Healthsouth Accounting Case

870 Words 4 Pages
HealthSouth is a public company who has been registered under Section 12 of the Securities Exchange Act of 1934 (Title 15, United States Code, Section 781) and is required to file periodic financial reports under Section 13(a) of the Securities Exchange Act of 1934 (Title 15, United States Code, Sections 78m(a) and 78o(d)).
In preparing its income statement, HealthSouth deducted the contractual adjustment from its gross revenues to get net revenues, which were reported in the periodic financial reports and filed with the U.S. Securities and Exchange Commission. Since generally accepted accounting principles claim any increase in revenue or decrease in expenses on the Income Statement should be in accordance with either an assets increase or
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The investors and lenders in 1990s concentrated less on the profitability of the company they invested in but concerned more on the revenue. In seeking for more capital contributions, company’s growth speed of placed a crucial rule. In order to meet the expectation on Wall Street, the managements of HealthSouth felt great pressure to keep the company expending. The less rigorous legal system also provided a hotbed for the later illegal activities. “If accounting procedures and policies did not directly violate Generally Accepted Accounting Principles (GAAP), then they were considered legal, and in turn, morally and ethically adequate.” This allowed Scrushy, CEO at that moment, made HealthSouth meet the expectations by using creative accounting methods and ultimately fraudulent accounting. Driven by this eagerness to achieve the expectations, Scrushy and five HealthSouth CFOs manipulated their earnings numbers. Since there was a gap between the actual condition and the expectation, the CEO alleged his employees to fix related accounting numbers and to “fill the gap” by overestimating insurance reimbursements, fiddling with fixed-asset accounts, improperly booking capital expenses, and overbooking reserve accounts to inflate company’s income and assets. They even created relevant documents to conceal the fraudulent behavior from external auditors. The management of the company had a clear idea that that the auditors’ threshold, which means they would look over any transactions whose amount happened was over $5,000. The employees just moved small amounts of money at a time, based on this knowledge. The forensic auditors from PwC revealed that $2.5 billion fraudulent entries were made through the year 1996 till 2002, $500 million in improper goodwill accounting and acquisition items from 1994 to 1999, and

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