When Health Goes South Essay

4327 Words18 Pages
Background In 2003, HealthSouth, one of the most dominant players in outpatient rehabilitation and surgery became the center of a corporate fraud scandal exposed under the newly enacted Sarbanes-Oxley Act (SOX). SOX, which set new standards in financial reporting of all U.S. public companies, was enacted in July 2002 in response to a number of major corporate and accounting scandals such as Enron and WorldCom, that had cost investors billions of dollars (Wang, Lin, and Ju, 2009). CEO and Co-founder of HealthSouth, Richard Scrushy, was allegedly the mastermind behind an accounting scheme that inflated earnings by as much as 4700% in order to deceive Wall Street and control the company stock price (SEC, 2003). Between the period of 1999 and 2002, the company’s earnings were overstated by $1.4 billion (SEC, 2003). HealthSouth’s accounting problems began to unravel in late 2002 after Scrushy sold $75 million in stock shortly before the company posted a large loss (Wynne, 2007). This drew the attention of the already suspicious Securities and Exchange Commission (SEC), which moved in to examine documents and question employees. March 18, 2003 FBI agents executed search warrants at the company's headquarters after the company's Chief Financial Officer, William Owens, agreed to wear a wire in an attempt to get Scrushy to talk about the fraud (Wynne, 2007). The following day they raided the company's headquarters and commenced civil actions against HealthSouth and Scrushy, followed soon by an action against Scrushy alleging insider trading (Wynne, 2007). Scrushy and 16 of HealthSouth’s executives became the first to be charged under the SOX provisions. HealthSouth employees, including all five former CFO’s, claimed that Scrushy was not only aware of the scheme; he had instructed senior executives and accountants to “fix” or manipulate the earnings whenever they
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