Business Ethics

INTRODUCTION

The HealthSouth scandal is a clear illustration of unethical conduct in a manner that was deliberate in its accounting fraud. The accounting fraud involved many individuals that was part of the management team, including the CEO Richard Scrushy. According to the University of Wollongong (2009) fraud has become so significant to prosecutors that billions of dollars have been directed toward fraud since the mid-1990's.

The investigation focused on utilizing a forensic audit to determine the extent of the fraud, while utilizing other individuals involved in the scandal to testify against Richard Scrushy. The audit would determine which audit protocols were taken previously, including who conducted the audits and what were their findings. In lieu of the audit findings, a determination could be made on how the previous auditing consultant failed to identify the accounting mishaps. The forensic audit utilized by prosecutors were able to identify multiple areas of accounting fraud, improper audit protocol and even more instances of corporate irresponsibility.

Most importantly, this is the first case where the Sarbanes-Oxley Act would be utilized since its inception following the Enron scandal. All key aspects of this Act are in direct correlation to the accounting fraud violations that occurred at HealthSouth, therefore this case should provide for a simple prosecution. Unfortunately, that was not the case and Richard Scrushy was found not guilty on over 30 charges associated with accounting and corporate fraud. Based on the decision of the jury it was evident they did not see him guilty of a crime, but it was clear that his conduct was unethical on the highest level.

HEALTHSOUTH CASE

HealthSouth was founded by Richard Scrushy and four others in 1994. It became one of the largest corporations in the area of rehabilitative healthcare services in the United States, with locations in every state and several foreign countries and an estimate of over 45,000 employees. Scrushy was known for demanding a significant amount of control during his tenure at HealthSouth, while serving as Chief Executive Officer and Chairman of the Board (Taylor, 2005). HealthSouth grew through continued acquisitions of other related facilities, and by ambitious financial accounting to acquire investor funding through shareholders.

Healthsouth's Executives inflated earnings well into the billions of dollars, which led to an increase in stock prices. By falsifying their earnings Executives could increase their draws as a result. (Taylor, 2005). The level of sophistication and cover up were of large scale proportions in this fraudulent accounting scandal (Piotrowski, 2004). According to Galloro (2003) prosecutors asserted that HealthSouth's tax department falsified tax documents to conceal the fraud within the corporation.

It was revealed later that HealthSouth practices relative to accounting were misrepresented dating back to the early 1990's. The U.S. Department of Justice and the SEC both identified over a billion dollars of inflated earnings. These figures were obtained through an audit conducted by the SEC, and information obtained by the Justice Department throughout the investigation process of the other Executives involved. As a result, the SEC made formal charges against Richard Scrushy and HealthSouth for accounting fraud (Weld, Bergevin & Magrath, 2003).

Following filing of charges, officials utilized outside auditors to provide an assessment of

accounting scandal and the extent of the abuse that had occurred. Following completion of an extensive auditing process it was determined that their earnings were overstated somewhere between three billion to four and a half billion dollars. In addition, other findings associated with this accounting scandal revealed another one billion dollars of abuse (Weld, Bergevin, & Magrath, 2004).

According to Healthcare Financial Management report in 2003 it was revealed that bankruptcy is very likely based on the financial condition of the Corporation. It was reported in the New York Times that the corporation is working to cut costs and stabilize operations in an attempt to avoid filing for bankruptcy. The New York Times also reported that the company's debt exceeded its value by over one billion dollars.

During the assessment of HealthSouth's Corporation it was determined that the board did not effectively fulfill its responsibilities from an oversight and governance standpoint. Lack of organizational structure and improper delegation was attributed to the board's inability to effectively carry out its mission (Piotrowski, 2003). Mr. Scrushy's inappropriate relations to the board through business dealings, and an over extended time as Chairman of the Board and CEO solicited too much control over the organization. It was evident that independent review through the board and committee structure failed to serve its intended purpose.

The case involving Richard Scrushsy is likely to have a long lasting effect on corporate responsibility, and will be utilized for years to illustrate a specific example of corporate abuse Piotrowski, (2003)

As a result of the indictment, the SEC sought to freeze the personal assets of Mr. Scrushy, whose lawyers argued that his living expenses and attorneys fees demands an estimated 120 million dollars. The SEC sought the option to freeze his funds, because the accounting fraud was well over 2 billion dollars. (Ambrosia & Kilpatrick, 2003).

It was evident that Richard Scrushy and his upper level executives had clearly demonstrated multiple instances of accounting fraud. With testimonies and an audit that provided evidence to support a conviction, the prosecution's case was "highly convictable". The result of the case ended with a not guilty decision on all the counts that were brought forth. It appeared that the case was not as solid as perceived, because all the nuances associated with the new Sarbanes-Oxley Act had not been tested (Brickey, 2006).

The prosecution was not able to link Mr. Scrushy to most of the documentation that was associated with the accounting fraud scandal. Therefore, Scrushy's attorneys argued that he was unaware of the actions of his management team, and all the fraud occurred without him being aware of it. His attorneys argument proved to be valid as it related to the Sarbanes-Oxley Act, because the jury felt there was not enough evidence to convict him on any of the charges filed (Taylor, 2005).

AUDITING HEALTH SOUTH

Audit consultants

...