background of healthsouth way of fraud reason of scrushy being acquitted ethical issues effects...
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HEALTHSOUTHPresented by Section 4 Group 6:
074043 Ng Man Hon074054 Yip Ka Yu074088 Wong Hor Yan Una
CONTENTBackground of HealthSouthWay of FraudReason of Scrushy being acquittedEthical IssuesEffects on StakeholdersRecommendationWhat did we learn?Conclusion
BACKGROUND OF HEALTHSOUTH
Richard Scrushy – Chief Executive and
Chairman
Aaron Beam – Financial Controller
FOUND IN 1984 BY…
BACKGROUND OF HEALTHSOUTH
1986• Went public in NYSE
1990s• Largest rehabilitation service provider• In 1989, earliest fraud described
2002• Fraud exploded…
INCIDENT…
2002Aug - CFO Weston Smith whistled
the SFC about manipulation of profits
1st CEO being charged under SOX
2003Mar - FBI & SEC commenced
actions against HealthSouth & CEO Richard Scrushy
Sentencing started later
INCIDENT (CONT’D)…
Fraud amount: US$2.5 billion
New estimated: US$4.6 billion
2004 28th June
Judgment Day
2005
INCIDENT (CONT’D)…
Richard Scrushy:Not Guilty and
Dimissed 5 CFOs & 10
Accountant Staff: Fined & Imprisoned
• Alter contra value• Falsify assets
accountsHow?
• Meet analyst expectation
• Maintain stock priceWhy?
WAY OF FRAUD
WAY OF FRAUD (1)
• Alter contra value• As “contractual adjustment”• Altering difference between gross charges to patients
and the amounts insurers would reimburse afterwards
Earnings
Contra value
WAY OF FRAUD (2)
Falsify Fixed Assets
Accounts
False journal entries
False supporting documents
Minimum suspicion from
auditors
AP Summary
BREAK-DOWN OF FIGURES
Manipulation of Profits, $2.5
billion
Acquisition accounting, $0.5 billion
Improper ac-counting prac-tice, $1.6 bil-
lion
Total Fraud Amount, $4.6 billion (about HK$36 billion)
MORE OF THAT…
Ex-employee
Fraud done since late 1980s
MORE OF THAT…• SFC gave up chasing back as evidence not
available
• Persuasion in 1997 by Aaron Beam Rejected by Scrushy
• Split Plan to hide fraud in 1999 and 2002
REASONS FOR
SCRUSHY BEING
ACQUITTED
• Overabundance of prosecution documents
• but no clue to make Scrushy guilty1. Documents
• The juries are not like those in metropolitan areas who are more skeptical
2.Location
• Scrushy was a respected figure in local• perceived as local boy made good3.Figure
REASONS FOR SCRUSHY BEING ACQUITTED
REASONS FOR SCRUSHY BEING ACQUITTED (CONT’D)
• focused on his religious devotion• he donated one million dollars to local
congregation• as a white, he joined a black congregation
4.Defense strategy
• 7 blacks and 5 whites• All from working class5. The jury
• Attacked the former CFOs’ credibility• by treating them as liars and cheats
6. Defense team
ETHICAL ISSUES
ETHICAL ISSUES
1. Meeting Wall Street analysts expectations– Actual results vs. Expected results by Wall street
analysts– If shortfall, Scrushy order management to ‘fix it’ by
making false entries
Excuse to commit fraud
Lack of legality
(illegal & violated accounting standard)
ETHICAL ISSUES (CONT’D)
2. Conflicts of interest– Fraud -> kept good numbers to Wall Street – Stock price stay up– Made millions of profit by selling stock
For own interests
but harmed stakeholders’ interest
Public interest vs. self-interest
ETHICAL ISSUES (CONT’D)
3. Finding ways to hide the fraud, e.g.a) Reduced some of the money which was not
there by write downs during takeoversb) Declared larger losses than it actually incurred in
1998c) Looked for ways to reduce Wall Street
expectations (no need to inflate profits as much in future)
d) Plan of Splitting the company up & sale of assets
Pushed HealthSouth deeper into fraud
ETHICAL ISSUES (CONT’D)
4. The five CFOs & Accounting executives- On a slippery slope (continue the fraud)- Persuade Scrushy to abandon the fraud- Scrushy refused, they quitted and left HealthSouth
Lack of integrity and fiduciary duty
Mistakenly use of competence
Should blow whistle on Scrushy and not just leave
ETHICAL ISSUES (CONT’D)
5. Mr. Scrushy (CEO)- Leader of the fraud- Demanded management to fix the number- Refused to abandon the fraud- Found ways to hide the fraud
Lack of fiduciary duty and integrityWhen fraud broke out
Claimed no knowledge of the fraudoffered to give evidence in return for immunity
Unethical
ETHICAL ISSUES (CONT’D)
6. Ernst and Young Auditors - Failed to discover the fraud (even there were many
warning signs)- E.g. 1999- 2000, growth of 143% in income before taxes
and minority interest , but sales increased only 3%
7. KPMG Tax Accountants- Failed to discover the fraudulently claimed earnings when
doing its tax returns Lack of competency and fiduciary dutyProfessionals must be due diligent and
objective, and being alerted to special changes.
