HealthSouth Corporation - Case Study Example

Lecture Section Number TA’s INTRODUCTION In 1984, Richard Scrushy found HealthSouth Corporation and established its headquarters in Birmingham. However, the company went public in 1986. HealthSouth had an independent section which was it is headquarter whose governance was under the control of Scrushy and his associated directors. The company was formed with a motive of providing surgical services to outpatients and offer rehabilitation services. Within a period span of 10 years that is in 1996 it had accumulated wealth worth $12 billion. To outsiders, this was a massive growth. However, there was massive internal fraud that amounted to $2.7 billion, which became known in 2003. For the company to expectations of earnings, actual financial records we manipulate and “fixed” with non-existing accounting entries that ranged from unaccounted expenditures, insurance payments that were overestimated and price entries of assets were set higher than the normal price. This continued until 2003, when Weston Miller informed federal investigators about the internal fraud. After the investigations, those who had involved themselves in the fraud turned themselves in, including William Owens who was the current CFO at that time. The fraud went to light in 2003 but since 1984 to 2002, the account of HealthSouth us under the auditing of Birmingham, office of Ernst & Young. This raised an alarm to shareholder who alleged that that was a long period span of auditing to fail to have recognized any element of fraud. As a result, investor it was also liable to investors of HealthSouth. EXPLANATION OF HEALTHSOUTH FRAUD People are obedient In a conventional work environment, people are always obedient. Majority of the managers tend to abide on what their manager tell them provided the command source seems to be legitimate. Therefore, if they are inclined, the managers tend to manipulate their employees to carry out questionable or unethical things when the obedience is mixed with the rewards. Employees may fail to realize that the managers are asking them to carry out unethical or illegal things. However, when the workers tend to realized that the instructions of the managers are not appropriate, the workers need to decide on ways of handling the situation. Out of fear and financial desperation, employees tend to follow the dictatorship of their manager even whey suspect or figure out the actions of the suspects are not right. Sometime the workers might attempt to look for other jobs just to avoid the ethical dilemmas. In very rare cases, few of the workers might be a whistleblower, which rarely end up being not well for them. As they are normally mistreated by the coworkers and organizations. Generally, the worker follow the guideline of the managers, however they need to question the dictatorship of the managers. Organizations are different. some of the participants were too obedient to obey command and engage themselves in facilitation unethical behaviors. Our case study focuses on Beam. He was an accountant by profession and was recruited by Scrushy in 1980. His successor, Michael Martin, also followed Beam’s footsteps. Being the company’s CFO, he never questioned anything and neither did he testify against Richard Scrushy. Due to his acts of obedience, he fostered fraud within the organization. In summary, obeying commands from superior people landed them into problems but money laundering and fraud continued leading to collapsing of HealthSouth. HealthSouth’s operations and objectives, in providing their medical care services, were different from other medical corporations. They provided medical and clinical in order to make profit rather than to meet the needs of the community. This is clearly evidenced by corporations like Sun Healthcare and Columbia/HCA. All the activities they carried out were directed at making profit. Sun Healthcare put up health therapies center because they realized that it had demand from patients. It was not driven by the desire to assist community but by making profit. However, when demand for therapies went down, Sun had to dismiss therapist since there was no money to pay them. In addition, the home based care offered to keep people at the homes instead of institutions, was shut down when funding for these services reduced (Fridson and Fernando, 5). As a result, patients, under this care, were left to nurse themselves. We conclude that different organizations are different in their operations, objectives, goals and generally, in how they execute their operations. People do what they are rewarded to do and typically avoid doing what can lead to punishment Both the internal value and external factors influence the behavior of workers in any situation. Some of the reward systems include recognition, promotions, money, and status. On the other hand the potential punishments influence greatly compared to the action of the employees. Generally, the employees tend to be ration and carry what they are meant to do. Consequently, assuming the managers offers incentive to encourage questionable and unethical activities, many workers will embrace that to gain rewards. The employee watches their fellow employees and their managers in learning what is being rewarded and significant at their firm. Again, the supervisors and managers may decide for their employees to carry themselves ethically. However, the workers will pay attention to the action of the managers and their rewards compared to misaligned words. Even the ethical