The HealthSouth Fraud - Essay Example

HEALTHSOUTH FRAUD Introduction HealthSouth was established by Richard Scrushy in 1984 and publicized in 1986. During 1996, its market value had grown to more than $12 billion. In spite of company’s rapid growth, the situation was not as promising as it was manifested to outsiders (Daigle 888). He led the other insiders in perpetrating a fraud that grew to $2.7 billion before 2003, when it came to light. Most of the prominent leaders were involved in the fraud. Richard, the president of HealthSouth Corporation, was under scrutiny for being involved with the health financial irregularities. Other five HealthSouth’s chief fiasco officers have been charged with fixing of business books. The first people were Weston Smith and William Owens, with falsely certifying the exactness of company accounts with the Exchange commission and securities. Therefore, among the provisions of the Sarbanes-Oxley corporate accountability law were ordained the previous year. David Dennis is also among the highly publicized case in Healthcare Corp. along with chief operating officer Thomas Mackey. They were charged with reimbursement after government analysis of the company. Universal Health services dismissed financial chief Kirk Gormn after expressing philosophical difference with the company’s audit firm. In United States, contemporary corporate fraud altered decimated private plans, market values and devalued public pension funds. In 2002, Dynegy, Tyco and WorldCom are among those companies that joined fraudulent accounting ranks. WorldCom’s Scott Sullivian and Enron Corporation Andrew Fastow are facing massive fraud charges linked to vast corporate collapse. HealthSouth was faced by fraud scandal due to its greedy CEO who manipulated his other colleagues to do what he thought was right. The first tragic truism is the inconsistent of some managers in what they do and say (Crew 3). The FCC chair, Michael Powell, told the C-Span that the Clear Channel is likely to be too much concentrated. They may have issues connected to the company after the congress portrayed 1996 deregulation law. The FCC, therefore, were expected to undergo a scrutiny, but Powell did not do anything about it and neither did FCC. On the contrary, they talked without carrying out any action (Grow 6). Fundamentally, Health South CEO only cares about his interests and what his fraud would generate for the stakeholders and the company. He promised the stockholders that the company is doing its best to increase the price of shares that was not the case. As a result, Richard engaged into fraud to meet his promises leading to the financial scandal in the company. Halliburton had fleeced the Army $61 million for Gasoline according to the pentagon audit agency. Kuwaiti subcontractor accumulated the profits instead of Halliburton. (Mokhiber, Weissmann, and Grow 9). Halliburton claimed that it was not overcharged hence, differing from the actions. Due to the manager threats, employees adhered to helping him conduct his fraud. For example, the manager overcharged $61 to the army and denied it because they wanted to escape the crime and keep money for Scrushy and the company. As a result, this behavior not only toppled the company’s reputation but also engaged in public abuse and comments. In 1995, Jay Murphy, former Cape Coral Hospital CFO, petitioned guiltily to looting a lot of money from a non-for-profit hospital and he was jailed for 18 months in prison. A former CFO in Pittsburgh, David McConnell, resolved a criminal charge of mismanagement of the company funds. He pleaded that he was not guilty and agreed to join first-time offender program. Hence, his behaviors and words were inconsistent. Furthermore, employees followed their leader example. McConnell denied his charges because when Scrushy was caught for admitting financial frauds, he denied it and escaped from the crime. David also wanted to abscond from the crime. His behaviors not only destroy his credits and reputation, but also led the company disgrace. Indeed, inconsistency of behaviors and words and talking without carrying out any action among the officials led to the scandal The second tragic truism is the obedience of employees to their superiors (Crews, 3). Managers can influence employees to do questionable or unethical actions mostly if they are rewarded .Employees quickly obey their employer’s directions due to financial needs and fear (Crews, 3). Richard gave the employees a lot of pressure hence they could not eliminate the crime in advance (Smith, 903). It is evident that sometimes the employees knew what they did was wrong, and their behaviors were law-breaking, but, they had no desire to disobey Scrushy’s orders because of fear. Due to their obedience to follow orders, he made massive fraud and finally led to the HealthSouth Scandal. Even though, the employers knew they were practicing fraud, they thought it was important to maintain the stock price favorable for a minimal of a year (Stuart, 60). Again the workers kept obeying the top management and focused in raising the stock price to avoid blame even though they knew it was wrong. As the leader of the company, Scrushy desired his staff to follow his orders and assist him make money despite the methods. As a result, Scrushy committed more fraud to make profits and involved the company into a disgrace. Moreover, Richard had rationalization influenced his performance (Weston, 903). It is evident that he tried to sway his employees by describing his actions to them and unveiled to them what profits they could make. Hence, many employees wanted to be obedient to what Scrushy told them to do because they wanted to make profits for the company and increase their salaries. Therefore, with the obedience of employees, Scrushy was