1 Summary The Rise and Fall of the Scrushy Empire became a landmark case. HealthSouth became one of the first companies to be charged under the provisions of the Sarbanes-Oxley Act, which was passed by Congress in 2002. Richard Scrushy, the former CEO of HealthSouth, worked in the respiratory therapy field for a short time. While working as a respiratory therapist, he realized that diagnosing and treating elderly patients was extremely profitable. Scrushy began to open private clinics that would provide the same treatments but at a lesser cost than hospitals. In 1984, Scrushy started Am Care which would later become known as HealthSouth. By 1998, Scrushy had acquired almost 1900 center in over 50 states. Scrushy cunningly manipulated the loopholes in the reporting of financial statements to the Security Exchange Commission. Scrushy ordered his employees to fix it, which meant do whatever is necessary to match or exceed wall street expectations for a profitable company. The accountants used several different tactics that wouldn’t raise red flags to external auditors. After several unnamed letters, pointed out accounting irregularities. Below is a timeline of events: • • • • • 1998 - HealthSouth’s auditor, Ernst & Young, received an anonymous letter identifying accounting irregularities. 2002 - Chief financial officer Weston Smith resigned from HealthSouth so he would not be forced to sign inaccurate financial statements. 2005 - The criminal trial of Richard Scrushy began in Birmingham, Alabama. HealthSouth was one of the first companies to be charged under the provisions of the Sarbanes-Oxley Act, which was passed by Congress in 2002 2005 - after 21 days of deliberations, the 12-person jury found Richard Scrushy not guilty of all 36 criminal charges. The jury stated that the government did not do a good job of presenting evidence that was beyond a reasonable doubt that Scrushy was guilty. CFO Owens’s statements about Scrushy’s involvement in the fraud after it was disclosed that Owens was late filing his tax returns and lied about a HealthSouth loan of more than $1 million While several ex-CFO’s were convicted, Scrushy was found to be not guilty of knowing what his employees where doing, nor did he advise them to do anything that would be considered illegal. His downfall came later with a conviction of bribery. Scrushy was also ordered to pay back 2.88 Billion, by way of a civil lawsuit with HealthSouth shareholders. According to the Security and Exchange Commission (SEC), Scrushy met with HealthSouth’s senior officers each quarter to go over the firm’s actual earnings. Scrushy then compared the actual earnings with what the market was expecting for the quarterly earnings. If the actual earnings were not as high as the expected earnings, Scrushy ordered the senior managers to “fix it.” Scrushy denied this allegation to Mike Wallace during a 60 Minutes interview. (Stanwick, 2016) Analysis MAROON TEAM: Sara Escamilla, Tawanna Espree, Kendri Horace, Sheila Ortega-Calvillo, & Diamond Viser 2 Analyze the case and include in your analysis all textbook chapters that are significantly relevant to this case. Relevant chapters may include those that have already been assigned according to the syllabus and those that have not yet been assigned. Explain why the chapters are relevant, including major points covered in the chapters. Create a separate paragraph for each chapter being analyzed with the chapter number in bold as a heading. This chapter analysis must be separate from the summary. Identify the major players in the HealthSouth Fraud, including the names, titles, charges, and results. MAJOR PLAYER Richard Scrushy TITLE Former CEO of HealthSouth CHARGES 85 criminal counts. Government would only prosecute 55, which included: conspiracy to commit fraud, filing inaccurate financial statements: and securities, mail and wire frauds. RESULTS Scrushy did not have any evidence against him as the main player in the fraudulent acts. Denied all allegations Ernst & Young 1998 HealthSouth auditor Accused by HealthSouth for failing to discover fraud during Scrushy employment. Reputation was damaged for being for its connection to HealthSouth. Was one of the first to notify Earnest & Young of accounting irregularities. Michael Vines Cathy Edwards Former HealthSouth bookkeeper Vines supervisor No charges Pled guilty to Committing Securities & wire fraud. This whistleblower started a domino effect which led Ernst & Young’s to take action and review financial documents once again. Altered accounting-relating documents, falsified assets & invoices. Directed bookkeeper to alter financial documents. MAROON TEAM: Sara Escamilla, Tawanna Espree, Kendri Horace, Sheila Ortega-Calvillo, & Diamond Viser 3 Unknown HealthSouth patient Filed complaint to Medicare for unqualified personnel and financial reimbursements requested by HealthSouth for services not performed. HealthSouth offered to pay DOJ $150 million to settle. Government refused shortly before accusing HealthSouth of $3 billion in net income falsifications. Complaint led to DOJ involvement Sentenced to 36 months in prison. Pleaded guilty to fraud. Michael Martin Former CFO Paid a fine of $50,000.00. Forfeited $2.4 million obtained through fraud. Why did it take so long for the fraud to be discovered? HealthSouth was able to carry on fraudulent acts beginning shortly after it went public in 1986, for such a long time because they manipulated reported numbers where it was easiest to do so. Ordered by Scrushy, accountants and senior managers would fix the accounts to match the quarterly