April 18, 2003

HealthSouth

From the latest large-scale corporate accounting scandal: HealthSouth:


New York Times: ...The 11-minute excerpt, which was played last week in a hearing in federal court in Birmingham, Ala., was secretly recorded by William T. Owens, a former HealthSouth chief financial officer. Mr. Owens has admitted to participating in the fraud and is cooperating with regulators.

As part of an undercover operation conducted by the F.B.I., Mr. Owens wore a recording device, which he used to tape a conversation with Richard M. Scrushy, HealthSouth's chairman and chief executive, on March 18, the day before the Securities and Exchange Commission accused HealthSouth and Mr. Scrushy of inflating the company's profits.

Mr. Scrushy has since been fired by HealthSouth, but his lawyers have said he had no knowledge of any wrongdoing. Nine former executives have admitted to participating in the fraud. No criminal charges have been brought against Mr. Scrushy.

On the tape, parts of which are not intelligible, Mr. Owens recounts a conversation with his wife: "She said, `I'm afraid if you keeping signing these phony financial statements' ? and that was her term ? she says, `I've been reading about Enron and I've been reading about WorldCom.' She said, `I'm afraid that if you keep this up, you may end up in prison.' And she said, `If you end up in prison, what's going to happen to me?' "

Mr. Owens tells Mr. Scrushy that he told his wife, "Kay, I don't have any answers for you."

The two then go on to discuss what Mr. Owens should do. "You know, ideally, it would be great to solve our problems, and that's going to take time," Mr. Owens said, before asking Mr. Scrushy for his advice.

"I think you're one of those people who wouldn't want to risk their jobs and this whole company," Mr. Scrushy says. "We're having good solid numbers. I think that, you know, we're going to come out of here with some damn good income statements, P. and L.'s," he says, referring to profit-and-loss statements. "We've taken a major write-off last quarter ? written off everything. People think the deck's clean."

They then turn to the company's balance sheet. "I think if there's other things that bother you about the balance sheet that you need to fix them over time," Mr. Scrushy tells Mr. Owens. "If there was a way, you could fix them now, but I think you'd get killed."

Mr. Scrushy asks at one point what happens "if you go quarter to quarter and fix everything you want to fix."

"We should end up where we want to be," Mr. Owens replies.

Mr. Scrushy later talks about watching his son at a ballgame and thinking: "You know the reality is, look at how profitable this company is. We ? do we really want to trash all of this?"

"No," Mr. Owens says.

Mr. Scrushy then lowers his voice. "We got accountants signed off on all of this. We got everything set up. You can get, you're smart, Bill, you can, you can, but you got to look at your troops. I mean, I, I'll do whatever you want to do. But I, I mean, I think that, I think that if you, you ought to go down fighting, Bill. Don't you want to go down fighting?"

Posted by DeLong at April 18, 2003 09:03 AM | TrackBack

Comments

The dishonest ones are scary, but the honest ones aren't all that much less scary-- there was a report early in this week where a hospital executive blamed low quarterly profits on a 'weak' flu season.

Posted by: Matt on April 18, 2003 09:12 AM

If "Mr. Scrushy" didn't exist, we'd have to invent him.

Posted by: RonK, Seattle on April 18, 2003 10:18 AM

This is clearly Gray Davis's fault.

Posted by: Atrios on April 18, 2003 10:25 AM

The boss Mr. "Scrushy"? The accountant Mr. "OWEns"? Perfectly Dickensian, and funnier if it weren't true.

Posted by: Chris on April 18, 2003 11:10 AM

Here in Birmingham, there is such schadenfreude for Richard Scrushy that we'd be very disappointed if it turned out this happened without his knowledge. It doesn't help that his local counsel is also not well liked in the community. That said, I'd make a huge wager that he'll be found responsible. For something more shocking, one executive has testified that Scrushy told him that every CEO he knows has s*** on the balance sheet.

Posted by: Henry on April 18, 2003 06:15 PM

Financial Times devoted a whole Comment and Analysis page to HealthSouth on April 15th.

Posted by: Emma on April 19, 2003 06:24 AM

Please read Adam Smith's "Wealth of Nations." He warned that business people are tempted to defraud the general public. Am I therefore arguing for Ralph Nader's almost hostile attitude towards these folks? Absolutely not! We should prudently monitor the leaders of the business world---but not in an adversarial manner! This distinction is of utmost importance.

Posted by: David Thomson on April 19, 2003 08:07 AM

Well it will be interesting now to find out how much was being stolen from the company through deals with his other firms. Considering that HealthSouth had a reputation for aggressive cost management at the treatment level and for aggressive billing, you'd think he wasn't lying when he said above that the company was very profitable. Unlike some other recent frauds, this company was involved in businesses which are normally profitable. So the forensic audit should soon tell what theft it was that was being covered up.

Posted by: snsterling on April 19, 2003 07:31 PM

Please read Adam Smith's "Wealth of Nations." He warned that business people are tempted to defraud the general public. Am I therefore arguing for Ralph Nader's almost hostile attitude towards these folks? Absolutely not! We should prudently monitor the leaders of the business world---but not in an adversarial manner! This distinction is of utmost importance.

gee, david, i don't know about you, but it's hard for me not to have an "almost hostile attitude toward these folks" when it's them first who act in an "adversarial manner" by "defrauding the general public."

it's kind of like not being angry at the criminals.

wait, it's exactly like that.

Posted by: skippy on April 19, 2003 11:36 PM

"We should prudently monitor the leaders of the business world---but not in an adversarial manner!"

We should serve them coffee and donuts with kid gloves and jail them in their own special country club prisons.

(Skippy)"wait, it's exactly like that."

How much corruption does it take to hobble an economy? Corrupt economies like Nigeria and Russia have debilitating corruption levels that stifle growth. In an advanced economy like the US, what is the level of corruption that begins to limit growth? When companies like HealthSouth and Enron get away with theft for years and then implode how much damage does these economic bombs do? Look at the disastrous injury done to the California market and government by energy, uh, criminals.

Is there any way to measure corruption?
Is there a way to manage corruption? Is our political system so corrupted by corporate money that our much bally-hooded economic eco-system is beginning to suffer (think Japan and gridlock)?

Happy Easter everyone!

Posted by: Troy McClure on April 20, 2003 08:37 AM

Ok,now that we have ventilated about what a bumb Scrushy is,what about the thousands of employees who go to work everyday? What happens to them?
The folks at the top of the dirt pile still haven't figured out that its about the patients and the employees who make it happen every day.
So does some schmuck come in and change the sign and institute "cost cutting changes"? In a wider sense,corruption exits on a daily basis and you cannot legislate it out of existance. The next healthcare mogul will be no different. Any wonder why we are in the healthcare mess we are in with uninsured workers and premiums which are like luxury car payments?
Time for a change!

Posted by: John Wyatt on April 29, 2003 08:05 AM
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