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Michael LaNue, Michael

Tancredo, Dina Mamarbashi,

Jordan Nguyen (Section 1)

Executie Summary!ealthSouth "ccounting #raud

$ntroHealthSouth Corporation a company whose headquarters is in Birmingham,Alabama, operates inpatient rehabilitation hospital as their line of business. Thecompany while being headquartered in Birmingham, Alabama, has been able toproliferate throughout the United States through aggressie acquisition. Currentlythe company trades on the !ew "or# Stoc# $%change under the symbol H&S.Howeer, HealthSouth almost lost this priilege in '(() when goernment o*cialsunearthed the company+s inolement is a massie accounting scandal that nearlyled to the company+s nancial deastation. This e%ecutie summary will gie a briefoeriew of the chronological timeline of the HealthSouth Case, particularly of theeents which transpired as well as how the accounting fraud was committed

!istory-ounded /01 by respiratory therapist 2ichard Scrushy, the company became anoernight success. After only two years the company went public with Scrushyleading the charge as its Chief $%ecutie 3*cer 4C$35. After its initial public o6eringthe company used its cash to acquire numerous hospitals and health7carecompanies to articially grow8a growth that continued throughout the /0(+s and//(+s. Throughout this period of growth Scrushy cemented his position as one ofthe top paid e%ecuties in the country with a ested interest in HealthSouth thatwas worth appro%imately )(( million.

$mmergence o% Scandal9roblems started to arise in '((', howeer, when HealthSouth asserted thatalterations to :edicare payment policy would impact their bottom line and wouldresult in the company losing half of its mar#et alue. This drop in alue starts to beinestigated especially since two months prior, Scrushy had sold his shares ofHealth South stoc# totaling (( million dollars. ;n :arch 0ththe -ederal Bureau of;nestigation 4-B;5, using a search warrant, raided the HealthSouth headquarterswith the intent of conscating the company+s nancial records. The ne%t day afterbeing raided, the Securities and $%change Commission 4S$C5 elucidated to the factthat HealthSouth had already been under inestigation for oer < months.-urthermore, they also enlightened that HealthSouth+s earnings had beenoerstated by .= billion dollars. This was done, according to the S$C on theinstructions of 2ichard Scrushy. Before each quarter 2ichard would instruct senior

accountants to alter the numbers if they were less than >all Street+s estimates. Thenumbers were then in?ated though a series of meetings #nown as @familymeetings.

Method o% #raudTo increase earnings senior accountants will falsify ournal entries by adusting thecontra7reenue account. This account lowers reenue for health7care proidersbecause for many cases, the gross billings to customers and insurerreimbursements are di6erent. As the reimbursements occur in a later period, the

7/25/2019 Executive Summary for HealthSouth

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Michael LaNue, Michael

Tancredo, Dina Mamarbashi,

Jordan Nguyen (Section 1)

contra7reenue account is standard. HealthSouth e%ecuties continually madeadustments to this account in order to increase their earnings. To balance out theaccounting equation, HealthSouth senior accountants would also ma#e ournal

entries to record fa#e assets under =(((, #nowing that the e%ternal auditors wouldnot e%amine them because the amount is immaterial. >ith an aerage ournal entryof '=(( there were oer a million separate entries that had to hae been createdto perpetrate this fraud.

"%termathAfter the raid of HealthSouth+s headquarters by the -B;, the company wasimmediately 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 onlyworth illiam 3wens, who was the current Chief $%ecutie 3*cer

4C-35 at the time, on administratie leae. -ollowing the aftermath, HealthSouthe%ecuties were indictedF while 3wens and other former HealthSouth C-3 pleadedguilty to in order to lessen the lengths of their criminal sentences, Scrushyadamantly repudiated his inolement and heaily emphasiDed his lac# of#nowledge8refusing to be the rst C$3 to be charged with iolating the recently7passed Sarbanes73%ley Act of '(('.

#orensic "udit and &esults9ricewaterhouseCoopers 49wC5 was then hired by the audit committee to conduct aforensic 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 itsyears of operations, particularly between //< and '(('. Below is a table that

delineates the di6erent accounting rules employed by HealthSouth e%ecuties in

order to oerstate their earnings.

;mpact to income Before Ta%es 4;n :illions5

2eduction of Contractual Allowances ','()Acquisition Accounting 1'

Bonus Accounting =';nestment Accounting G

-acility Contractual Accounting /

Third7party Transaction Accounting '/Total ',G1

Scrushy's LitigationScrushy went to trial in Eanuary '((=. Using numerous testimonies from formerHealthSouth e%ecuties as ammunition, the U.S. goernment sought to put Scrushyaway for a ery long time. Unfortunately, Scrushy+s lawyers were ery procient attheir obs. Arguing that the fraud was done without Scrushy+s #nowledge andattac#ing both the credibility and character of the witnesses, Scrushy wase%onerated from blame. "et despite the success of his trial, Scrushy was still notliberated from the courtroom. :onths later he was again indicted on charges of

7/25/2019 Executive Summary for HealthSouth

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Michael LaNue, Michael

Tancredo, Dina Mamarbashi,

Jordan Nguyen (Section 1)

bribery with the former Alabama goernor. He was conicted and sentenced in '((