Executive Summary for HealthSouth

Michael LaNue, Michael Tancredo, Dina Mamarbashi,  Jordan Nguyen (Section (Section 1)

Executie Summary !ealthSouth "ccounting #raud $ntro HealthSouth Corporation a company whose headquarters is in Birmingham, Alabama, operates inpatient rehabilitation rehabilitation hospital as their line of business. The company while being headquartered in Birmingham, Alabama, has been able to proliferate throughout the United States through aggressie acquisition. Currently the company trades on the !ew "or# Stoc# $%change under the symbol H&S. Howeer, HealthSouth almost lost this priilege in '(() when goernment o*cials unearthed the company+s inolement is a massie accounting scandal that nearly led to the company+s nancial deastation. This e%ecutie summary will gie a brief oeriew of the chronological chronological timeline of the HealthSouth Case, particularly of the eents which transpired as well as how the accounting fraud was committed

!istory -ounded /01 by respiratory therapist 2ichard Scrushy, the company became an oernight success. After only two years the company went public with Scrushy leading the charge as its Chief $%ecutie 3*cer 4C$35. After its initial public o6ering the company used its cash to acquire numerous hospitals and health7care companies to articially grow8a growth that continued throughout the /0(+s and //(+s. Throughout this period of growth Scrushy cemented his position as one of the top paid e%ecuties in the country with a ested interest in HealthSouth that was worth appro%imately )(( million.

$mmergence o% Scandal 9roblems started to arise in '((', howeer, when HealthSouth asserted that alterations to :edicare payment policy would impact their bottom line and would result in the company losing half of its mar#et alue. This drop in alue starts to be inestigated especially since two months prior, Scrushy had sold his shares of Health South stoc# totaling (( million dollars. ;n :arch 0 th the -ederal Bureau of ;nestigation 4-B;5, using a search warrant, raided the HealthSouth headquarters with the intent of conscating the company+s nancial records. The ne%t day after being raided, the Securities and $%change Commission 4S$C5 elucidated to the fact that HealthSouth had already been under inestigation for oer < months. -urthermore, they also enlightened that HealthSouth+s earnings had been oerstated by .= billion dollars. This was done, according to the S$C on the instructions of 2ichard Scrushy. Before each quarter 2ichard would instruct senior accountants to alter the numbers if they were less than >all Street+s estimates. The numbers were then in?ated though a series of meetings #nown as @family meetings.

Method o% #raud  To  To increase increase earnings earnings senior accountants accountants will will falsify ournal entries by adusting adusting the contra7reenue account. This account lowers reenue for health7care proiders because for many cases, the gross billings to customers and insurer reimbursements are di6erent. As the reimbursements occur in a later period, the

Michael LaNue, Michael Tancredo, Dina Mamarbashi,  Jordan Nguyen (Section 1)

contra7reenue account is standard. HealthSouth e%ecuties continually made adustments to this account in order to increase their earnings. To balance out the accounting equation, HealthSouth senior accountants would also ma#e ournal entries to record fa#e assets under =(((, #nowing that the e%ternal auditors would not e%amine them because the amount is immaterial. >ith an aerage ournal entry of '=(( there were oer a million separate entries that had to hae been created to perpetrate this fraud.

"%termath After the raid of HealthSouth+s headquarters by the -B;, the company was immediately suspended on the mar#et before being delisted the following wee#. >hen trading did resume the stoc# price fell from almost '( a share to being only worth illiam 3wens, who was the current Chief $%ecutie 3*cer 4C-35 at the time, on administratie leae. -ollowing the aftermath, HealthSouth e%ecuties were indictedF while 3wens and other former HealthSouth C-3 pleaded guilty to in order to lessen the lengths of their criminal sentences, Scrushy adamantly repudiated his inolement and heaily emphasiDed his lac# of #nowledge8refusing to be the rst C$3 to be charged with iolating the recently7 passed Sarbanes73%ley Act of '(('.

#orensic "udit and &esults 9ricewaterhouseCoopers 49wC5 was then hired by the audit committee to conduct a forensic audit.  The forensic results were startling. ;n Eune of '((1, 9wC, through a report of their ndings, illuminated the degree of fraud that encompassed HealthSouth during its years of operations, particularly between //< and '(('. Below is a table that delineates the di6erent accounting rules employed by HealthSouth e%ecuties in order to oerstate their earnings. ;mpact to income Before Ta%es 2eduction of Contractual Allowances Acquisition Accounting Bonus Accounting ;nestment Accounting -acility Contractual Accounting  Third7party Transaction Accounting  Total

4;n :illions5 ','() 1' =' G / '/ ',G1

Scrushy's Litigation Scrushy went to trial in Eanuary '((=. Using numerous testimonies from former HealthSouth e%ecuties as ammunition, the U.S. goernment sought to put Scrushy away for a ery long time. Unfortunately, Scrushy+s lawyers were ery procient at their obs. Arguing that the fraud was done without Scrushy+s #nowledge and attac#ing both the credibility and character of the witnesses, Scrushy was e%onerated from blame. "et despite the success of his trial, Scrushy was still not liberated from the courtroom. :onths later he was again indicted on charges of

Michael LaNue, Michael Tancredo, Dina Mamarbashi,  Jordan Nguyen (Section 1)

bribery with the former Alabama goernor. He was conicted and sentenced in '((< for G years in prison. Since Eune '(', he has been released from custody but still faces a class7action lawsuit from HealthSouth shareholders see#ing '.< billion dollars in compensation.

urrent !ealthSouth After the chaos of the accounting scandal, HealthSouth had been able to aoid ban#ruptcy by selling o6 assets and renancing its debts. ;t also brought in consultants to implement internal controls in order to aoid fraud from reoccurring. eeping only its core inpatient rehabilitation centers, HealthSouth now operates within '< states and is currently trading at )=.)1 per share. ;t has emerged from the rubble to become a stronger company and that has learned a ery important lesson, one that we beliee will help it continue to grow een further while still being ethical to its sta#eholders.