NOTE: Facilitator noted that more indepth info would have been beneficial to this paper, so please only 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 as the third largest publicly held company in Alabama (Chaubey, 2006). Scrushy is best known, however, for his deplorable lack of ethics and the massive fraud he perpetrated during his tenure with HealthSouth.

Government Subsidies

Scrushy mistakenly assumed that generous government reimbursements would continue to provide operating funds, and for nearly 10 years, these government payments provided a steady stream of funds permitting the rapid acquisition of rehab and diagnostic centers across the country (Haddad, et al.). However, when Congress slashed Medicare reimbursements in 1997, HealthSouth’s operating capital and profits plummeted because the health care industry is largely dependent upon limited government subsidies and a prolonged downturn in the economy decreases the reimbursements to medical providers (Haddad, et al.). In response, Scrushy began one of the largest frauds in recorded history, with PricewaterhouseCoopers estimating that management overvalued HealthSouth’s profits by anywhere between $3.8 to 4.6 billion dollars (Weld, Bergevin, Magrath, 2004). Scrushy left HealthSouth amid federal indictments in 2003, nearly 300 unprofitable rehabilitation and diagnostic centers closed, and fifteen corporate executives plead guilty to federal charges in what was an unbelievable example of corporate greed.

Signs of Corruption

Just as the executives of Enron, WorldCom, Tyco, and Parmalat failed to recognize the gradual erosion of corporate ethics leads to greater lapses and these executives justified their actions by adopting the win at all costs mentality, they are merely a small sample of high profile unethical leaders (Bello, 2012). Many unethical leaders justify their actions as for the greater good of the organization, failing to consider the long-term damage unethical behavior leaves. Signs were present that indicated HealthSouth was balancing on a precipice early on; however, many of these signs were overlooked in favor of increasing the company's revenue. Scrushy even went so far as to fire some executives raising concerns while ignoring and subsequently excluded others from corporate meetings that discussed financial issues (Jennings, 2009). An assistant vice president of accounting who voiced suspicion regarding the authenticity of financial documents relayed concerns to the compliance department, was transferred to another department, and passed over for a promotion ultimately awarded to another who assisted in covering up the fraud (Jennings, Chaubey). During Scrushy's tenure as CEO, lawsuits were filed against HealthSouth by an insurance provider citing improper Medicare charges, billing for additional services, the use of unlicensed therapists; the SEC also filed charges prior to indicting Scrushy alleging the falsification of profits, a charge that was settled out of court (Solieri, Felo, & Hodowanitz, 2008). Enough signs were present that investigators should have been aware of the potential fraud long before the indictment of Richard Scrushy.

Ethical Issues of HealthSouth

Prior to HealthSouth going public, an auditor must certify a company's accounting records; however, the first accounting firm hired by Richard Scrushy refused to do so as they had reasonable doubts as to the validity of the HealthSouth reports (Weld, et al). Scrushy subsequently hired Ernst & Young who certified these same financial records, and HealthSouth became a publicly held firm headed by Richard Scrushy with stock selling for one dollar a share (Weld, et al.). Because of the rate of reimbursement for Medicare payments, HealthSouth stock prices increased substantially in a short period, rising $30 in the two years following their initial public offering (Jennings). Competitors subsequently copied this organizational design and many analysts predicted this organizational design to be the future of medical centers (Jennings). HealthSouth increased their market share and reputation by purchasing other failing medical centers and these acquisitions made HealthSouth into a billion-dollar company (Jennings). Additionally, during the heyday of Medicare reimbursements, HealthSouth made astronomical profits, relying upon the continuation of these government subsidies to continue operating. When these payments dried up, Scrushy decided to inflate the organizations profits, effectively perpetuating a massive fraud on shareholders, investors, and corporate stakeholders as well as the U.S. Government.

Management of HealthSouth

In 2000, Richard Scrushy employed 51,000 employees, had 1,700 centers throughout the country, and HealthSouth was considered an innovator in the medical facility field with many other facilities executives exemplifying Scrushy's business acumen (Chaubey). Scrushy appears to have begun HealthSouth with good intentions; however, young impressionable managers joined the company to enhance their own personal fortunes and they blindly followed the lead of the CEO who cared more for fraudulently meeting the numbers created by Wall Street than for playing it safe with investors' money. HealthSouth attracted many young, seemingly corruptible executives and the frequent turnover, accounting irregularities, and rapid rate of promotion assisted Scrushy in controlling the young executives working for HealthSouth. Additionally, HealthSouth had an "extensive loan program to enhance equity ownership" making these executives beholden to the company and more likely to remain loyal (Jennings, p. 186). Although Jennings (2009) suggests that many red flags existed prior to Scrushy's indictment, no formal investigations began and the management of HealthSouth continued fixing the numbers. HealthSouth's board of directors was just as complicit, with many assuming high paying positions even though conflicts of interest were present (Jennings).