easy to gain the consent from others and made fraud. With the growing number of fraud, as a result, the HealthSouth Scandal occurred. Third tragic truism is the performance of people according to what they are rewarded to do and typically evade doing what can make them get punished (Crews, 4). Workers actions are greatly influenced by potential punishments and reward systems. Individual can cheat, steal, cut corners and lie in the existence of right circumstances (Crews, 4). Richard informed CFO Owens that if they would go public with their actions they would be. He intimidated William Owens that if he announces to the public about their fraud, everyone will be affected (Stuart, 60). It is evident that Scrushy used threats to make his employees not to tell about the fraud or else they would be fired. For example, the CFO did not tell the stockholders about their fake financial records making them invest more because he warned him that they would be punished. As a result, stockholders investment financed Scrushy in committing fraud. In addition, due to the fake number that Scrushy showed to the stockholders, the taxes that firm paid exceeded the real earnings of HealthSouth (Daigle, Louwers and Morris, 883). A large amount of money financed Scrushy fraud hence, HealthSouth scandal. Bill Massey was the CEO’s personal CFO for moving money, private interests, financing and stealing money. Bill helped him to deal with illegal financial issues. He felt betrayed and hurt when Richard blamed him when they were caught (Helyar, Cherry and Neering, 76). Scrushy rewarded his employers to motivate them in committing fraud. For example, Bill helped him to manage all the illegal monetary activities because if he did so, not only would he be rewarded with high salaries but also get huge profits. He, therefore, did what he was being rewarded to do and avoided doing what leads to punishment. As a result, Scrushy got assistance to do his illegal activities which led to company bankruptcy. In many cases, top management especially the CEO, have a humorous role in setting a tone that comically plays a role in misinterpretation and fraud (Castellano and Lightle, 6). HealthSouth CEO played a great role in influencing his employees in fraud and setting a bad example that led to other employees imitating him. Due to the bad example that managers set for the employees, they followed what instructed to do to avoid punishment. The employees working in the company did the fraud for him resulting to the company scandal. Fourth tragic truism is the complexity and difficultness of navigating business operations, decision, relationships (Crews, 4). Weston writes that the early rationalization was temporary, and they could catch up in the next quarter (Weston, 903). He adds that the company was in starts, and since the street believes in them, they could not let them down but catch Up in the next quarter (Weston, 903). Even though, the situation was not positive, Scrushy believed that it would improve and make the Wall Street down (Weston, 903). Scrushy tried to fake numbers and fraud in order their company to have high ranking in the Wall Street. He could quickly catch up and make the price go down but due to complex and difficult business operation it did not catch up successfully. Stockholders hope for earning more made them forgot to follow up HealthSouth’s activities, which was their native responsibility, and they were unable to stop their greed. (Weld, Bergevin and Magrath, 45), However, due to the complications in business operations, relationships and decision, even if he faked the number, the stock price did not go up. The situation was similar in Wall Street, where also price did not go up. But, due to the high expectation that Scrushy provide to them wrongly, they believed it was easy to catch up, which made their greed of the money increase rapidly (Washington Post). As a result, Scrushy was unable to seek their needs. Hence, HealthSouth Scandal occurred. HealthSouth Corporation is a Business Hall of Shame even though it is one of the nations largest contributors of diagnostic imaging, outpatient surgery and rehabilitation services. The SEC ordered a civil lawsuit against HealthSouth and its CEO, affirming they committed a great amount fraud since 1999 by overstating amounts by $1.4 billion (Castellano, Lightle, and Grow, 1). Scrushy declared that since 1999 they magnified what they earned by $1.4 billion to create fraud (Castellano, Lightle, and Grow, 1) Due to the importance of the HealthSouth Corporation as evidence reflected, Scrushy had to overstate what they earned to fake the number. Due to that, people will not lose hope of them, and HealthSouth can continue serve them. In order to do this, Scrushy exaggerated their earnings by $1.4 billion. Unfortunately, with the quick increase of their wants, He was unable to fill due to business complex decision and; therefore, Scandal occurred. Around 400 HealthSouth employees laid off terms for savings nearly $28 million annually. By July, Marsal estimates that the company costs lies between $110 million and $115miilion. The team could then focus in alleviating company’s name along with the doctors, with creditors at bay (Santini and Grow, 40). HealthSouth lay off their managers and employees to remove cut expenses and save money in order to improve (Santini and Grow 40) It is evident that business operations, decisions, and relationships are complicated to navigate when it reach a point when, Scrushy had to cut off some employees and expenses to maximize their profits. Stockholders expectations have real repercussion for organizations and other businesses (Crews, 8). However, what he did was imprudent because he focused on the short- term profit instead of the long-term. Whereas, long-term profitability