expectations, instead of the firm’s actual earnings. Scrushy’s urge to always make sure HealthSouth met or exceeded Wall Street’s expectations only encouraged his actions. By making small adjustments the accountants were able to manipulate the accounts without raising any red flags. Some accounts were easier to adjust than others. The contractual adjustment account was impossible to verify the amount of money to that was to be there (in the account), therefore this accountant was the go-to for the fraudulent activity to take place. This was the easiest method because the account is only used to estimate the variance between the amount billed to a patient and the amount insurance will pay. (Stanwick, 2016). Accountants also had to take things a step further and manipulated asset accounts, by adjusting the fixed asset account of plant and equipment, they were able to increase the asset levels. The accountants then had to produce falsified invoices to support the manipulations from the fixed adjustments. (Stanwick,2016). If HealthSouth’s auditor Ernst & Young, would have never been tipped off by notifications and anonymous identities through letters (including information given by former bookkeeper Michael Vines), the irregularities could have gone on for much longer than they did before Medicare, the SEC and the DOJ got ahold of them. Identify the stakeholders in the case. Explain the impact of the fraud on each of the stakeholders. MAROON TEAM: Sara Escamilla, Tawanna Espree, Kendri Horace, Sheila Ortega-Calvillo, & Diamond Viser 4 The main stakeholders of HealthSouth included management, auditors, shareholders, employees, the patients, tax authorities, stock analysts, investors, and shareholders. i. Management: Some managers were sentenced to prison, five former CFO’s were charged with accounting fraud, and eighteen former HealthSouth managers were charged between 2003 and 2005. ii. 3 Why do you think Richard Scrushy was acquitted of all charges related to the HealthSouth fraud? The prosecution did not have enough physical evidence showing Scrushy’s direct interference or knowledge of wrongdoing. The case was weak, most of the prosecution’s evidence was hear say. Not enough actual proof presented. Do you think it is feasible for Scrushy not to have known about the fraud, if all CFOs admitted to it? Explain. Is it feasible for a CFO to commit fraud without the CEO being a part? Explain. I do not believe it is feasible for a CFO to commit fraud without the CEO knowing or being involved in some way. Scrushy would do anything to uphold the financial expectations of his company. During the trial, he claimed that he signed off on financial documents he was given under the assumption they were accurate; however, as CEO it was his due diligence to review the documents accordingly. (Stanwick, 2016) Despite, Scrushy’s defense, there were several former members of upper management testified that Scrushy has given instructions, even if indirectly, to alter earnings. In fact, former CFO, Michael Martin, testified that Scrushy specifically told him to inflate the numbers. In addition, former CFO, Tad McVay, stated that he was told by Scrushy that all companies manipulate financial statements. Scrushy has continued to deny stating this and continued to claim that CEO’s had the most to gain by fudging numbers because of their bonuses and incentives. Regardless of this, Scrushy had an obligation as CFO to review the documents he was signing and should still be held accountable. Based on his actions, Scrushy would go to any lengths for financial gain and acted unethically. Update the case. Where is Richard Scrushy today? Be sure to cite your sources. It is safe to say that Scrushy lost it all after his conviction. In 2009, a judge ordered him to pay $2.8 billion to settle the civil lawsuit if HealthSouth shareholders. His family was forced to sell most of their belongings and downgraded to a smaller suburban home. Scrushy completed his prison sentence in 2012 and moved to a halfway house in Houston, Texas. He completed his sentence and subsequent probation in 2017. (Stanwick, 2016) In January of 2017, Scrushy sought a pardon from President Obama citing judicial misconduct in the Middle District of Alabama. In his letter to former President Obama, Scrushy claimed that he and Governor Siegelman Governor Siegelman were improperly charged and convicted with federal funds bribery and honest services fraud. (Scrushy, 2017) MAROON TEAM: Sara Escamilla, Tawanna Espree, Kendri Horace, Sheila Ortega-Calvillo, & Diamond Viser 5 Today, Richard Scrushy is an author, speaker, and consultant. According to his website, Scrushy serves as a commercial instrument multiengine pilot, a musician and a songwriter in his spare time. (Scrushy 2019). He resides with his wife and has nine children and six grandchildren. His website clearly lists his highest achievements in his 30-year career and boasts about his impressive business dealings. It does not provide details about his conviction. MAROON TEAM: Sara Escamilla, Tawanna Espree, Kendri Horace, Sheila Ortega-Calvillo, & Diamond Viser 6 Works Cited Stanwick, P. A., & Stanwick, S. D. (2016). Understanding business ethics. Los Angeles: SAGE Publication. Scrushy, R. (n.d.). Biography. Retrieved October 5, 2019, from https://richardscrushy.com/biography/ Scrushy, R. (2017, January 12). Richard Scrushy Seeks Pardon. Retrieved October 5, 2019, from https://richardscrushy.com/richard-scrushy-seeks-pardon/. MAROON TEAM: Sara Escamilla, Tawanna Espree, Kendri Horace, Sheila Ortega-Calvillo, & Diamond Viser