employees may do bad things. Under the correct circumstance, people tend to cut corners, steal, cheat, and lie. The employees tend to be pressured by the external and internal needs such as family problems, financial burdens, and addictions. Additionally, desperate employees find themselves doing desperate things. In summary, the goal settings, competition, and reward may be appropriate mechanisms in shaping the behavior of employees; however, they come up with unethical and unexpected consequences. The second act of instance of truism was that there was inappropriate ethical tone set by top officials in HealthSouth. Richard Scrushy, the CEO of HealthSouth was charismatic and egotistic. Upon dawning of a fiscal quarter when financial report of HealthSouth was to be evaluate to see if they met Wall Street expectations, Scrushy persuaded his accountant, Beam, to manipulate and alter the accounting records so that they meet Wall Street’s expectations. To cover up for this unethical act, Scrushy hypocritically began demonstrating act of civic generosity. Both him and his wife began making donations and began religious preaching on public media. Business decisions, operations, and relationship are complex and difficult to people In a business setting, priorities deemed to be legitimate tend to conflict, and the supervisors make decision without adequate and perfect information. The managers of a firm tend to weigh the profit against the ethical concerns on daily basis. Unluckily, most companies focus on short terms concerns rather than the success measures. Similarly, most companies need a concern for the long-term profitability and reputation. The conflict between the productivity and worker safety offers a perfect example. In summary, working safely normally undermines the productivity and efficiency. In many work settings, workers take time in putting n protective gears like gloves and goggles. Therefore, some of the task that makes sure the safety of the activities reduces their productivity. While the productivity and efficiency of the workers are important, the safety of workers is among the long-term interest of the company. While taking note of the ethical concerns, the local operations of the business are complicated. However, the business decisions, relationships, and operation are difficult and complex. The business operation also affects the stakeholders. Therefore, operating in an ethical manner is within the international context. Ken Liversay, in his life history he had been and was working for HealthSouth. He confesses saying that he would download the true earning of the company into his computer and make necessary adjustments that meet an analyst’s earnings. It is clearly evidence that he had a lot of wealth estimated to be $760 000. Ken Liversay was conservative but unethical in making adjustment of the real income to suit his needs (Rodengen, Jeffrey, and Melody, 21). One can therefore conclude that the wealth he had was not genuinely amassed but through unscrupulous means. Finally, misleading and flawed accounting reports does a great disservice to managers and workers since they need correct information to make better decision for the organization. The above-mentioned happenings are discourteous behaviors that much contributed to the HealthSouth’s fraud. Ineffective internal and external oversight also contributes to ethics scandals Stakeholders are meant to hold the business accountable and managers for their actions. In real sense, auditing, labor union, and regulatory weakness contribute to ethical scandals. For instance, board of directors of the company is easy to manipulate when the supervisors withhold crucial information. The stakeholders lack the expertise, time, and accurate data in holding the executives accountable. In addition, the investors and consumers lack complete and accurate information required to make investing and purchasing decisions. Additionally, the investors and consumers have confined mechanism in holding the companies accountable when anything goes in bad direction. For any company to succeed there must exist stakeholder and other third party organizations that will propel the company to achieve its dreams and objectives (Crews, 3). For HealthSouth Company, some of the prominent companies and people that were involved are discussed as follow. For any company to succeed there must exist stakeholder and other third party organizations that will propel the company to achieve its dreams and objectives (Crews, 3). For HealthSouth Company, some of the prominent companies and people that were involved are discussed as follow. Ernst & Young Company audited the accounts of HealthSouth for a period of 18 years, since 1984 to 2002. However, it is as if Scrushy used to bribe the auditing firm for 18 years is a long period for fraud cases to have not been revealed (Beam, 8). In addition, reports indicate that it is CFO is who notified federal organanistion about the ongoing fraud and not Ernst & Young. The second prominent body involved was the Federal departments and organizations. Their main role was to investigate fraudulent claims within HealthSouth corporations. This company audited the accounts of HealthSouth for a period of 18 years, since 1984 to 2002. However, it is as if Scrushy used to bribe the auditing firm for 18 years is a long period for fraud cases to have not been revealed (Beam, 8). In addition, reports indicate that it is CFO is who notified federal organanistion about the ongoing fraud and not Ernst & Young. The