The Scrushy Way: Fraud in Health Care Organization - Research Paper Example

?The Scrushy Way: Fraud in Health Care Organization Introduction HealthSouth CEO Richard Marin Scrushy was founder of HealthSouth Corporation established in Birmingham, Alabama, in 1984 (Romero, 2003). HealthSouth operates a chain of rehabilitation hospitals and employs some 3,500 in Birmingham alone. It has centers in about 50 US states and became popular for linking the names of its famous patients from Shaquille O'Neal, Michael Jordan, Roger Clemens, Jack Nicklaus, Tara Lipinski, Troy Aikman, to Lucio Carlos Cajueiro Souza to the hospital advertisements and campaigns (Jennings, 2006). In two years, it was able to grow with assets close to $100 million and by early 1990s, HealthSouth has revenues of more than $181 million (Jennings, 2006). Scrushy was described as extravagant, charismatic, and was popularly known as “an executive who ruled by topdown fear, threatened critics with reprisals and paid his loyal subordinates well,” (Abelson and Freudenheim, 2003, 1). In the commission of accounting fraud within the company, Scrushy has maintained his innocence and instead accused his executives, even his dead personal accountant (Jennings, 2006). Accounting fraud is often deliberate as described by his staff. Through scheming manipulation of showing good intentions, Scrushy was able to influence his staff of over-recording sales revenue, charging of services that were never made, as well as commission of conflict of interest by having his own companies transact business with HealthSouth. In addition, the assets of the company were also bloated to make it appear that it remains big in the eyes of stakeholders. Case Summary HealthSouth owned the largest chain of rehabilitation hospitals and clinics in the US. Scrushy was also one of the highest paid chief executives with HealthSouth’s 2,000 facilities in the United States, Puerto Rico, Australia and the United Kingdom (Jennings, 2003). Unethical practices within the company was said to have started brewing by 1989 when an internal auditor was fired for pointing out financial problems within HealthSouth (Matulich and Currie, 2008). By 1991, Medicare alleged illegal practices of adding costs to reports for outpatient and inpatient rehabilitation. While Scrushy denied the allegations, the company paid Medicare $7.9 million fine after overcharging Medicare for computers sold by Scrushy’s own G. G. Enterprises to HealthSouth (Matulich and Currie, 2008). During the ongoing prosecution, Scrushy was, “Accused of orchestrating an elaborate scheme that spanned seven years and generated $2.7 billion in imaginary profits, Scrushy now faces charges ranging from conspiracy to securities fraud to false certification. But it is crimes like the latter, covered under the new Sarbanes-Oxley Act, that could cost him the most,” (Davis, 2003, 2). Employees who were aware of disparities in HealthSouth’s records disclosed that Scrushy manipulated incomes in order to inflate earnings per share (Jennings, 2006). By 1998, Scrushy made over $108 million from sales of stock, which violation was seen as illegal insider trading (Matulich and Currie, 2008). Aside from overbilling, the company was also accused of billing for services it never provided and delivering poor care. Patients were allegedly treated without formal plan of care, using trainees and interns as well as unlicensed therapists in paid care services (Jennings, 2005; Matulich and Currie, 2008). Scrushy was found to have his own several companies that did extensive business with HealthSouth. Various revelations of the board members include a director earning $250,000 per year for a consulting contract that run for seven years; a joint investment venture of another director with Scrushy on a $395,000 investment property; another director awarded of $5.6 million worth of contract to install glass as a hospital building; medical supplier MedCenterDirect that did business with HealthSouth owned by Scrushy and six other directors; the audit committee and compensation committee as being the same directors since 1986; and another director receiving $425,000 donation to his charity prior to going on the board (Jennings, 2005, 372) and this was seen as gross negligence, and a judge declared the actions were “compromising ties to the key officials who are suspected of malfeasance,” (Jennings, 2005, 373). Gross negligence in US corporate law constitutes a high degree of recklessness and disregard for legal duty (Smith v. Van Gorkom, 1985). Scrushy was accused of conflict of interest for being chief executive of HealthSouth and at the same time, conducting business with it. Scrushy was indicted of 85 counts of conspiracy, money laundering, securities fraud, and mail fraud by the US Securities and Exchange Commission but he was acquitted in 2005 (Jennings, 2008). However, another case was filed four months later in October 2005 accusing him of 30 counts of money laundering, extortion, obstruction of justice, racketeering, and bribery and convicted for bribery, mail fraud and conspiracy in June 2007. He was sentenced six years and