HealthSouth: A Tale of Accounting Fraud


Upon looking around at various companies at the height of their business operations, I found that HealthSouth, based out of Birmingham, Alabama, caught my attention. Known for being the largest publicly listed healthcare company in the U.S. at one point, HealthSouth provides outpatient rehabilitation centers, surgical centers, and various diagnostics. In 1986, CEO and founder Richard Scrushy led HealthSouth through its transition to a publicly held company; HealthSouth was the largest publicly listed healthcare company in the U.S. With only minimal research, I discovered that Richard Scrushy was instrumental in the falsification of several financial reports, while also selling $100 million in HealthSouth stock only days before a huge loss was recorded. In 1998, the company was accused of violating the Securities Exchange Act, and under thorough investigation, Richard Scrushy was charged on 36 accounts of fraud for inflating earnings by over $1.4 billion. With such a strong presence in the healthcare industry, it is a shame the CEO abused his power and HealthSouth’s internal controls to falsify reports to prove a higher financial standing to all investors.

Some sources used so far:

Based on the fraudulent actions during the life of the business, there are some similarities between Enron and HealthSouth. Though very different industries, internal controls and authoritative powers conflicted with business operations, allowing for fraudulent practices to continue for several years. Based on HealthSouth, I plan on talking about ethics from two lenses: deontology and justice. Deontology, as we know, is the school of ethics based on rules while following professional ethics or an ethical code. Similarly, I will speak about justice and whether the actions of Richard Scrushy were just, impartial, and fair. This case exposes much more than accounting fraud, but I will focus mainly on the incentives, risks, and potential rationalizations Scrushy had during his time at HealthSouth, and the aftermath of his fraudulent actions/decisions. With this in mind, I will conduct more researching on rationalizing fraudulent actions, corporate greed, tone at the top, and the effects of financial collapses on all stakeholders. I plan on exploring other sources using phrases or key words listed above.

Potential sources:

This paper is linked to accounting fraud and the laws, rules, regulations, and practices set in place by HealthSouth and other regulating bodies. I am interested in seeing what allowed for such errors in HealthSouth’s internal controls, and determining the tone at the top. My final paper will examine various companies faced with fraud-related problems and what specifically occurs in companies to allow such acts to take place. There are regulatory bodies in place, but all of the rules and laws in our nation cannot prevent fraud from developing within companies.

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5 thoughts on “HealthSouth: A Tale of Accounting Fraud

  1. Interesting choice of topic. I had not previously heard of this company, yet it certainly seems like a viable topic for a thorough ethical analysis. Its surprising to me that accounting scandals of this magnitude continue to happen even after Enron and subsequent regulations. Im also using deontology for my ethical analysis, and I think that the case youve chosen applies nicely to this framework. As deontology focuses on dutifulness, you might want to consider to whom the CEO of HealthSouth was primarily responsible–investors, patients, customers, etc.? This consideration could lead to an interesting analysis, as you mention I believe, as to what motivated this sort of behavior. Was it due to pressure from investors? Pure greed and selfishness?

    In thinking about Kant’s three formulations of the categorical imperative, this CEO and this organization, were investors and other stakeholder groups being used as a means to an end instead of a end themselves? Considering the important notion of universality and morally sound rights and obligations in Kantian ethics, I think it is clear that these kind of practices pose some clear ethical objections.

    In terms of the policy paper, you might want to consider looking in to ways in which the health care industry lobbies the government, organization and possible corruption within regulatory bodies such as the SEC (i.e. what allows these sorts of things to happen), consolidation of the industry leading to greater systemic risk within the industry…

    Hope this helps, good luck

    Liked by 1 person

    1. GReat points about deontology. Also, no book-cooking like at Healthsouth can stand up to the scrutiny of the categorical imperative. if Healthsouth’s financial, or even worse, medical provider employees or suppliers provided so much false information, it’s whole business space would collapse. Imagine if doctors and nurses invented numbers of patients seen or treated just to seem productive? Taking whatever Healthsouth did with financial accounting and using it as a metaphor for their own internal managerial accounting would be an interesting approach.

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  2. Being an accounting major, this topic definitely caught my eye and I immediately thought of Enron, as you mentioned. As Enron’s accounting practices ultimately led to its fall, it’s interesting to see whether or not HealthSouth will have the same fate or what is different about it that will allow it to sustain as a profitable business. A current article in the WSJ discusses how businesses and investors today seem to be straying from GAAP or finding loopholes in it, so it’ll be interesting to see how accounting practices might even be changing today.

    http://www.wsj.com/articles/investing-red-flag-pro-forma-results-and-share-price-performance-1458837868

    Liked by 1 person

  3. Don’t do justice. Dig into deontology. I think you can also use Stout and some of her sources in terms of how shareholder maximization encourages bad behavior.

    Healthsouth is ABSOLUTELY similar to Enron, along with Adelphia and others in the 1997-2001 period who use loose accounting standards to cook the books. And, the fact that they went from private to public seems relevant.

    I think the idea of duty to transparency is so useful here because laws and accounting standards are clearly not enough to protect ethical practice. In other words, Healthsouth can show how accountants and other executives could rely on apparently legal actions to nonetheless engage in ethically unsound or deceptive financial accounting.

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