Healthsouth, Inc – Corporate Accounting Fraud - Baruch College / Cost Accounting - Research Paper

Healthsouth, Inc – corporate accounting fraud
HealthoSouth was one of the largest nationwide chain of orthopedic hospitals in 90’s. Built from a scratch by a talented manager Richard M. Scrushy for $1 million on 1986, its value passed $12billion mark in 1996 when it was first introduced to public stock market. All these growth, however, and large market cap was created by its management that executed one of the largest Wall Street accounting frauds of $2.7 billion. The fraud happened in its most due to lack of economic regulations in that period and specific investor’s focus on revenues but not profitability of companies. Company growth was a key from a point of attracting new capital. This environment put a huge pressure on lots of CEOs of the period, they were forced to show continuous growth and meeting market expectations for each reporting period. HealthSouth depended heavily of government money as most of its patients used Medicaid. Company grew incredible 31% on average a year thanks to this strategy. In 1997 when government decreased spending on Medicaid financial situation of HealthSouth was under extreme pressure as these funds accounted for more than 40% of company’s revenues. This was the time company management started to play with books to keep investor’s expectations and steady growth.
Company CEO Scrushy and corporate “financial family” that consisted of 5 CFOs started to alter earning numbers. In order to increase revenues corporate board followed few basic steps: compared real financial results to analyst expectations; if earning were short of needed numbers – managers were forced to adjust them in any way possible; false ghost documents were created in order to level up false entries in statements. Since top management of HealthSouth was filled with many experienced former E&Y auditors (the company that happened to continuously audit HealthSouth) they knew how to keep this kind of fraud off the public view. One of the most common tricks of this fraud was keeping amounts of money moved less than $5k at a time – management knew that E&Y assurance company will not look at any entries below this amount. So, HealthSouth employees were forced to cre...