HealthCare South PPT

Case : Health South – Can 5 CFOs Be Wrong : 

Case : Health South – Can 5 CFOs Be Wrong By: Juan Carlos Salinas Acct 6300

Health South Corporation : 

Health South Corporation

Health South Biography : 

Health South founded in 1984. Grew to become the largest provider of outpatient, diagnostic, and rehabilitation services in the United States. By 2003, it owned or operated over 1800 different facilities with worldwide revenues and earnings of $4 billion. Health South stock trades on New York Stock Exchange symbol, (HRC). Health South Biography

Health South Core Services : 

HealthSouth is one of the nation's largest healthcare services providers with facilities nationwide. Our vast network of highly skilled physicians and clinicians working with the latest equipment and technology guarantees that all patients have easy access to high quality healthcare. Health South Core Services Inpatient Rehabilitation Outpatient Rehabilitation Long-Term Acute Care Hospitals Home Health Rehabilitation Technology

Health South CEO, Richard M. Scrushy Role : 

Richard M. Scrushy, who founded Health South, served as its Chairman and CEO from 1984 to 2002. He relinquished the CEO title on August 27, 2002, but reassumed it on January 06, 2003. Health South CEO, Richard M. Scrushy Role

Richard M. Scrushy, CEO - Profile : 

The major Scrushy-directed Health South fraud is not the first or only one to take place in Scrushy’s companies. Earlier frauds, bankruptcies, or questionable business dealings are part of history of several companies owned at least in part by Scrushy and/or Health South, and controlled by Scrushy with interlocking boards of directors links to Health South. Richard M. Scrushy, CEO - Profile

Richard M. Scrushy, CEO – Cont’d : 

It is alleged, however, that Scrushy began to fix earnings in the early 1990s, and it is evident that he became involved in questionable business dealings during the same time frame. Significantly, the people involved with Scrushy in these and other questionable dealings were often current and/or former Health South board of directors. Scrushy, however, appears to have been the common link among the corporations involved. Richard M. Scrushy, CEO – Cont’d

SEC v. Health South Corporation and Richard M. Scrushy, CEO : 

The U.S. Security and Exchange Commission filed accounting fraud charges against HRC and CEO, Richard M. Scrushy also charges with knowingly miscertifying the accuracy and completeness of the company’s financial statement. SEC v. Health South Corporation and Richard M. Scrushy, CEO

Sarbanes – Oxley Act of 2002 : 

Sarbanes – Oxley Act of 2002

Health South SOX Violations : 

Clarification of the roles, responsibilities, and accountabilities of the board of directors, its subcommittees, of the board themselves, and the auditors Reduction of the conflicts of interest influencing the directors, executives, and auditors so that they would exercise loyalty, independence judgment, and objectivity in the best interest of the shareholders or the company; or in the case of the auditor, in the public interest. Ensure that the directors were sufficiently informed on the corporate plans and activities, the adequacy of the company policies and internal controls to ensure compliance, and actual compliance, including whistle-blowers concerns. Health South SOX Violations

Health South’s SOX Violations Cont’d : 

Ensure that directors possess adequate financial competence and other expertise where required. Ensure that financial reports were accurate, complete, understandable, and transparent. Ensure that accounting standards are adequate to protect investor’s interests. Ensures that the regulation and oversight of auditors of the public companies, as well as their appointment and operating parameters, are adequate and appropriate to serve the public interest. Health South’s SOX Violations Cont’d

SEC Claims Against Health South : 

SEC states that Scrushy instructed that HRC earnings be inflated as early as just after the company’s stock was listed on the NYSE in 1996. Specifically, during the forty-two month period between 1999 and the six months ending on June 30, 2002. HRC’s Income (loss) before income taxes and minority interests was inflated by at least $ 1.4 billion. SEC Claims Against Health South

SEC Claims Cont’d : 

Each quarter, HRC’s senior officers would meet with Scrushy and compare HRC’s actual results with those expected by Wall Street analyst. If there was a short fall, Scrushy would tell HRC’s, to fix it by recording false entries on HRC’s accounting records. HRC’s senior accounting personnel then convened a meeting – referred to as “family meeting” to fix the earnings. SEC Claims Cont’d

Family Meeting : 

Family Meeting HRC’s Senior Accountants “Family Meeting”

The Trial : 

The Trial

Scrushy’s Acquittal Strategy : 

Faced with 5 former CFO’s testifying to Scrushy’s guilt, his defense team decided to impugn their credibility. All five had negotiated lenient sentences prior to testifying. The defense team’s goal was to treat the CFO’s as one comprised group of liars and cheats. A bold move. Scrushy’s Acquittal Strategy

Scrushy’s Acquittal Strategy Cont’d : 

Characterized one witness as looking clean as “Winn-Dixie chitin” Portrayed prosecution star witness Owen Wilson, as a rat who squeals. Another witness was ridiculed because he used antidepressants. Another witness was accused of faking tears on the stand. Another witness was forced to admit that he often cheated on his wife. Scrushy’s Acquittal Strategy Cont’d

The Jurors Verdict : 

The issue of credibility who to believe seemed to be paramount. There were 5 CFOs who testified against Scrushy and they all seemed to have some reason to lie. Based on that conclusion, they voted to acquit. Scrushy never took the stand. The Jurors Verdict

Jurors Vote To Acquit : 

Jurors Vote To Acquit

Health South’s 5 CFOs Punishment : 

The 5 CFO’s all of whom pled guilty to charges such as conspiracy to commit securities and wire fraud, and falsification of financial records. Aaron Beam, CFO 1994 – 1997, fined 1 million. Michael Martin, CFO 1997 – 2000, sentenced 15 year, fined 1.25 million Bill Owens, CFO 2000 – 2001, sentenced 30 years, fined 5.50 million. Weston Smith, CFO 2001 – 2002, sentenced 25 years, fined 2.20 million. Malcolm McVay, CFO 2002 – 2003, sentenced 15 years, fined 1.25 million. Health South’s 5 CFOs Punishment

Scrushy Acquitted On All Charges : 

Scrushy Acquitted On All Charges Expert observers do not view this verdict as a problem for the future enforcement of the Sarbanes-Oxley Act. They view it as a defeat for these particular prosecutors in this particular case.