EFFECTS ON STAKEHOLDERS
EFFECTS ON STAKEHOLDERS - DIRECTLY
Shareholders• Capital Lost• Lost Confidence
Suppliers• Lost of the customer• Bad debts may be
occurred
Customers (Patients)• Received improper treatment• Paid overcharged price• Spend time on finding new
company
EFFECTS ON STAKEHOLDERS - DIRECTLY
Creditors• Might have bad debts
Employees• Dismissed• Might suffer penalty
and/or sentences
Company• Deal with the court suit• Spend long time to re-
build the customers’ confidence
EFFECTS ON STAKEHOLDERS - INDIRECTLY
Investors• Capital Lost• Lost confidence for further
investment decision
Government• Deal with the law suit• Set up more regulations• Regular review
Insurance Companies
• Deal with over-paid insurance
Other Companies in the same industry
• Lost of revenue
RECOMMENDATION
RECOMMENDATION
• Securities and Future Commission (SFC)– Pay attention to any abnormal movement of the
shares’ price– Analyze company’s annual report– Require additional information if necessary
• Other authorization (e.g. CPA)– Enhance the regulations– Set up examination to test whether the members performed
properly– Establish workshops
RECOMMENDATION
• Internal Auditors– Perform regular internal audit– Perform special internal audit when it is necessary– Reduce weaknesses
• External Auditors– Perform external audit analysis– Additional audit analysis and testing– Provide qualified opinion if client refuses to co-
operate
RECOMMENDATION
• Company’s Accountants– Comply with code of ethics and other accounting
principles– Top management support– Force employees to read– Review regularly
• The Board– Set up independent team for investigation– The team members do not have relationship with
suspected employee– Team members change regularly
WHAT DID WE LEARN?
The Slippery Slope• http://www.youtube.com/watch?v=Wbhpglz
muFg&feature=related
WHAT DID WE LEARN?
• How dangerous a slippery slope could be– Once start a fraud -> continue -> find ways to
cover the fraud– Push yourself deeper into fraud
• Before making ethical decisions– think of Consequences and impacts
• Public interest vs. Self-interest
CONCLUSION
1. Want to sell stock at higher price Human nature
2. Justify the value of company3. Analyst expectation not a magic wand4. Honest management environment5. Non-selfish spiritual leader 6. Fearless, courageous and sensible staff
“You have to stand up - or you'll be the guy that goes to prison and pays
the price.”
REFERENCE
Sites:http://www.google.com.hk/images?q=aaron+beam&hl=zh-TW&rlz=1B3RNFA_enHK229HK231&um=1&ie=UTF-8&source=univ&ei=EHLATJ51hslxv4Os7gs&sa=X&oi=image_result_group&ct=title&resnum=3&ved=0CDIQsAQwAg&biw=1440&bih=707
; photo of Aaron Beam searched through google and source from www.cnbc.com
http://money.cnn.com/2005/06/28/news/newsmakers/scrushy_outcome/index.htm for photo of Richard Scrushy
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