking corporate profits………………………………………………… 10 C.) The Impact on Stakeholders…………………………………………………………….. 10 3.) Employees and Executives……………………………………………………... 10 e.) Many Lost Jobs as a result……………………………………………… 10 f.) Top Level Management Complacency.………………………………… 11 4.) Investors and HealthSouth Stock……………………………………………….. 11 5.) HealthSouth Patients and Customers….………………………………………... 11 D.) Outcome and Fairness of Punishment…………………………………………………... 12 6.) 2003 SEC Civil Law Suit against HealthSouth………………………………… 12 g.) Charges of Fraud………………………………………………………... 12 h.) Inflated Earnings on Financial Statements ...…………………………... 13 7.) Punishment: Does it fit the crime? ...................................................................... 13 i.) CEO Richard Marin Scrushy’s sentence...……..………………………. 14 j.) Other HealthSouth executives sentence ………………………......... 14-15 E.) Conclusion …………………………………………………………………………....
Words: 4087 - Pages: 17
...Whistleblowing and Sarbanes-Oxley Act Student Name College or University Name LEG500 – Law, Ethics, and Corporate Governance Professor’s Title Date Whistleblowing and Sarbanes-Oxley The federal government passed and put into law the Sarbanes-Oxley Act of 2002 (SOX) to primarily protect whistleblowers from retaliation for reporting corporate fraud and financial malfeasance to the government. The negligence became apparent in the 1990’s when corporations such as Enron, HealthSouth, Tyco and WorldCom were found to have grossly overstated their earnings. This cost billions of dollars in losses to shareholders and caused the near-collapse of the stock market (Prentice, 2010, p. 17). The companies were able to hide, scam or misrepresent their earnings due to the dot-com boom, soaring investments, and auditor fraud. The Sarbanes-Oxley Act contains many sections, sub-sections and creation of other agencies to enforce it. It was a sweeping change to standard reporting practices and was created to restore investor confidence, hold corporations and auditors financially and criminally accountable, and protect whistleblowers. Prior to the creation of SOX the whistleblower had no protection from retaliation by the organization. Whistleblowers had fears of criminal prosecution, bodily harm and job loss if they reported the misdeeds of their employer both publicly and privately. The Sarbanes-Oxley Act of 2002 redefined the whistleblower. An examination of the characteristics of a whistleblower...
Words: 1159 - Pages: 5
...FROM GREAT TO GHASTLY: HOW TOXIC ORGANIZATIONAL CULTURES POISON COMPANIES THE RISE AND FALL OF ENRON, WORLDCOM, HEALTHSOUTH, AND TYCO INTERNATIONAL David R. Lease, Norwich University Abstract This paper presents an analytical and comparative study of four recent corporate scandals involving organizations that had previously been recognized as both ethically and organizationally sound. Based on these case studies, the following issues are discussed: (1) The role of leader behavior and organizational/leadership styles in shaping the corporate organizational culture of an organization, and (2) The extent to which this culture renders the organization and its members (including the top executives) prone to ethical misbehavior. The four companies selected for this case analysis are: Enron Corporation, WorldCom, Inc., Tyco International, Ltd., and HealthSouth Corporation. Each case is considered individually. The basic elements in the scandal are outlined and the principal aspects of each organization’s corporate culture discussed, with special emphasis on the influence of leadership styles and leadership behavior/practices on organizational culture. The four cases are then compared and contrasted in the light of the existing evidence on the relation between corporate culture and ethical misbehavior. PRELUDE “We were doing something special. Magical. It wasn’t a job – it was a mission. We were changing the world. We were doing God’s work.” – Jeffrey Skilling, former Enron COO, President...
Words: 15928 - Pages: 64
...and Morality Religious and Philosophical Foundations of Ethics 3 Teleology 4 Deontology 6 41 Acting with Integrity Personal Integrity 8 7 The Moral Point of View 7 The Six Pillars of Character.... 8 Trustworthiness 8 Respect 10 Responsibility 10 Fairness 11 Caring 11 Citizenship 12 Chapter 3 Ethical Decision Making in Business 50 What Is Business Ethics? 51 Ethical Issues in Business 51 Virtue, Character, and CPA Obligations 12 Scope and Organization of the Text 12 Conclusion 14 Discussion Questions 14 Endnotes 15 Chapter 1 Cases 17 Case 1-1: A Student s Dilemma 18 Case 1-2: Giles and Regas 19 Case 1-3: Jason Tybell 21 Case 1-4: Lone Star School District 23 Case 1-5: Reneging on a Promise 24 Foundations of Corporate Governance...
