Question

HeathSouth is American’s largest provider of out-patience surgery and rehabilitation services. It owns or operates over 1,800 facilities across the country and serves 70 percent of the rehabilitation market. It was founded in 1984 by Richard Scrushy, a former respiratory therapist who believed the efficient one-stop shopping could be applied to the health care industry. From the time it went public in 1986, the Birmingham, Alabama, firm exceeded Wall Street Expectations, a pattern that would continue for the next 15 years. In 1992 Scrushy aggressively began to acquire other clinics, and HealthSouth stock soared 31 percent annually between 1987 and 1997.

            Scrushy cut a charismatic figure; the headquarters housed a museum dedicated to his achievements. He flew his own jet, mingled with celebrities, and sang with a band. For his third wedding in 1997 he chartered a plane to fly 150 guests to Jamaica. His workers knew him as King Richard.

His management style impressed many analysts. Fortune magazine described him in 1999 as executing his ideas brilliantly, and said he was

a taskmaster and micromanager . . . Scrushy honed his technique . . . centralizing every piece of data imaginable. Every Friday a stack of printouts detailing the performance of each facility landed on his desk; when any one of them had a problem, Scrushy pounced . . . HealthSouth managed everything out of Birmingham: construction, purchasing, billing, even personnel. While this kind of top-down management may sound impossibly bureaucratic, Scrushy’s troops made it work efficiency. Needed supplies and authorizations arrived within 30 days. Administrators who couldn’t hit budget targets were fired. Says Scrushy “We can call ‘em and tell ‘em, ‘Jump through hoops! Stand on your head.’”

However, behind the scenes was a pattern of institutionalized fraud. By the third quarter of 2002, the $8 billion company had overstated its assets by $800 million. According to testimony, the fraud began shortly after the company went public when Scrushy wanted to impress Wall Street. If the results were not what he expected, Scrushy would allegedly tell his staff to “fix it.” They would then convene what came to be known as a “family meeting” to adjust the figures, a process they called “filling the gap.” The internal accountants kept two sets of books – one with the true figures and one that was presented to the outside world.

HealthSouth was able to keep up the deception in a number of ingenious ways that systematically fooled outside auditors. One scheme involved what are known as contractual adjustments. Sometimes the government or insurer would not fully reimburse a facility for the amount charged to a patient. The amount would be subtracted from gross revenues. In typical double entry accounting, any loss of revenue has to be balanced by an increase in liabilities. HealthSouth simply failed to enter the liability amount. They also posted regular expenses as long-term capital expenditures and billed group therapies as single person sessions. They routinely inflated the value of their assets. The practices were pervasive but individually so small that they rarely met the threshold levels that would signal review by an outside auditor. The inside accountants were careful to make sure the adjustments were uneven and dispersed around the country so they appeared realistic.

Five HealthSouth accounting employees have been convicted of fraud. Four did not receive prison sentences, though. Their lawyers argued threat they were obeying orders, subject to constant intimidation, and relatively low on the organizational chart. The judge declared at sentencing that although three held the rank of vice president “These four were essentially data entry clerks, regardless of their job titles.”

Scrushy was fired by the board on March 31, 2003. On November 4, 2003, Scrushy was indicted for securities fraud, money laundering, and other charges. He had maintained through-out that he was unaware of the illegal accounting practices. Yet, he was secretly recorded saying that he was worried about “fixed up” financials. As part of the Sarbanes-Oxley Act of 2002, an executive has to certify the company’s financial reports. Moreover, in August of that year, Scrushy signed that he had reviewed and endorsed HealthSouth’s 2001 annual report and the second quarter reported for 2002. He claimed on CBS’s 60 Minutes program in October 2003 that he had signed because he trusted the five chief financial officers who prepared the figures. In June 2005, an Alabama jury cleared Scrushy of all charges. In May 2009, former HealthSouth investors sued him for fraud and on June 18, 2009, Scrushy was ordered to pay $2.87 billion in damages. Scrushy appealed the judgment and lost the appeal.

1A) Is it fair to hold a CEO responsible for any and all actions of a company? Consider that Scrushy was not an account and that the outside auditors Ernst & Young did not detect the fraud. If he were not involved, should he still be held accountable?

1B) Would it have been appropriate for employees to blow the whistle in this case? Was there imminent harm to people? What would be an appropriate motive for whistle-blowing, and how much proof do you believe the employee would have needed to be credible?

Answer 1

1. AS the senior executive officer of the corporation , the CEO must be held responsible .If he or she can claim the credit for the sucessful operation , then blame must be taken for the unsucessful one. Kne lay at the enron pursued the same " ignorant defense" , but the cahin of command required that the CEO be kept informed of all key decision in the company. Scrushy also appeared to take pleasure in being recognized as a micromanager, the definition of which is that he would have his fingers on every aspect of the organizations operations.

2. There was no evidence that any patents were harmed in this case. -it was all about cooking the books. however the evidence of massive accounting fraud would still have warrented the attention of the necessary regulatory authorities. Given how well the fraudlent transaction were hidden, the action of the whistelbower would have been the best opportunity to bring this case to light. those authorities would have needed evidence of systematic fraud. the over billing effictevely raised cost for medicare and HMO,S which in turn effected everyone. If this was not sufficent ethical motivation for a whistelbower,the prospect of claiming part of the fraud settlement from the goverment as a reward should have been.