Fraud of Healthsouth Company - Case Study Example

Introduction HealthSouth is the largest US operator of rehabilitation hospitals, but now it is under investigation for the overstatement of their earnings by $2.5 billion each year. Former CEO Richard M. Scrushy, including fifteen HealthSouth employees and all five former chief financial officers, are alleged to be involved in this fraud case. Before 2003, the HealthSouth Company was playing very well in the competitive market. They have a huge market share and stakeholders in many of the other countries. Other companies have to bear the prominence and the dominance of the HealthSouth Company in the market. The growth of the company was so fast that market analyst were predicting that this bubble will burst somewhere in the future and same thing happen in 2003, when all the accounts fraud come in the spotlight. It was evident that the CEO Scrushy and the accounts manager are fully involved in this fraud but all this happen under the direction of the CEO. Explanation of the Fraud of HealthSouth Company Crews in his publication gave ten bad truisms regarding different situations in the business organizations. These truisms are named as bad truisms just because of the reason that all of these factors are the cause behind any unethical or unfavorable situation, which is problematic for the company and the employees. The situation of fraudulent case of HealthSouth Company can be analyzed using these truisms. First Truism: “People are obedient” (Crews 4). According to Crews (4) mostly people want to do whatever their manager or the higher authorities order them to do. In this way, managers can even take the advantage of the obedience of the people. Usually managers offer certain kinds rewards and incentives thus employees are impressed and can do even unethical acts just for the sake of those rewards. Same is the situation with the Scrushy’ employed people. He as the CEO of the company ordered his people to fill the gaps of the financial reports and the balance sheet by using some of the illegal tools and tactics. The CFOs from the HealthSouth as well as their staffs follow Scrushy’s instructions, which cook the books in order to make the balance sheet look good and attractive (Voreacos and Davidson 2). Therefore we can say that usually people are very obedient to their boss or the executives; they follow their commands without considering the consequences. Scrushy wants to make money irrespective of the legal or illegal nature of accounting techniques. The CFOs and the accounts department were obedient and did the financial fake transactions for HealthSouth, without considering any single thought. Scrushy and his team did all this just to meet the expectations and the standards of the Wall Street (Helyar, Cherry and Neering 3). The finance managers would report the company’s financial attitude to Scrushy every month. If Scrushy found their profits are not matching with the target standards of Wall Street then Scrushy ask them to fill the holes of the balance sheet (Helyar, Cherry and Neering 2). Some of those CFOs knew they should not use fake data to make the balance sheet look good, but they still obeyed because it was an order from their CEO, the top ranked personality of the Company. According to one of the CFOs each one realized the blunder of his ways, but most of them felt helpless to blow the whistle or even leave the company(Stuart 56). The HealthSouth outrage occurred because the highest or we can say top ranked person of the company, the executive officer was asking his subordinates to meet his demands by any means. Second Truism: “Business decision, operations and relationships are complex and difficult to navigate” (Crews 6). According to Crews (6) managers, consider profits against ethical concerns on a regular basis. Usually the CEO are giving the justifications that we are at the initial phase of the business and thus we can do it and later we will balance the ethical concerns (Weld, 903). Similarly Scrushy the CEO of HealthSouth felt pressure to meet the expectations of Wall Street. His pressure influenced the decision making process of the business. Scrushy said the HealthSouth had just started, he wanted to ensure that their reputation in the Wall Street remains high. He commands his subordinates to do everything for showing the profitability in the financial reports. Sometimes it is easy to start, but it is hard to stop. When people use a lie to cover the truth, they will use another story to modify the lies. Scrushy’s simple decisions finally lead to a huge scandal in business. An improper decision will make the company in an unexpected crisis even face bankruptcy. The employees were obeying the orders of the Scrushy but after allegation, all of them surrender. Scrushy did not think about the consequences while he was making the illegal order, he only wanted to keep his property not devalue. Scrushy enjoyed the feeling that the huge wealth brings to him (John, Brenda, and Patricia 56). One of the reasons that cause the downfall of the HealthSouth is Scrushy’s greed. Scrushy believes that he deserves the entire honor, because he is “successful”. Scrushy has the absolute power to makes decision and operates the whole company because of his position of CEO. Richard Scrushy used rewards and threat manages his subordinates and staffs in order to complete his decision, but he ignored the business ethics, which is doomed to the failure of the company. Third Truism: “Ineffective internal and external oversight also contributes to ethics scandals” (Crews 10). According to Crews (10) stakeholders perceptions have real consequences for businesses and other organizations. People should pay the price even if they make a small mistake (Mokhiber and Weismann, 1). Scrushy believes that he build reserves without concerning ethics. The first quote reflects the basic business concept in HealthSouth. If somebody commends a misdeed, he/she should go to jail. However, the managers in the HealthSouth despite the law even little children know this simple rule. Scrushy and the CFOs of the HealthSouth Company thought they had to build up the reserve of the company regardless of what strategy or method. Scrushy did not allow anyone to violate his decision and does not accept anyone’s suggestion. Therefore, when someone stands out and question Scrushy, he would get punished. The internal management insight and external oversight created a gap between the employees and the managers. The ineffective audit reports of Ernst & Young LLP failed to identify the financial irregularity or loopholes in the financial statements of the HealthSouth center. The low-level efficiency on part of Ernst & Young LLP caused the continuance of the fraud and finally led to the more serious consequence. Therefore, in this case, the auditor is also responsible for the negligence in their work. That is one of the reasons why the business scandal happened. Scrushy wants his company to perform good and meets the expectations of the Wall Street. As the first quote above, the Wall Street only cares about the result, and process is meaningless. Hence, Scrushy thought he could not let the Wall Street down, and in this kind of business fraud case, the company would loss a huge number of assets once the stock price went down. In addition to make the stock exchanges look good, Scrushy wanted to satisfy his ambitious and maximum his wealth. The pressure from the Wall Street and social public motivated Scrushy to steps over the line. Fourth Truism: “Some managers are inconsistent in what they say and do” (Crews 3). John Workman is a good counter-example for the HealthSouth case. John Workman said he and his staffs will operate the company by using a non illegal tool. Workman says and he keeps his word. However, on the contrast, Scrushy’s action was contributed to a paradox. Apparently it looks that Scrushy and his company were working for people selfless. Nevertheless, the inside of the HealthSouth were doing the dirty thing, which hurt the shareholders when the society knew accounting scandal in 2003. If the manager is a liar, his/her staffs will not better off. Scrushy’s unethical behavior led the company fell into terminal decline. It is obvious that Scrushy’s behavior is inconsistent. A leader in the company affects the staffs a lot, no matter whether it is a good effect or bad effect. Scrushy is the CEO of HealthSouth, but his word and his behavior run in the opposite direction. The CFOs and their staffs worked together to cheat the society because their leader did not be a positive role models. On the surface, HealthSouth was a health and well-received company, but in fact, the inside of the company was corrupt. All five CFOs in the companys history have admitted to cooking the books. Eleven guilty pleas admitted they worked illegally for King Richard. All five CFOs also admitted the business fraud they did (John, Brenda, and Patricia 3). Scrushy’s inconsistent behavior influenced the CFOs and other staffs, which led them cheat to the shareholders and the Wall Street. If the CEO of a company did the wrong thing, it would bring a bad effect to all the employees and the whole company. As a result, Scrushy’s inconsistent behavior is one of the main reason that why HealthSouth scandal occurred. Lies will not always exist, people will expose lies ultimately. Consequences of Fraud to Important Stakeholders At the top of affected stakeholders, the company HealthSouth itself exists. The Court has alleged the successful and highly growing company as the bankrupt due to the accounting fraud case. This actually ruined the name of the company. The HealthSouth Company has to pay $3 million to the court as allegation charges. After the allegation of the Company in 2003, the company started the working from the beginning and it is kept under strict observation from the higher authorities so that they may not involve in any other illegal act. After the company, the auditors of the HealthSouth Company have to bear the loss of their name because of the allegation that they are mutually involve in the company’s accounting fraud. The reason behind this allegation is that the auditors do not highlight any of the fraudulent transaction in the financial reports. The shareholders of the company have to bear the loss because the share prices of the company fall down at once after this unethical incident. However, some of the employees are involved in the unethical acts but all of the employees have to bear the loss because their professional career is now stained because of the part of the fraudulent company. All the other companies, which are involved in the business with the HealthSouth Company in different geographical areas, have to bear the uncertain loss because of at once stoppage in the business processes after the allegation form the court. Lessons Learned There are some ethical lessons, which we should learn from the fraud case of the HealthSouth Company. Creative accounting in the financial reporting is not always good for the company. Usually it is said that creative accounting techniques can make a good impact of the financial reports of the company but HealthSouth prove it wrong. All the auditing firms should critically review the financial reports of the company otherwise; they may be struck in any fraud case like the HealthSouth Company. An audit firm also reviews the financial reports of the HealthSouth Company but they took it casually and were unable to pinpoint any of the fraudulent reporting in the reports. Therefore, that audit firm is also considered as the part of the fraud. According to some analysts, the reason behind the fraud case of the HealthSouth Company was the failure of leadership of Scrushy, unethical and illegal mistakes or we can say blunders of the company management. Therefore, the new ventures should go for a leadership and management that are ethical and impressive so that they can take the wise and timely decisions. Otherwise, it may not sounds good that leadership or the management is the cause behind company’s downfall. ‘Works cited’ ‘Timeline of Accounting Scandal at HealthSouth’, Washington Post (2004), Web access 11 October 2014 Castellano, Joseph & Lightle, Susan ‘Using Cultural Audits to Assess Tone at the Top’, The CPA Journal, (2005): 6-11. Crews, Sandra ‘Top Ten Tragic Truisms’ Handout: Management 3200, (2014), Elliot, Carol. ‘HealthSouth Former CFO and Whistleblower to share insider view of the scandal’ Mendoza College of Business. (10 April 2013), Web access 11 October 2014 Helyar, John, Brenda, Cherry & Patricia Neering, ‘The Insatiable Kind Richard’ Fortune, (2003), Web access 11 October 2014 Mokhiber, Russell & Weismann, Robert, ‘Multiple Corporate Personality Disorder: The 10 Worst Corporations of 2003’, Multinational Monitor, (2003): 9-21. Smith, Weston ‘Lessons of the HealthSouth Fraud: An Insider’s View’ Issues in Accounting Education, (2013), page 901-912 Stuart, Alix, ‘Keeping Secrets: HealthSouth’s Tranquil Alabama Headquarters Masked A Dysfunctional Corporate Culture’, The Birmingham News, (June 2005), 11 October 2014 Voreacos, Davidson, ‘Former HealthSouth executive describes deception and abuse’, Bloomberg News, (February 18): E04. Weld, Leonard, Peter, Bergevin & Lorraine Magrath, ‘Anatomy of Financial Fraud: A Forensic Examination of HealthSouth’, The CPA Journal, (2004): page 44-49 Read More