Healthsouth Accounting Scandal

Accounting Fraud > Accounting Scandals > HealthSouth Accounting Scandal

Accounting scandals happen to all industries around, health care not excluded. The Healthsouth accounting scandal was noteworthy for the sheer size of the scandal. The SEC was tipped off in late 2002 after CEO Richard Scrushy sold $75 million in stock several days before the company posted a large loss, driving the stock price downward. After further investigation of HealthSouth by the SEC, the company was accused of being involved in an accounting scandal to falsely inflate the company’s revenues by $1.4 billion.

Looking back in to what was the cause of this, it was suspected that in 1996, Scrushy instructed the company’s executives and lead accountants to fraudulently modify the company earnings reports so that they could meet Wall Street analyst expectations. The goal of this fraud was to control of the price of the company’s stock. The company blatantly modified these reports with complete disregard, to such an extreme extent that in certain fiscal periods income was overstated by as much as 4700%. The inflation of the $1.4 billion in revenues represented over 10% of the company’s total assets.

The SEC announced it was investigating Scrushy’s stock sale in March ’03, shortly after his large stock sale prior to the reported loss, to link the relationship between his sale and the loss. In an attempt to control public relations, HealthSouth paid a law firm investigate the stock sale. The ultimate conclusion was that the sale and profit loss were not related, although the SEC was unphased. On one evening in March, 2003 FBI agents executed search warrants at the company’s headquarters.

In June 2005, Scrushy was acquitted on all 36 of the accounting fraud counts against him, most notably one count in violation of the Sarbanes-Oxley Act. But in June 2006, he was convicted on bribery charges, having stood accused of arranging $500,000 in campaign donations in exchange for a seat on a state hospital regulatory board. While this executive unfortunately appears to have gotten away with the accounting scandal, he was ultimately found guilty of another.

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