Before the Sarbanes-Oxley Act, in health care frauds, it has been the companies that have paid large settlements and the executives responsible have walked away with their profits. However, with this Act, executives are now personally responsible for any misstatements. The main objective of the Sarbanes-Oxley Act was to “enhance corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraud” (sec.gov/about/laws.shtml). “This Act requires that Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) in every annual report that they have reviewed the report and that it does not contain untrue statements or omissions of material facts, and are personally responsible for any misstatements”. HealthSouth
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Whenever the actual results fell short of Wall Street’s expectations, Scrushy would instruct his senior accounting personnel to “fix it.” Instead of increasing earnings directly, they inflated earnings by decreasing a contra revenue account, called “contractual adjustment,” and by decreasing expenses (Contractual adjustment is a contra revenue (i.e., revenue allowance) account that estimates the difference between the gross amounts billed to the patients and the amounts that healthcare insurer will pay for the treatment). They were convinced that this will not be detected by HealthSouth’s independent auditor first, the amounts booked to this account are estimated, then, there is a limited paper trail and finally, it’s more difficult to verify than other revenue …show more content…
However, under HealthSouth’s control system, each invoice received is entered into a computing system, which first conducts a computer audit and then creates a report as it generates checks for payment. To circumvent the control system, the fraud perpetrators used manual entries in a computerized accounting system. They waited until monthly operating reports were completed by the computer. After the reports were completed, they imputed false transactions elsewhere in the computer system, which were later merged into consolidated corporate statements. Moreover, they created false increases in assets to cover up the inflated earnings. Earnings before taxes and minority interest for 2001 were overstated by as much as 4,700%.
The perpetrators in the fraud had a good mastery of GAAP. This is the reason why they were able to make the false entries appear to be routine entries that complied with GAAP. When Ernst & Young’s auditors reviewed the accounts payable and other accounting functions, they did not detect anything out of the ordinary in the accounts payable function. Ernst & Young’s officials insisted that fraudulent actions by such a significant portion of management made it much more difficult to detect than it would have been in a company with a less pervasive environment of fraud surrounding the top management team.
Whenever the actual results fell short of Wall Street’s expectations, Scrushy would instruct his senior accounting personnel to “fix it.” Instead of increasing earnings directly, they inflated earnings by decreasing a contra revenue account, called “contractual adjustment,” and by decreasing expenses (Contractual adjustment is a contra revenue (i.e., revenue allowance) account that estimates the difference between the gross amounts billed to the patients and the amounts that healthcare insurer will pay for the treatment). They were convinced that this will not be detected by HealthSouth’s independent auditor first, the amounts booked to this account are estimated, then, there is a limited paper trail and finally, it’s more difficult to verify than other revenue …show more content…
However, under HealthSouth’s control system, each invoice received is entered into a computing system, which first conducts a computer audit and then creates a report as it generates checks for payment. To circumvent the control system, the fraud perpetrators used manual entries in a computerized accounting system. They waited until monthly operating reports were completed by the computer. After the reports were completed, they imputed false transactions elsewhere in the computer system, which were later merged into consolidated corporate statements. Moreover, they created false increases in assets to cover up the inflated earnings. Earnings before taxes and minority interest for 2001 were overstated by as much as 4,700%.
The perpetrators in the fraud had a good mastery of GAAP. This is the reason why they were able to make the false entries appear to be routine entries that complied with GAAP. When Ernst & Young’s auditors reviewed the accounts payable and other accounting functions, they did not detect anything out of the ordinary in the accounts payable function. Ernst & Young’s officials insisted that fraudulent actions by such a significant portion of management made it much more difficult to detect than it would have been in a company with a less pervasive environment of fraud surrounding the top management team.