and reputation require ethical behavior (Crew, 6). The action made it hard to meet the needs of stockholder due to their increased greed hence creating scandal. CONSEQUENCES TO IMPORTANT The HealthSouth case affected both the internal and external stakeholders. The stakeholders included employees, customers, government, suppliers and society. The company should ensure its stakeholder’s needs are met by practicing in ethical business activities. The stakeholder’s interest is affected when a firm practices unethical business practices like fraud. Workers and officials were significantly affected by HealthSouth fraud. It destroyed employees’ lives by losing their jobs. The employees suspected who pleaded guilty were suspended or sacked. The employees participated in poor accounting and business activities. Security and exchanges commission also sacked the top executives after revealing the unethical accounting practice. Therefore, the weak organizational and leadership culture had a negative effect on the employees, and some lost their jobs. Due to the fraud, the investors and HealthSouth stock were affected because of inaccurate information provided to them to them. The fake financial statements assurance financial success of the company and also increased its share price. During the period of July 1969 to 1979 July, the shares increased from $15 to $29 per share. The shares maintained $31 per share in April 1998 and executives got nearly $166 million through illegal procedures in the company. The company’s comprehensive internal control system though eliminated the accounting irregularities. Therefore, investors did not have the returns on their investments and income as they expected. HealthSouth fraud led to less satisfaction to customers need since the workers focused on gaining profits. The health care was the largest firm in the country and had 93 inpatient rehabilitation hospitals and 49 outpatient rehabilitation satellites. Therefore, the firm was the major provider of rehabilitation services. However, customers’ needs were not met since the company focused on profit making. Due to the fraud, the hospital did not; pay tax as expected, pay VAT, have planned legislation, truthful reporting and legalities. The government was affected in a way the company breaks the rules set by the government and could not get revenue from its taxes. In that order, it resulted to severe punishment. The suppliers were also affected by the fraud in HealthSouth. The hospital could not provide services and products for the suppliers and, therefore, freezing their work also. They also suffered a loss since they depended on the company’s products. Therefore, HealthSouth fraud halted supplier’s job and hence, not earning. The lesson learnt from HealthSouth experience includes: First, managers should be consistent in what they do. The top management should avoid speaking what they do not reflect in their actions. Scrushy actions of lying to protect his interest resulted to the company losing its reputation. Therefore, as a manager I should take cautions with how their actions and remain consistent. Second, employees should weigh on what to obey and not to. The top management does not always give orders in respect of company’s respect. Therefore, as an employee, I should be able to weigh which commands are to benefit the company and those, which will lead company’s downfall. Scrushy took advantage of his employee’s obedience character to control them and commit his fraud interests. Thirdly, Employees should not be blindfolded by rewards and break the laws. Some leaders take advantage of employees greedy to earn more salaries and get allowances to use them in illegal activities. For that reason, I should be able to resist such offers and be able to stand with what is right. Schrushy was able to lure his employees in committing fraud by promising rewards and increase of salaries. In conclusion, in order to maintain order in organizations, Like a manager I would avoid using my powers to manipulate my workers to work according to their interests. Misuse of power can lead to scandal in a firm hence demolishing the reputation of the company to the society. Therefore, managers and the workers should follow the rules governing their performances to the latter. My main secret of success would enforce the above statement. WORK CITED Castellano, Joseph. F. and Lightle, Susan S. “Using Cultural Audits to Assess Tone at the Top” The CPA Journal, (2005): 6-11. Print. Crews, Sandra. M. “Top Ten Tragic Truisms” Handout. Management 3200, Fall, 2014. Print Daigle, Ronald. J., Timothy. J. Louwers, and Jane Taylor Morris. “HealthSouth, Inc.: An Instructional Case Examining Auditors’ Legal Liability.” American Accounting Association 28.4 (2013): 887-899. Print Helyar, John, Brenda Cherry, and Patricia Neering. “The Insatiable Kind Richard.” Fortune. Fortune, 2003. Web. 14/09/2014. Jaklevic, Mary Chris. Chief fiasco officers? 23 June 2003. 23 June 2003. Mokhiber, Russel and Weissman Robert. “Multiple Corporate Personality Disorder: The 10 Worst Corporations of 2003” Multinational Monitor, (2003): 9-21. Print. Santini, Laura. On the Mend, Investment Dealers’ Digest, 23rd September. 2004. Print Smith, Weston. L. “Lessons of the HealthSouth Fraud: An Insider’s View” Issues in Accounting Education” 28.4, (2013): 901-912. Print. Stuart, Alix Nyberg, “Keeping Secrets: HealthSouth’s Tranquil Alabama Headquarters Masked A Dysfunctional Corporate Culture” The Birmingham News, 2005, June, 13th September. Print Washington Post. Timeline of Accounting Scandal at HealthSouth, 2004. Web. 13 September 2014. Weld, Leonard. G., Peter. M Bergevin, and Lorraine Magrath, “Anatomy of Financial Fraud: A Forensic Examination of HealthSouth.” The CPA Journal (2004): 44-49. Print . Read More