question archive Healthsouth, the largest provider of outpatient surgery and diagnostic and rehabilitation services in the US at the time, overstated its earnings by at least $1
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Healthsouth, the largest provider of outpatient surgery and diagnostic and rehabilitation services in the US at the time, overstated its earnings by at least $1.4 billion from 1999 to 2003 to meet Wall Street analysts' expectation of earnings. Ernst & Young was the auditor during this period. The following indications of fraud were present during the audits:
In December 2001, Healthsouth was charged fraud in overbilling Medicare for physical therapy services it never performed and submitting falsified documents to justify the claims. Without admitting wrongdoing, HealthSouth in May 2001 agreed to pay $8.2 million to settle a separate Justice Department civil lawsuit that accused the company of fraudulently overbilling Medicare.
Mr. Richard Scrushy, who co-founded HealthSouth in 1984, was well known inside and outside the company for his domineering management style.
HealthSouth directors, including a member of the board's audit committee, had significant business dealings with the company.
HealthSouth had substantial allowances, the size of which is open to wide management discretion, to reflect the difference between the amounts that HealthSouth would bill insurers for its services and the smaller amounts it actually expected to collect.
HealthSouth grew rapidly through acquisitions.
HealthSouth's 2000 pretax earnings more than doubled to $559 million, though its sales grew only 3%. Pretax earnings for 2001 were nearly twice 1999 levels, although sales rose just 8%.
Ernst & Young responded to the inquiry by the SEC stating, "When individuals are determined to commit a crime, as was the case with certain executives of HealthSouth, a financial audit cannot be expected to detect that crime."
Use the information provided and the fraud risk factors and identify the incentives and pressures, opportunities, and attitudes and rationalizations that were present at HealthSouth. Given this information, do you feel that Ernst & Young should have uncovered the fraud at HealthSouth?
Incentives at Health south
The HealthSouth Management overstated its earnings by nearly $ 2.7 billion for seventeen years. The management falsified the financial statements of the organization to receive from more government incentives. The involvement of directors in the audit committee is an incentive to the organization (SEC Press Release, 2003)
Pressures and opportunities at HealthSouth
The HealthSouth case is similar to various financial statement frauds that have been carried out by other organization due to undertaking activities such as insider trading to meet the expectations of the management. In this case, the company overbilled clients for Medicare services by falsifying financial statements to justify reimbursement claims (Jonathan Weil,2003).
The company wanted to meet the Wall Street requirement that showed the company had the highest-earning from the year 1999-2003.
Opportunity to the company: The HealthSouth received a substantial amount of allowances. This size was open to the management discretion, and it demonstrated the difference between the amount that the HealthSouth would bill the insurers for the services it rendered and the smaller amount of incentives it would obtain.
Attitudes and Rationalization
The attitude of the HealthSouth organization was to falsify its financial statements to make their firm look financially stable. Rationalization: the pretax earnings of HealthSouth doubled to $559 million, and its sales grew by 3 %( Jonathan Weil,2003).
Ernst & Young should have uncovered the fraud at HealthSouth.
I believe that Earnest & Young missed the Key indicators of fraud that were visible during auditing, and the investigation should have gone deeper to provide clear evidence. For instance, Earnests & Young missed signs since there was a huge falsification of financial statements. The director of the company used the wrong style of managing business that altered auditors from carrying out their audit functions appropriately. The management officials were involved in insider trading. The revenue of the company increased without an increase in net sales. The auditors should have looked at what operations made the organization attain this. The allowances were suspicious, and all these activities made Earnest & young to uncover wrongdoings of HealthSouth. All these wrongdoings were visible in the organization's audit report.