Business 8th Edition by Marianne Jennings

Exercise 8

The SEC charged HealthSouth with inflating its earnings by $1.4 billion over a three-year period, with total inflated earnings of $2.5 billion over a decade. The case was the first one brought under the new provisions of Sarbanes-Oxley for financial fraud.
In a federal district court hearing the following information emerged.
• Two of the company's CFOs and its current CFO have been indicted for fraud.
• CFO William Owen recorded his conversations with former CEO Richard Scrushy at the request of the FBI.
• Mr. Scrushy said on tape to Mr. Owen, "We just need to get those numbers where we want them to be. You're my guy. You've got the technology and the know-how."
• Mr. Scrushy has sold $175 million in HealthSouth shares since the accounting fraud began.
• The bookkeeper for Mr. Scrushy's personal companies committed suicide in September 2002. His new bookkeeper, Mary Schabacker, indicated that all of Mr. Scrushy's five corporations owe debts to each other, with no intention to repay them.
• HealthSouth stock was delisted from the NYSE for a period of time. It was listed at $15 per share one year ago and is worth pennies today.
• Mr. Owen's wife told him that if he kept signing "phony financial statements" he might go to jail.
• Mr. Scrushy maintains that he knew nothing about the accounting fraud and that Mr. Owens did it all.
• The acting chairman of the HealthSouth board said, "We [directors] really don't know a lot about what has been occurring at the company."
• For seven years, one director was paid a consulting fee of $250,000 per year.
• One director purchased a $395,000 resort property as a partner with Mr. Scrushy.
• One director secured a $5.6 million contract to install glass at a hospital HealthSouth was constructing.
• MedCenterDirect.com had as investors HealthSouth, Mr. Scrushy's private investment company, six of HealthSouth's directors, and the wife of one of the HealthSouth directors.
• HealthSouth directed business to MedCenterDirect.com totaling almost $174 million in 2001.
• The audit committee and compensation committee were joint committees made up of the same directors.
• HealthSouth invested $2 million in Acacia Venture Partners, a venture capital fund founded and run by C. Sage Givens, a director of HealthSouth. When a shareholder questioned Givens's independence as a result, HealthSouth defended her board position.
• Ernst Young served as HealthSouth's auditor. It earned $1.2 million for financial statement audits and $2.5 million for other services.
Discuss the legal issues that each of these revelations raises. Be sure to cover the changes that Sarbanes-Oxley would impose on the company's governance practices. Also, refer back to Chapter 8 and determine what criminal charges were brought.