HealthSouth: The Scrushy way

Table of Contents

Introduction3

Discussion4

Impact on Stakeholders7

Outcome and Fairness of Punishment8

Areas of Risk and Correction10

Ethics and Role in the Government's Responsibilities to All Parties12

Conclusion and Aftermath13

HealthSouth: The Scrushy way

Introduction

The 2003 trials of HealthSouth CEO and senior accountants marked the first test for the newly legislated Sarbanes-Oxley Act. Designed to improve public confidence and enforce ethical accounting in the wake of the Enron collapse of 2001, this act placed numerous safeguards to ensure that all publicly traded corporate books were legitimate. Although voluminous in nature, SOX (Sarbanes-Oxley) was designed with a few key points to ensure that an Enron type scandal never happened again (Glater, 2003). Included in the regulations were increased measures to ensure auditor independence, increased penalties for accounting fraud convictions, and new measures that were designed to make CEOs and senior management easier to prosecute for fraud (Frieswick, 2003).

In November 2003, a federal grand jury indicted Scrushy on 85 counts including conspiracy, securities fraud, money laundering and charges related to overstating HealthSouth's earnings by nearly $3.0 billion. According to federal investigators, the company overstated earnings to meet analysts' earnings estimates, while hiding the accounting fraud from the auditors. However, questions were raised whether the auditors failed to find or simply overlooked the fraud at HealthSouth. Then on November4, 2011, Mr. Richard Scrushy the ousted leader of HealthSouth was indicted on charges that he directed a $2.7 billion fraud which designed to inflate the company's stock prices to fund his super-luxurious lifestyle (Glater, 2003).

Mr. Scrushy had purchased items like a Lamborghini, a 92-foot yacht, a private jet, paintings by Renior as well as Picasso, and a mansion surrounded by water. When you look at his salary in 2002, it included 3 million in salary, 10 million in bonus pay, and 99.3 million in stock sales in one year. He is still married to his wife Leslie Ann Jones. He has nine children and several grandchildren. He was sued and his personal items were auctioned off to pay judgments ordered by the court against him.

However, this law went relatively untested until March 19, 2003 when HealthSouth CEO Richard Scrushy was charged under the act for accounting fraud that overstated HealthSouth's earnings by over 4,700%. Yet, in a case that is particularly vexing for accounting ethicists, all five senior accountants were fined and four of them faced 15+ years in jail. The CEO walked free - facing no fines and, more importantly, no jail time. Understandably, these case raised serious legal consequences for SOX - if the CEO can get away with zero penalties, how well can these acts are enforced in the future? This essay will explore the ethical consequences of this scandal while at the same time showing, step by step, how such an incredible scam could have occurred (Helyar, 2003). All this occurred and remarkably the man responsible for it all - Scrushy - was able to walk away from the fraud completely unscathed.

Discussion

To begin this analysis, it's important to analyze HealthSouth's ...