The HealthSouth Corporation
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Introduction
My case study will focus on the HealthSouth scandal, which happened between 1996-2002. The HealthSouth corporation is among the largest USA healthcare hospital, which undertakes its operations through 33 different nations across the globe. The reason I settled on the Corporation is that regardless of all efficient and effective systems of operations of The HealthSouth Corporation, it still was accused of conducting unethical practices regarding disclosing financial report statements to investors (Markham, 2015).
The approximately $2.8 billion accounting scandal at HealthSouth left behind a trail of activities, including CEO Richard Scrushy imprisonment alongside several HealthSouth CFOs plus other officials of the Corporation. HealthSouth started in the USA by offering outpatient medical-care facilities but surged quickly to owning and operation of rehabilitation hospitals, which has remained the company’s main business to date. With a quick trail of success in two years, the Corporation decided to go public. In 1998 a downturn occurred in the market, which was influenced by Medicare fraud crackdown. HealthSouth, however, emphasized that this crackdown wouldn’t impact them. The senior management believed selling large numbers of the company’s shares wouldn’t meet their articulated profits. This started issues in 1999 since for HealthSouth to be able to meet the expectations of those who had invested in it as shareholders, through Richard Scrushy, who was the CEO of the Corporation, HealthSouth had to falsify accounts (Cast, 2005).
This resulted in approximately $1.4 billion exaggerations that accounted for more than 10% of the total assets of the company. This scandal was established in 2002. By September 2002, HealthSouth asserts been exaggerated by $800 million, which made the government have a sharp focus on the massive distinction between the actual and the reported profits of the HealthSouth Corporation. After the scandal became public, the price shares of the HealthSouth Corporation became excessively unstable (Akdeniz, 2015).
Through 2001 Enron became bankrupt, which was among the most considerable electricity, communication, natural gas, pulp, and paper companies in the world due to accounting fraud, which has since been referred to as the Enron scandal. This necessitated crime investigators to start establishing accounting operations in other companies with HealthSouth becoming their target at the ending of 2002. The USA Securities and Exchange Commission (SEC) initiated their investigations in insider trading. However, still, Richard Scrushy continued selling a large number of shares. He made a public announcement on project fall in profits claiming that this was attributed to changes in the Medicare funding. This was a deception technique since he couldn’t gain investors’ trust; hence the share value plummeted, which made HealthSouth be on the verge of bankruptcy in 2003. The company was delisted from the stock exchange in March 2003. June 2005 saw Richard Scrushy acquitted of all his charges regarding accounting and fraud counts that amounted to 36. This included the most evident one of the Sarbanes-Oxley Act. In 2006 he was then convicted of bribery charges and found guilty. The kind of fraud committed resulted in an accounting scandal, which has since then been referred to as the HealthSouth accounting scandal (Markham, 2015).
SOX regulations application in for-profit and not-for-profit health care organizations for reducing fraud and increasing corporate governance.
To date, all organizations and corporations, regardless of their nature and size, have to adhere to the 2020 Sarbanes-Oxley Act, which has the accountability of financial regulations and corporate governance of organizations without consideration of whether the particular organizations are for-profit or not-for-profitbased on the fact that the compliance of the 2020 Sarbanes-Oxley is appropriately conducted and systematically, it helps in the elimination of daunting activities for the management of the organization which otherwise would have required performance. Hence, this is a defined law for enabling a company in the United States on the disclosure of financial information for usage by third parties. The 2020 Sarbanes-Oxley Act made amendments to several laws for corporations regardless of whether they are for-profit or not for profit; hence these companies were obligated into following outlined rules. That relates to the aspect of internal control reporting, establishing and stating the firm’s independent directions, whistleblowers programming in the company, proper code of conduct application about the auditing aspect in the organization (Markham, 2015).
Primarily when SOX requirements are entirely and carefully implemented, there’s an expectation of more company benefits regardless of their nature. SOX implementation would also handle the issue of corporate governance issues since that will be solved, the performance of audit functions will be more productive, an authentic and genuine company’s position will be reflected by the financial statement, which is through additional transparency. Considering this, there will be changes in statement quality since the management will concentrate on transaction reporting, which consequently will enable the business to be able to establish and maintain strong business standards (Cast, 2005).
SOX principles applications in not for profit corporations can also bring out considerable results, for instance, fraudulent activities reduction and enhancing the corporate governance of the particular not for profit organization. This can be accomplished only because the not for profit organization compliance with the SOX provisions ensure improvement in corporate governance through activities that include changing lead audit partners, the formation of the audit committee and pre-approval of non-audit fees (Lehman, 2010).
SOX regulation of ethical behavior in for-profit health care organizations.
SOX has generally been established as useful in the regulation of ethical behavior basing on for-profit healthcare organizations. This has been attributed to the fact that SOX implementation has a requirement of compliance with an outlined code of ethical conduct defined that encourages employees into disclosing and reporting fraudulent and unethical code of conduct prevailing in the Healthcare organization without fear of wrongful termination. Sox implementation assists in the achievement of various advantages with the inclusion of the promotion of responsible and ethical behavior when it comes to the decision-making process in the for-profit healthcare organizations (Rezaee, 2007).
