HealthSouth Discussion Questions
Incentives for Fraud
1. Your textbook discusses the concept of the fraud triangle in Chapter 5. At the top of the triangle
is the concept of incentives and pressures. Both Weston Smith and a previous CFO of
HealthSouth (Aaron Beam) make references to the pressure from Wall Street to “make the
number” and how that pressure contributed to the climate of fraud at HealthSouth. Discuss the
role of Wall Street in encouraging accountants in this role (CFO and similar positions within the
corporation) to violate their ethical standards.
2. Do you think that optimism played a meaningful role? Smith indicated that in the relatively early
stages of the fraud, the company was growing rapidly and he thought the growth would provide
the opportunity to correct the fraudulently reported numbers in future years. Discuss how this
optimism might lead a CFO to go along with pressures to misrepresent the company’s financial
results. Is (was) that appropriate?
3. How large a role do you think the prestige of being the CFO of one of the fastest growing
Fortune 500 companies played in Smith’s decision to participate? That is, do you think that in
the beginning, Smith may have agreed to go along because of the value he personally placed on
having such a high profile job? What about later on? Smith made several references to the
concept of “golden handcuffs” during his presentation. What did he mean by that term and how
did it keep him from walking away from HealthSouth when his superiors pressured him to
commit even greater levels of deception?
Red Flags
4. Consider the HealthSouth case in the context of William Black’s explanation of “control frauds.”
First, did HealthSouth constitute a control fraud? If so, what kind of control fraud was it?
Explain.
5. Imagine that you were an auditor for HealthSouth, either internal or external. Aside from the
analytical procedures that the audit teams presumably performed on the company’s accounts,
what red flags should perhaps have been apparent to the company’s auditors that additional
attention should have been paid to the possibility that management was misleading them?
6. In retrospect, what do you think about the idea that all the members of the management team
in the accounting department were prior employees of the outside audit firm? What about the
fact that every member of the company’s management team was promoted from within?
Overview
7. After watching Weston Smith’s presentation (video will be available on Wednesday), how would
you assign responsibility for the HealthSouth fraud? How would you characterize Smith’s role in
the fraud? What lessons would you draw from his story?
8. As you know, Mr. Smith was sentenced to 27 months in federal prison and a $7 million fine. He
served 14 months in prison and 3 months in a halfway house upon his release. Do you think his
punishment was adequate for his crime(s)? What other costs has he paid in connection with the
role he played in the HealthSouth fraud?