Intimidation and Cooperation

To accomplish this massive a fraud, Scrushy intimidated managers into following his desired earnings projections, relying upon their sense of self-preservation to retain their positions as well as the hefty salaries and bonuses afforded to cooperative managers to ensure the projected profits materialized (Helyar, Cherry, & Neering, 2003). Managers failing to meet their budgets were reprimanded, doctoring the numbers became acceptable and amply rewarded his managers, and those executives failing to succumb to this accounting deception were excluded from further financial information until they quit in frustration (Jennings). This profits before people standard led many executives to fear reprisals and employee turnover rates increased; former employees report Scrushy led via coercion, once claiming that shining a light on someone's actions improves the likelihood of compliance (Jennings). Scrushy also preferred to rule top-down using fear, reprisals, while paying loyal managers outlandish salaries in exchange for their complicity in perpetrating the fraud. This led to an influx of young, corruptible executives and many young executives began making the hefty salaries typical of older, more experienced management (Jennings). Initially this deception was to meet the expectations of Wall Street who projected HealthSouth was the future of medical facilities; however, as time went by and corporate executives reaped huge rewards, the deception became easier to justify and more elaborate.

Culture of Corruption

According to Beenen and Pinto (2009), the corrupt organization phenomenon is a top down hierarchy in which a dominant entity or management team corrupts the personnel for the benefit of the organization. Bello (2012) asserts that top management sets the tone for employees and leaders cannot shirk this responsibility, as they become a role model through visible actions that employees throughout the company mimic. In the case of HealthSouth, the Chief Executive Officer (CEO), Richard Scrushy, corrupted the management to ensure that HealthSouth remained the darling of the medical community and continued to meet the high expectations of Wall Street. Over time, it became easier to continue the fraud than to admit profits were declining and previous revenue was inflated. Additionally, investors expected HealthSouth to provide a high rate of return on their investment, and Scrushy likely justified this by rationalizing that he was doing nothing wrong as the community was also benefiting from the company's profits (Beenen & Pinto, 2009). Scrushy became accustomed to having unlimited wealth at his disposal leading to even greater extravagances and his rapid accumulation of wealth enabled him to become a philanthropist in his community. Romano (2003) claims Scrushy netted nearly $100 million from stock trades in the two months preceding the devaluation of HealthSouth stock and when projected profits fell short, Scrushy informed his managers to "fix it" however was necessary. Scrushy went so far as to develop the "Pristine Audit" as a way of placating auditors, shareholders, and the Board of Directors, with a former internal auditor claiming this audit was a "white glove, walk through of the facility" rather than a meaningful assessment of the company's finances (Jennings, p. 187). Most disturbing, however, is the fact that so many of HealthSouth's employees were willing to either assist in the fraud or look the other way, putting ethics behind profits.

Lavish Lifestyle and Philanthropy

Scrushy lived a modest lifestyle until forming and taking HealthSouth public; however, he rapidly became accustomed to living the rock-star lifestyle. The meteoric rise of HealthSouth permitted Scrushy to buy lavish gifts, donate to local charities, and introduced him to a glamorous lifestyle. Scrushy accumulated expensive homes, cars, and even private planes, sharing his wealth freely with associates and on the surface had achieved the American Dream. Scrushy used his position as the CEO of HealthSouth to become a mover and shaker, interacting with celebrities, sports figures, politicians, and local media figures (Helyar, et al.). This dramatic increase in wealth provided Scrushy with enough personal wealth to donate large amounts to many causes and Scrushy became known for his philanthropic generosity throughout the community. Jennings (2009) indicates that philanthropic activities are often used to justify or negate the unethical activities of leaders and many may believe that as long as the good they do outweighs the bad, they are justified. Jaklevic (2003) further verifies this, stating that Scrushy was an avid churchgoer who heard many sermons on greed and biblical ethics from his pastor and was a major donor during the construction of their new church facility. Chaubey (2006) claims Scrushy was a minor celebrity in Alabama, a philanthropist donating sizable amounts to charities while also being known as a highly ambitious CEO. This ruthless ambition appears to have led Scrushy to make decisions to further his own personal agenda of becoming the most highly paid CEO in the United States rather than admit mediocrity (Chaubey).

Impact on Stakeholders

The fraud indictment of Richard Scrushy affected many stakeholders, including his management team, his board of directors, his employees, the patients of HealthSouth, affiliated companies, the communities of HealthSouth facilities, and the U.S. Government. Following the indictment of Richard Scrushy, HealthSouth stocks plummeted and stakeholders were left holding almost worthless stock in a company whose reputation was in shambles. Stock transfers were suspended, shares lost 60% of their value in two days following Scrushy's indictment, and a series of successive legal problems plagued HealthSouth that further damaged the reputation of the previous healthcare giant (Romano, 2005). The credit rating of HealthSouth was quickly downgraded as ratings agencies questioned the ability of HealthSouth to remain solvent (Romano).

