Unhealthy Accounting at HealthSouth Essay

What steps should management, the Board of Directors, or the Audit Committee of the Board of Directors take in response to allegations of possible fraud or illegal acts?

In 1984, Richard Scrushy founded HealthSouth in Birmingham, Alabama. Scrushy was the company’s Chairman and Chief Executive Officer (CEO) when the company went public in 1986. HealthSouth grew quickly over the next several years. Shortly after HealthSouth went public, it is alleged that Scrushy instructed senior staff to materially inflate the company’s earning to match expectations. In 2002, the first sign of troubles occurred when Scrushy sold $75 million of HealthSouth stock days before HealthSouth announced a large loss. After this the SEC began to investigate if any insider trading laws had been violated. In 2003,

Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”

Without a question the BOD should have placed a high degree of reliance on Andersen, which at the time was one of the most prestigious worldwide accounting firms. The auditors should have known the kind of accounting taking place in Enron. In my opinion, Andersen knew, at least to some extent, the company’s financial condition. However, Enron was already too deep under water that blowing the whistle so late would have created problems for Andersen as well. According to the case, on 02/05/01, Andersen held internal meeting during which it addressed the company’s accounting from and oversight of the LJM partnership. Andersen never discussed these concerns with the Audit and Compliance Committee. Although the BOD has its faults, it should have been able to rely on Andersen’s work.

Employees at HealthSouth were afraid of losing their jobs, and most of them rationalized the fraud as it is an only small adjustment, it will be okay. Weston Smith, the Chief Financial Officer at the time, was a willing participant in "cooking the books." He rationalized the adjustments as a one-time thing; that was not to happen again. However, his deceitful behavior continued. In the end, his conscious got the best of him and by early 2000s he went to the feds with a personal account of the

Weston Smith (2013), former CFO of HealthSouth, states “the tone of the company may be memorialized through policies and procedures, both written and spoken, but nothing sets the tone more than the everyday actions of the leadership.” At the top of the HealthSouth organization sat Richard Scrushy. As founder and CEO of the company who instilled fear in employees that did not carry out his orders. This set the tone from the top. Do as you’re told or suffer the consequences. When financial results did not meet market expectations, managers were told to fix it. And they did by creating false journal entries and false documentation to back up those entries. There were no checks and balances in place and the accounting system was not linked to the enterprise resource planning software. There was no oversight of managers by a board of directors or an audit committee. The audit committee was not well trained, did not have enough staff, and was not independent of management. Scrushy had complete control of the company and he was obsessed with increasing his earnings trends. He reinforced the idea of top management being family and therefore more loyal to each other than to the unknown public (Lupica, 2014).

The audit world was transformed more than ten years ago due to a series of accounting scandals. This change took place when The Sarbanes–Oxley Act of 2002, otherwise known as SOX, was passed affecting not only business entities but also the firms that audit those companies (Thomas). One of the companies whose fraud was unmasked by the passage of SOX was HealthSouth Corporation. A company in the healthcare industry who had overstated about $2.7 billion dollars in earnings since 1996. The company’s CEO, Richard Scrushy, was the first to be tried under SOX for misrepresenting and signing off on misleading financial statements(Accounting Fraud at HealthSouth).

There are various procedures that could be taken in to account that would, if properly implemented, would have detected the frauds that occurred within the companies. There are many control risks that should have been taking regarding inventory along with preliminary audit strategies for the inventory and substantive test to be done that would have raised many flags during the typical audits as well as in depth ones.

E&Y auditors violated their responsibility to the public and to their profession. The auditing standards that were violated were AU 15 responsibility of the auditor to obtain sufficient evidence to provide a reasonable basis for his opinion, AU section 339 preparation and maintenance of working papers, AU 339.01 Principle record of work contains information and conclusions the auditors have reached concerning significant matters in the working papers, AU 339.08 the auditor is required to “adopt reasonable procedures for safe custody of his working papers and retain them for a period, AU 15 was violated when Trauger requested revisions to the workpapers. AU 339, AU 339.01 and AU 339.08 were violated with the

During the performance of this integrated audit, require numerous judgments about the internal control and overall financial reporting and how well it addresses risks of material misstatements within the financial statements (AICPA, 2014). After re-evaluating the previous errors found from the previous audit, the audit team found the corrective actions to be appropriate and justified in elimination of human error by implementing additional checks and balances within the manual process. No additional misstatements have been found and all internal controls off the financial reporting seem appropriate and just.

1. Discuss three management events that occurred that should have been a “red flag” to the auditing firm.

Fraudulent, erroneous, and illegal acts committed by a public company, usually at a managerial or executive level, have been a very serious problem for many years and have prompted development of strict and updated regulations, such as the Sarbanes-Oxley Act, in an attempt to prevent these occurrences. Unfortunately, these new or updated regulations are not enough to prevent these acts from happening, thus not alleviating the auditors of their responsibility to detect fraud. Some methods that management and auditors can employ to prevent and detect fraud, errors, and illegal acts are: improving knowledge, improving skills,

Additional concerns have been made in regards to the red flags missed by auditors. First of all, auditors should have been alarmed by the size of the cash account held in the Cayman Islands. Auditors should have remained skeptical about the existence of this account. They should’ve addressed this red flag with

There were several red flags in Crazy Eddie’s financial statements. The company’s higher-than-normal level of audit risk can be determined by completing a ratio analysis of the financial statements. An analysis of key ratios over the period of 1984 to 1987 would have resulted in red flags. Crazy Eddie’s change in assets between this period is one red flag that an auditor should have noticed. Short-term investments had a zero balance until 1986 when it dramatically

On March 19 of the year 2003, Securities and Exchange Commission brought the trading of HealthSouth to an end on the New York stock exchange, charging the company for inflating its earnings by more than 10 percent and overstated its profits by more than $2.5 billion between 1999 and 2002. HealthSouth’s trading reached to $30.81 in the year 1998, but ever since the trading of the company has been put to an end it reached to $3.91 per share. One week later, Owens pleaded guilty to changing and editing the company’s financial statements.