ten months in prison as well as ordered to pay $267,000 in restitution to United Way Alabama, and a fine of $150,000. Another case filed in May 2009 had a judge order Scrushy to pau $2.87 billion in damages (Davidson, 2009). It was also reported that 15 of the HealthSouth executives pleaded guilty when charged, among them William Owens, Weston Smith, Michael Martin, Malcolm McVay, Aaron Beam, Angela Ayers, Cathy Edwards, Rebecca Kay Morgan, Virginia Valentine, and Emery Harris (Jennings, 2005). Impact on Stakeholders One of Birmingham’s business personalities commented during the raid of Health South that, “HealthSouth is a very significant presence both in terms of jobs and economic impact…The fact that the F.B.I. had to raid HealthSouth obviously shocked a lot of us, but it wasn't totally surprising because the problems there had been building for some time,” Dave Adkinson, president of the Birmingham Regional Chamber of Commerce, said in an interview (Romero, 2003, P 4). There has been a high degree of distrust and doubt that was built among investors and stakeholders on the many cases of accounting fraud and misappropriations conducted by executives in the recent years. This has implicated many executives, mainly founders like Scrushy, Kenneth Lay of Enron, Bernard Madoff, and many others. Loss of investor confidence usually follows many lawsuits and bankruptcies as publicly listed companies and corporations previously doing well were suddenly found to be engaged in fraudulent activities. Usually, accounting frauds are involved where bloated assets and incomes were committed to attract more investors as well as conduct stock sales of which insider-trading is a goal. Aside from investors, the ones affected the most with fraudulent activities gone public are employees who have devoted not only their time, commitment and resources to these companies but also their loyalty and hard work. In the end, many stakeholders end up as losers because the executives are implicated, investors, the public and employees defrauded. However, there were also stakeholders such as beneficiaries of Scrushy’s so-called generosity of which one was John J. McMahon Jr., president of the board of trustees of the University of Alabama. He said, “Many charities have had to deal with the issue of having well-respected donors that didn't have the background you thought they did… 'There are not a lot of people here that have the capacity or desire to be generous on that level… I'm a long way from accepting that these charges are true because this is already unfortunate for the entire community,” (Romero, 2003, P 2). On the economy, the recent surge of fraudulent activities exposed led to the downward spiral of the economy, not only in the United States where many of these fraudulent activities happened but also around the world due to the interconnectivity as well as global operations of businesses. It is like a domino effect when one chip falls, and others followed. Katona (1975) suggested that investor confidence is very important in the macroeconomic sense due to the role many investors such as the regular or majority of them who may not be investing big amounts but collectively, can translate to a bigger chunk of the national or even global investment. With the integration of digital technology with many investment companies, investor confidence has become more important than ever due to the immediate proliferation of negative information via the internet. Where investors feel they need to move immediately before losing probable incomes, they move swiftly in the flick of their fingers to salvage whatever they can. Many events where investor confidence fell, there was what they call bursting of bubble, economic downward spiral, economic crisis, and so forth. Quotes like “stocks plummeting” fill the news, print or online and broadcast. Outcome and Fairness of Punishment In the Medicare allegations, HealthSouth agreed to pay the government $325 million in 2004 to settle the allegations. In the first trial case of Scrushy filed by the SEC, manipulative moves were undertaken by Scrushy and his family in order to influence the jury. It has been said that in the case United States of America v. Richard M. Scrushy, many executives of HealthSouth testified against Scrushy. However, Scrushy and wife joined the Guiding Light Church composed mainly of African Americans, prayer rallies and religious shows, and this has influenced the juror composed of 11 African American out of 18 jurors (Whitmire, 2006). The outcome of a subsequent lawsuit had Scrushy and former Alabama Governor Don Siegelman guilty of bribery, extortion, obstruction of justice, conspiracy, and mail fraud. Scrushy bribed the former governor for a seat at the Certificates of Need Review Board that reviewed hospitals and approved construction. He was sentenced of six years and ten months in prison as well as a total fine and restitution fees of $417,000. In another trial in Birmingham Alabama, Scrushy was made to pay $2.87 billion in damages by Judge Allwin Horn (Davidson, 2009). He also paid $31 million to HealthSouth, and $81 million to the US