Managers who assisted Scrushy in fixing the numbers were indicted, many turning into informants or assisting the prosecution by testifying against Richard Scrushy. One former executive who worked directly for Scrushy even took his own life prior to being indicted (Helyar, et al.). Employees of HealthSouth were terminated as facilities were closed, many losing benefits and pensions, patients had to find new doctors, received poor healthcare, were treated by unlicensed therapists, and found new diagnostic facilities to continue treatments because of these closures. The true extent of the damage to patients of HealthSouth, who may not have received optimal healthcare at the nation's leading facilities, remains unknown. Even other medical facilities not affiliated with HealthSouth were affected with this fraud coming so soon after another in the healthcare industry, with many hospitals and healthcare facilities tightening controls, improving governance, and bracing for the inevitable backlash that follows high profile corruption cases (Romano, 2003). HealthSouth repaid millions of dollars to the federal government for falsely billed services, yet much of the monies reimbursed from government programs remain uncollected (Jennings).

The Board of Directors asserted they knew nothing about the fraud and were hapless victims of Richard Scrushy even investigators exposed damning revelations. These revelations included a director earning a former consulting contract with HealthSouth, a director's company obtaining a new construction contract worth millions, and even a substantial donation to a board candidate's charity prior to accepting a seat on the board. Likewise, HealthSouth's auditing firm, Ernst & Young, claimed to have been duped by HealthSouth executives, in spite of former employees informing them of potential concerns in specific areas and their supposed expertise in corporate audits (Jennings).

Charges

The SEC began investigating HealthSouth and filed charges against Richard Scrushy in November 2003 for his role in creating and continuing the fraud at HealthSouth. These charges included conspiracy, securities fraud, and money laundering as well as implicated other HealthSouth executives along with Scrushy (Chaubey). Subsequently, fifteen of HealthSouth's executives plead guilty to a variety of charges resulting from their complicity in Scrushy's fraud, including five former chief financial officers, a vice president of finance, a vice president of taxation, and the vice president of investment all plead guilty to the charges filed against them (Chaubey). Many of these former executives testified against Scrushy to avoid incarceration or in exchange for reduced sentences, but each implied that Scrushy directed and perpetuated the fraud in an effort to stave off additional legal repercussions (Chaubey). According to Jennings (2009), only one former CEO had no responsibility in the fraud since he left the company after he voiced concerns regarding improper financial reporting. In light of the guilty verdicts for so many HealthSouth executives, many expected mastermind Richard Scrushy to be found guilty of numerous charges as well (Piotrowski, 2003).

Outcome and fairness of punishment

The charges filed against Richard Scrushy were the first test of the Sarbanes-Oxley (SOX) Act of 2002 with the Securities and Exchange Commission (SEC) investigating charges of improper revenue accounting, improper expense accounting, and improper accounting reporting (Weld, et al.). The federal indictment encompassed 85 counts and could have resulted in a 650-year sentence; however, a handpicked jury acquitted Scrushy of each charge, and a separate bribery charge yielded his only conviction following his acquittal (Piotrowski). This bribery conviction resulted in a 70-month sentence and Richard Scrushy was again a free man on July 25, 2012 (Faulk, 2012). Sloane (2005) states that even though the Scrushy verdict was disappointing and absurd, it should not negate the necessity of business ethics, future prosecutions, or reflect poorly on the Sarbanes-Oxley Act. Furthermore, "Scrushy's $25 million bought him a great defense, but it was predicated on a clueless jury, an obliging judge and strong local ties greased with charitable lucre" (Sloane). Barr (2005) puts forth that Richard Scrushy wishes to regain his position with HealthSouth following his acquittal, a clear indication that Scrushy believes he is entitled to his company and blames his subordinate managers for the HealthSouth fraud. In spite of this, Scrushy lost a considerable fortune, his company, the respect of his colleagues, and most importantly, his own self-respect. Scrushy will likely never regain his stature in society, will be ostracized as corrupt, and leaves a legacy of corruption that will serve as a warning to future CEO's.

Conclusion

HealthSouth was once touted as the future of medical care; embodying a total care approach to diagnostics, surgery, and rehabilitation that revolutionized the healthcare industry. HealthSouth is best known, however, for the fraud that the CEO developed, nurtured, and committed upon the community, stakeholders, and the U.S. government for years. Although HealthSouth's ethical problems arose because of the actions of the CEO, Richard Scrushy, executives throughout the company copied his unethical behavior while those opting to retain their ethics found themselves on the outside. Executives throughout the company's various departments cooperated and assisted with continuing this fraud, permitting the lure of untold wealth to blind them to their responsibilities to the company stakeholders. As troubling as Scrushy's actions were, he is but one of many executives who fail to realize how their unethical actions negatively affect subordinates and company stakeholders.

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