Words: 1401 - Pages: 6
...Draft - Corporate Governance Considerations This material was prepared by Eliot H. Sherman – July 2005 FOCUS Learning Objectives By the end of this chapter, you should be able to: Understand the issues related to agency and delegated responsibility. Describe the similarities and the differences in the corporate scandals that have been identified in the past few years Identify the responsibilities of managers to the shareholders and other stakeholders associated with their corporations. OVERVIEW Corporate governance is not a new topic. It has been around for many years, often described as the “agency issue.” However, in recent years it has taken on increased significance, demanding increased attention. Since 2001, in particular, the corporate marketplace has seen a significant number of headline grabbing scandals involving major corporations. These scandals have raised new questions about corporate governance and, as a direct consequence of some of these situations, the U.S. Congress passed a very broad piece of legislation called the Sarbanes-Oxley Act of 2002. This law has had a wide range of consequences directly affecting large public corporations and public accounting firms and, less specifically, smaller public firms, private corporations, not-forprofit organizations and regulatory entities in many different ways. This law mandates some specific actions for large public corporations, many of these actions being required shortly after the legislation passed and others in...
Words: 7269 - Pages: 30
...Background of the Study 4 Statement of the Problem 4 Purpose of the Research 5 Research Questions 5 Significance of the Research 5 LITERATURE REVIEW 7 CONCLUSION AND RECOMMENDATIONS 19 ABSTRACT This paper investigates White Collar Crime (“WCC) in society and the affects it has on businesses in today’s society, the cost and statistics involved with white collar crime and the difference in how white collar crime and street crimes are dealt with. While white collar crime has existed for many decades, I have conducted research regarding the definition of white collar crime, the history of white collar crime, the different types of white collar crime that affect businesses directly and indirectly, goals of white collar crime, fraud statistics and the cost factors related to white collar crime. White collar crimes and business ethics play hand in hand with one another and often cross the line with one another into criminal behavior. White collar crimes have played a very instrumental part in our downward economy over the past five years, and the level of trust given by society to corporations and employers entrusted with their life earnings has changed dramatically. My research will include factors that contribute to this problem and how white collar crime affects the management and operations of business organizations; what part modern technology plays in white collar crimes being committed; and what positions our society and government have taken on dealing with...
Words: 6980 - Pages: 28
...REPORT RE: RECENT ACCOUNTING AND CORPORATE GOVERNANCE SCANDALS Contents INTRODUCTION: 3 CORPORATE GOVERNANCE 5 CORPORATE GOVERNANCE IN IRELAND 5 RESPONSE FROM REGULATORS TO THE MOST RECENT SCANDALS IN BANKING SECTOR 7 US CORPORATE GOVERNANCE at a time of Tyco scandal 8 RESPONSE FROM THE REGULATORS -SARBANES-OXLEY ACT 2002 9 AUDIT 10 EXTERNAL AUDIT 10 INTERNAL AUDIT 11 INTRODUCTION TO ANGLO IRISH BANK 12 The Scandals 12 Loans to Sean Fitzpatrick 13 Irish Life and Permanent Depositing Funds 14 Corporate Governance Situation of Anglo 16 Ernst & Young – External Auditor 17 Impact on Shareholders & The Public 18 Company Law, Financial Regulator, Accounting Standards IFRS and GAAP 19 TYCO INTERNATIONAL 20 DETAILS OF TYCO’S SCANDAL 21 ACCOUNTING ISSUES IDENTIFIED 22 THE CORPORATE GOVERNANCE WEAKNESSES AT TYCO 22 PERFORMANCE OF EXTERNAL AUDITORS 23 CONCLUSION 27 The Main Reasons for The Scandals 27 Steps taken afterwards-will they prevent similar events happening in the future? 33 END REFLECTION 36 Bibliography: 37 Appendices: 41 INTRODUCTION: Accounting and corporate governance scandals have been a growing problem in the recent years. Many believe that the blame for those scandals should be borne on two groups of people. Those responsible for managing a company and those whose duty is to provide assurance on the accounts prepared by the directors (auditors), both of whom failed to perform their jobs adequately...
Words: 12288 - Pages: 50
...An Analysis of Fraud: Causes, Prevention, and Notable Cases Kristin A. Kennedy University of New Hampshire - Main Campus, kaj79@wildcats.unh.edu Follow this and additional works at: http://scholars.unh.edu/honors Part of the Accounting Commons Recommended Citation Kennedy, Kristin A., "An Analysis of Fraud: Causes, Prevention, and Notable Cases" (2012). Honors Theses. Paper 100. This Senior Honors Thesis is brought to you for free and open access by the Student Scholarship at University of New Hampshire Scholars' Repository. It has been accepted for inclusion in Honors Theses by an authorized administrator of University of New Hampshire Scholars' Repository. For more information, please contact scholarly.communication@unh.edu. An Analysis of Fraud: Causes, Prevention, and Notable Cases University of New Hampshire Honors Thesis in Accounting Kristin Kennedy ADMN 799 Professor Le (Emily) Xu Fall 2012 Table of Contents I. II. III. IV. V. VI. VII. Background……………………………………………………………........1 a. What is accounting and what role does financial reporting serve?..........1 b. History of accounting standards………………………………………..2 c. Role of auditing………………………………………………………...5 Fraud……………………………………………………………………….6 a. Two types of fraud……………………………………………………..6 i. Misappropriation of Assets…………………………………….7 ii. Misrepresentation of Financial Statements…………………….7 b. Fraud Triangle………………………………………………………….8 c. What to look for in a fraudster…………………………………………9 Past Cases of Fraud………………………………………………………...
Words: 14962 - Pages: 60