Securities and Exchange Commission (Davidson, 2009). It was the goal of the prosecution to recover every amount of money that should be returned to HealthSouth. However, despite the seemingly positive outcomes of the cases filed against Scrushy, the effect on HealthSouth is still negatively staggering for it was predicted to file for bankruptcy. Joel Gordon, the interim chairman was quoted saying, “While there are natural tensions that arise in any negotiation process, today's action we believe is a very public tactic by the holders of these notes to try to extract greater value at the expense of other stakeholders…We will continue to do what is right for the benefit of all HealthSouth stakeholders,” (Davis, 2003). It meant another uphill journey for the executives and staff of HealthSouth despite the status it has achieved the previous years and expansion it has gained. While shares of stock were reported to have increased slowly by the first quarter of 2011, by May, it was already reported that HealthSouth was selling six acute care hospitals to pay off debt. The expected sale amounts to about $120 million although the sale is said to be outside the company forecast of earnings per share to be at $1.28-$1.33. Aside from paying off debts, proceeds of the sale will be used to finance retirement at 10.75 percent of senior staff. Acute care hospitals in Las Vegas, Texas, Sarasota, Pittsburgh, Mechanicsburg and North Louisiana were targeted for sale (Reuters, 2011). Overall, the punishment and outcomes of the case of Scrushy should be carefully reviewed. Where HealthSouth started as his own, all identifying incomes and properties or assets of Scrushy that went well beyond his lawful income should be returned and be paid for in order to sustain stakeholder confidence not only on the laws of the land but to its leaders and other business executives who are doing their best to provide and earn honestly on their capacity. Conclusion The frauds committed by the executives are all manifestations of greed. Scrushy’s case was not very different from the bigger ones before him such as Madoff’s or Enron’s: accounting frauds are very possible and connivance with the right auditors, executives, and accounting firms can easily lead to defrauding the public and other stakeholders but most especially investors. Accountants are provided too much power to be left on their own. Most of the time, these fraud cases were discovered too late to unravel the huge damages done. In all cases, there was always the involvement of an accountant or an auditor. This point out to the fact that numbers can easily lie and that no matter how charitable or seemingly righteous a person can be, they are also like numbers: mere representations of what they want to be understood. Beneath, there is a questionable presence of another reality. The question remains on the regulatory bodies, laws and policies that protect stakeholders: from the consumers up to the investors. Where individual perpetrators of illegal acts are not properly accounted and made to pay for their negligence, fraudulent actions, and other irregular activities, there will be a continuing trend on the part of others who have witnessed the events surrounding Scrushy to try and get away with it. It is about time that policy-makers will take into consideration that stakeholders are not only the executives of corporations but also consumers, the public, and the small but many investors. Reference Abelson, R. and M. Freudenheim. (2003). The Scrushy Mix: Strict and So Lenient. The New York Times, April 20. Accessed June 2011 from http://www.bloomt-hal.com/chapter6/scrushy.pdf Davidson, Laurence Viele (2009). HealthSouth’s Scrushy Liable in $2.88 Billion Fraud (Update 3). Bloomberg. Accessed June 2011 from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a89tFKR4OevM Davis, Melissa. (2003). Scrushy's Prognosis Looking Worse Than HealthSouth's. The Street, November 10. Accessed from http://www.thestreet.com/stocks/melissadavid/10125323.html Jennings, M.M. (2006). "Innovation Like No Other". The Seven Signs of Ethical Collapse (annotated ed.). New York: St. Martin's Press. Jennings, M.M. (2005). Business Ethics: Case Studies and Selected Readings. Southwest. Katona, George, Psychological Economics, Elsevier, 1975. Matulich, S., Currie, D. (2008). Richard Scrushy: The Rise and fall of the King of Health Care". Handbook of Frauds, Scams, and Swindles: Failures of Ethics in Leadership (Illustrated ed.). CRC Press, June. pp. 315–351 Reuters. (2011). HealthSouth to sell 6 acute care hospitals for $120 million. May 18. Accessed from http://www.reuters.com/article/2011/05/18/healthsouth-idUKL4E7GI26F20110518?type=companyNews Romero, S. (2003). The Rise and Fall of Richard Scrushy, Entrepreneur. The New York Times, March 21. Accessed June 2011 from http://www.nytimes.com/2003/03/21/business/the-rise-and-fall-of-richard-scrushy-entrepreneur.html Smith v. Van Gorkom (1985). 488 A.2d 858 (Del.Sup.Ct. 1985). Whitmire, K. (2006). Ex-Governor and Executive Convicted of Bribery. New York Times. Accessed from http://www.nytimes.com/2006/06/30/us/30verdict.html. Read More