second prominent body involved was the Federal departments and organizations. Their main role was to investigate fraudulent claims within HealthSouth corporations. CONSENQUENCES TO IMPORTANT STAKEHOLDERS The end result of the fraud was not welcoming to some parties that we involved. For as much as HealthSouth succeeded in maintaining its cash flow, it had a challenge of retaining the doctors in hand. Surgeons complained of late payment. Many felt that their future jobs were at stake and wanted to leave. However, through persuasions and negotiations the company promised to be accountable for the welfare of the doctors. On the other hand, some scavenging company the HealthSource bonds and posed threats to make the company bankrupt. As a result, HealthSource had to pay more than the value of the bond in order to redeem them from this scavenging company. Moreover, after a shareholders meeting in 2005, HealthSouth had to sell some of its divisions. This was because, the new Medicare regulations had adversely affected their profit margin in 2006 (Stanwick, Peter and Sarah, 18). The second stakeholder was Michael Martin. He was the successor of Mr. Beam. This accountant was obedient to Scruchy’s command. In addition, he was unfaithful and because of this, he was found guilty of contributing to fraudulent activities. His fate was that he was imprisoned for 3 years and charged with fine and penalties that amounted to $2 450 000. The third stakeholder, Mr. Beam was a CFO in HealthSouth when the frauds began. His earning amounted to $500 000 per year. By involving himself with the scandal, he ended up in prison washing urinals. Moreover, he was fined $285 000 and lost his job. After prison, he opted to work as a flower gardener since, according to him, it was satisfactory. The ringleader of the fraud, Mr. Richard Scrushy never escaped unpunished. All those who were taken to court testified against him. As a result, there being no evidence to prove him innocent, he was sentence to prison. Records indicate that on 28th of June, 2007, Scrushy taken to a federal prison where he spent 82 months. The sentence also compelled him to not resume any duties of a CEO for three years. He was supposed to pay $267 000 in restitution and a penalty and fine of $150 000. As a prisoner, he was under the order of working 500 hours for the community. HealthSouth was initiated with a motive to provide nursing and home-based care to its patients. Following the fraud, many patients have lacked this medical support and have had to find is elsewhere. LESSONS LEARNED Lesson one learnt is that people and or organization have varied thought and motives of doing thing. From our case study, one realizes that Ernst & Young Company had the sole responsibility of auditing the books of account of HealthSouth. In case of any act of fraud, they were supposed to air it out. However, for 18 good years this had never happened. With coming of CFO like Williams, all fraud claims were brought to light. One therefore concludes that companies like Ernst & Young simply saw the fraud and kept silent but Williams revealed it. This is because these two entities had different ways of doing things. The second lesson learnt is that is wise and good to obey our superiors in any given organizations. However, the obedience level should not be too much to tolerate some unethical acts. This is because when outcomes of a wrongdoing affect the executives, they will also affect them who supported these executive. This is clearly illustrated by Beam who was imprisoned because of fraud against Scrushy; he was too obedient to do all that Scrushy told him. The third lesson learnt is that, it is always good to be ethical is what one does. Unethical acts not only demoralize ones reputation but also have major impacts to those one is associated with. Ernst & Young Company was the internal auditing firm of HealthSouth. However, it did not perform its duties as expected by the shareholders of HealthSouth. In the end, it lost their confidence. Finally, those who unethically supported fraud, the CFO’s, ended up in jails, ruining their public image. Works Cited Crews, Sandra M. “Top Ten Tragic Truisms” Handout. Management 3200. Fall 2014. Aurr, Peter. 108-1 Hearing: The Financial Collapse of Healthsouth, Part 2, Serial No. 108-59, November 5, 2003, *. S.l.: s.n., 2004. Print. Beam, Aaron. HealthSouth: the wagon to disaster. Fairhope, Ala.: Wagon Pub., 2009. Print. Beasley, Mark S.. Auditing cases: HealthSource. 3rd ed. Upper Saddle River, N.J.: Pearson/Prentice Hall, 2006. Print. Carroll, Archie B.. Business Ethics Brief Readings on Vital Topics. Hoboken: Taylor and Francis, 2013. Print. Cast, William. Going south an inside look at corruption and greed, and the power of the Health South message board. Chicago, Ill.: Dearborn Trade Pub., 2005. Print. Fridson, Martin S., and Fernando Alvarez. Financial statement analysis: a practitioners guide. 4th ed. Hoboken, N.J.: Wiley, 2011. Print. Matulich, Serge, and David M. Currie. Handbook of frauds, scams, and swindles: failures of ethics in leadership. Boca Raton, FLA: CRC Press, 2009. Print. Peat, Susan. The business book on 5 top hospital corporations: Columbia/HCA, HealthSouth, Magellan, Tenet, Vencor. Washington, DC: Atlantic Information Services, 1997. Print. Rodengen, Jeffrey L., and Melody Maysonet. The story of HealthSouth. Ft. Lauderdale, FL: Write Stuff Enterprises, 2002. Print. Stanwick, Peter Allen, and Sarah D. Stanwick. Understanding business ethics. 2 Ed. New York: Oxford, 2006. Print. Read More