background of healthsouth way of fraud reason of scrushy being acquitted ethical issues effects...

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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Q & A