HealthSouth: The Scrushy Way
Vonetta M. Henderson
The Enron and Tyco scandals brought visibility to corporate scandals. The magnitude of these scandals resulted in the Sarbanes-Oxley (SOX) Act in 2002. Richard M. Scrushy and HealthSouth Corporation were the first CEO and company to be indicted under the SOX Act. HealthSouth was charged with filing false financial statements with the SEC to hid poor financial conditions from Wall Street. An audit conducted by PricewaterhouseCoopers concluded that HealthSouth overstated its cumulative earnings between $3.8 billion to $4.6 billion (Weld, Bergevin, & ...view middle of the document...
This acquisition made HRC the largest rehabilitative care provider in the nation. HRC continued to expand through mergers and acquisitions throughout the 1990s. In 1995, HRC changed its name to HealthSouth Corporation due to its diverse interests in the medical industry.
In January 1995, HealthSouth Corporation acquired Surgical Health Corporation, now having position in the surgery center business. In 1996, Health Images Inc was acquired to now expand HealthSouth Corporation into diagnostics. In 1997, HealthSouth Corporation purchased Horizon/CMS for $1.8 million. One of the most significant deals, however, in HealthSouth Corporation’s history was the announcement in 2001 that it would partner with Oracle Corporation to build the first all-digital hospital.
In 2002, Richard Scrushy sold $75 million dollars in stock several days before HealthSouth Corporation posted a loss in revenue. This caused for alarm and generated an investigation. However, when Weston Smith, chief financial officer, initially refused to certify the financial statements out of fear of retribution through the SOX Act (Taylor, 2005), this caused the SEC to start a full investigation into HealthSouth’s financial practices.
Impact on Stakeholders
Outcome and Fairness of Punishment
During the onset of the investigation by the SEC, the board of directors at HealthSouth held an emergency meeting and terminated Scrushy as CEO and Bill Owens as CFO. The board had to address obtaining cash to make interest payments on senior bonds and principal payments due on a $344 million convertible bond. The board of directors hired Alvarez & Marshal to repair financial damages and by the end of 2003, HealthSouth had not filed Chapter 11 bankruptcy and had most of its finances reorganized.
Richard M. Scrushy was the first CEO indicted under the Sarbanes-Oxley Act (Pitroski & Fong, 2003). On March 19, 2003, the SEC filed conspiracy to commit massive accounting fraud charges against Scrushy and several other senior executives (Healthcare Financial Management, 2003). The SEC alleged that HealthSouth fraudulently hid its poor financial conditions from Wall Street by inflating company earnings by at least $1.4 billion (Healthcare Financial Management, 2003). The SEC also filed charges against Scrushy for knowingly filing a false financial records statement. In June 2005, Scrushy was acquitted on all 36 counts of accounting fraud against him. Scrushy was able to proclaim ignorance of the wrongdoings occurring.
On March 19, 2003,...