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HealthSouth Scandalby Mason Sakoda
BUS-206-Q3590 Business Law I 15EW3
HealthSouth Introduction
• Leading provider of medical
rehabilitation
• More than 2000 locations
• Focused on economic
enrichment
• known for accounting fraud
Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth
History
• Founded in 1984 by Richard
Scrushy
• Became a publicly traded
company in 1986
• Grew by acquisition
Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth
The Start of a Scheme
Wallstreet Expectations
• By 1991, market analysts giving
positive stock evaluations
• Between 1995-1998, stock
increased by 250%
• Accountants match optimistic
profit projections to prevent
falling stock prices.
Ethics and Fraud at HealthSouth: Lessons from Inside a
Corporate Meltdown. (2011). Retrieved January 20, 2015,
from https://www.youtube.com/watch?v=R_K7bQpDJzg
Accounting Fraud“Fix” the Numbers
• If actual earnings were short, Scrushy told management to “fix
it”
• “Family meetings” were convened
• Accounting entries to reflect increased assets and decreased
liabilities
• Necessary to comply with GAAP
Detection of Fraud
HealthSouth and Scrushy under radar
• Scrushy accused of insider trading
• Scrushy’s lavish lifestyle goes public
• HealthSouth Headquarters raided by FBI agents
By the Numbers
• Securities Exchange
Commission(SEC) had
been investigating
HealthSouth for awhile
• By 2002, overstated
earnings by $1.4 billion
and assets by $800 million
• In 2002, sworn statements
required when submitting
financial reports.
Overstated by 4700%
Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth
Civil Action Lawsuit
• In 2003, SEC filed
accounting fraud in
federal court against
HealthSouth
• First time Sarbanes-
Oxley Act was enforced
• Violated sections of the
Securities Act of 1933
and Exchange Act of
1934
SEC(2012, August 10) Securities Exchange Act of 1934. Retrieved from http://www.sec.gov/about/laws/sea34.pdf
Morals and Ethics
• A company’s morals and
ethics start with each
individual
• Crime starts with small
compromising ideas
• You have the power to
stop fraud before getting
sucked in to it
Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth
References
HLSsettlements(2014, April 8) HealthSouth Securities Settlement Funds. Retrieved from
http://www.hlssettlement.com/healthsouth/docs.htm
B. Dooley, D. Gordon, M. Shachem(2013, July 10) Section 17(a) of the Securities Act of 1933: Unanswered
Questions. Retrieved from http://www.jdsupra.com/legalnews/section-17a-of-the-securities-act-of-1-59190/
SEC(2012, August 10) Securities Exchange Act of 1934. Retrieved from
http://www.sec.gov/about/laws/sea34.pdf
Assosiated Press (2003, March 20) SEC charges HealthSouth with $1.4 billion fraud. Retrieved from
http://www.sptimes.com/2003/03/20/Business/SEC_charges_HealthSou.shtml
Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth
Wikipedia (2015, February 3) Securities Act of 1933. Retrieved from
http://en.wikipedia.org/wiki/Securities_Act_of_1933
Any Questions?