In March of 2003, The Securities and Exchange Commission (SEC) charged HealthSouth Corp., the nation's largest healthcare provider with widespread accounting fraud. It is alleged that since 1999, at the insistence of its CEO, Richard M. Scrushy, HealthSouth consistently overstated its earnings to exceed Wall Street expectations and therefore maintain stock value. It is estimated that the fraudulent earnings and fraudulent claim was in excess of $1.4 billion. Additionally, HealthSouth did not stop with the false earnings increases – they also overstated their assets by an estimated $800 million.
HealthSouth Corporation is based in Birmingham, Alabama and is best known for its widespread rehabilitation services, HealthSouth has a number of facilities throughout the U.S., Canada and Puerto Rico with additional facilities in Australia. In all, HealthSouth has more than 330 hospitals among its 1,900+ facilities that act as both inpatient and outpatient rehabilitation facilities and that act as outpatient surgery centers. HealthSouth was founded by Richard Scrushy who ultimately took the company public and became its CEO.
It had been thought that HealthSouth was a fiscally sound and growing healthcare entity, but it became clear in 2003 that it was actually gaining that reputation on fraudulent reporting. The CEO, Richard Scrushy had even certified the earnings, as was required by law after the Enron and WorldCom scandals and he therefore endorsed the fraudulent claims and opened himself up to a great deal of blame and culpability.
The SEC alleges that Scrushy’s actions and those of HealthSouth violated antifraud laws, reporting laws, and internal controls provisions of the federal securities laws. Scrushy is accused of aiding and abetting in those fraudulent violations. The SEC is seeking civil money penalties and they plan to pull out any fraudulently acquired assets from both HealthSouth and Scrushy. Additionally they are seeking to bar Scrushy from this type of power position at any publicly held company into the future.
It was thought after the Enron, WorldCom and Tyco scandals that the largest frauds had all been uncovered, but HealthSouth and Richard Scrushy proved everyone wrong. This is another case of inflating the value of a company to maintain a stock price for personal gain and for the continued “growth” and maintenance of a major corporation. Of course, many investors were badly hurt financially by this gross fraud and there are many suit pending against the healthcare giant and it disgraced CEO.
Stock fraud is all too common in corporate America. Nefarious executives and stockbrokers collude to create situations that benefit their profits and huge bank accounts to the detriment of the common man. Sadly, Richard Scrushy was recently, Scrushy was acquitted of all 36 counts of fraud against him, most notably the single count of the violation of the Sarbanes-Oxley Act – the requirement of a CEO to certify earnings and then to be culpable if they are false. This therefore casts doubt on the enforceability of the law which may mean more problems like that of HealthSouth, Enron and WorldCom and more major accounting fraud to come.