The effective SOX implementation in for-profit organizations can achieve several vital results that include conflicts of interest resolving in healthcare organizations, making sure there is accuracy in financial reporting and being able to establish a defined and robust code of conduct. SOX implementation also ensures effectiveness in internal control while encouraging self-regulation with the promotion of due diligence. This provides corporate governance through the development of ethical behavior at workplaces. Implementation of SOX regulations helped for-profit health care corporations in unethical practices reduction, for instance, billing frauds, issues that comprise patient care, and the aspect of inappropriate marketing and advertising (Previts & Robinson, 2007).
The audit report review for HealthSouth corporation and external auditors negligence in preparation of the audit report regarding Internal Control deficiency and GAAP violation.
The General Accepted Accounting Principles (GAAP) states that the aspect of matching concept must be achieved and adhered to as the basic principle of accounting. Basing on the matching concept, the additional increase in earnings should consequently be in correspondence with the other net assets increase, which establishes a balancing effect in the shareholders’ fund (Previts & Robinson, 2007).
Sec established that HealthSouth violated this principle through overstating and exaggeration of their earnings and consequently led to the additional asserts increase that was alongside liabilities understatement. The income statement of HealthSouth and contractual adjustment account had a representation of the distinct side of every description of the difference estimated with consideration to gross patient billing and the aspect of insurer reimbursements (Cast, 2005).
Generally, the earning of revenue is attributed to the period of provision of service while the reimbursements of expenses don’t happen in the same period. Hence, the adjustment activity of the same and establishing the difference was way against the GAAP. Therefore there was a violation of the GAAP matching concept since the concept of matching revenues and expenses of different periods wasn’t allowed (Akdeniz, 2015).
The accounting enforcement during a Medicare audit noticed that various expenses we inappropriately recorded, but based on the auditors’ submission, the error of these particular expenses was allowed. Healthsouth corporation ended up receiving excessive compensation from the Medicare HealthSouth is established to have done misinterpretation of expenditures that would have indicated hospital administration expenses, which they ended up recording as improvements in capital. As a result of auditors’ errors, similar fraudulent claims kept reoccurring without notification to the Medicare of the overpayments by anyone. This scheme was finally established by an auditor who required a revision of hospital cost reports by HealthSouth corporation (Markham, 2015).
SOX provisions violations in HealthSouth corporation and Indication of whether SOX adequately provides sanctions to deter the behavior and changes needed on the regulations to remedy HealthSouth hence ensuring compliance.
Several SOX regulations and provisions were violated in the case of HealthSouth Corporation. These violations included the fact that there was no presence of independency in the opinion of auditors in the Healthcare corporation, which also lacked an independent audit committee. The HealthSouth corporation required a proper code of conduct of business ethics since the provision of consultancy services for audit clients is prohibited, which is outside the scope and jurisdiction of practicing auditors (Previts & Robinson, 2007).
The 2020 Sarbanes-Oxley Act has various penalties imposed in the event of breaching the law that includes the fact that any kind of changes to the securities law would lead to penalties attraction with fines or in other cases up to imprisonment for 20 years if an individual has been found guilty of destroying, altering and production of records that are falsified. This ACT also comprises provisions and regulations entailing corporate penalties and cases of company insiders’ criminal frauds. The eyes of law establish that if records are destroyed, altered or the is the production of falsified documents stands as a crime with fines as penalties or imprisonment for 20 years or both (Rezaee, 2007).
Recommendations on internal control environment improvements for reduction of those occurrences of fraudulent activity basing on HealthSouth scandal.
My recommendations regarding the improvement of frauds include the following.
First, severe punishment must be determined and implemented to auditors whose performance is against the professional code of ethics regulating the auditing sector. These auditors’ CPA membership should be terminated. The work of the auditors should be to portray the valid and actual state of the company via financial statements, hence to be able to gain profits and self-interest, they shouldn’t at any point subject the public at risk. Their primary duty is the protection of the interests of the general public and shouldnt t any point undertakes neglect duties (Previts & Robinson, 2007).
Secondly, audit interaction should be conducted in organizations to help to strengthen internal controls that comprise changing the employee attitude regarding auditors. This can be done via proper channels of communication, definition, and clarification of ownership roles and responsibilities and through segregation of duties in organizations that entail the authorization, custody, and recording of source documents. This should be accompanied by the application of up to date technology, which must involve internal control regulations regarding all mobile computing applications, telecommunication devices of the company, for instance, smartphones and personal computers (Lehman, 2010).
References
Akdeniz, C. (2015). Corporate scandals: Crime in the age of big business. Can Akdeniz.
Cast, W. (2005). Going south: An inside look at corruption and greed, and the power of the HealthSouth message board. Kaplan Business.
Markham, J. W. (2015). A financial history of modern U.S. corporate scandals: From Enron to reform. Routledge.
Lehman, C. R. (2010). Ethics, equity, and regulation. Emerald Group Publishing.
Previts, G., & Robinson, T. (2007). Research in accounting regulation. Elsevier.
Rezaee, Z. (2007). Corporate governance post-Sarbanes-Oxley: Regulations, requirements, and integrated processes. John Wiley & Sons.
