1. What were the major flaws in HealthSouth’s corporate governance?
2 & 5. What should HealthSouth’s auditors, Ernst & Young, have done if they had perceived these flaws? What is the auditor’s responsibility in case of fraud?
3. How – in accounting terms – did the manipulation of HealthSouth’s financial statements take place?
4. Why did all the people who knew about the manipulation keep quiet?
6. What are the proper audit procedures to ensure existence of assets in the financial statements? What are the proper audit procedures to validate estimates?
7 & 8.What areas of risk can you identify in HealthSouth’s control environment before 2003? What areas of risk can you identify in HealthSouth’s strategy before 2002?
9. What changes could be made in HealthSouth’s control system and corporate governance structure to mitigate the risk of accounting fraud in future years?
10. Was Scrushy’s defense ethical?
On March 19, 2003, the U.S. Securities and Exchange Commission (SEC) filed accounting fraud charges in the Northern District of Alabama against HealthSouth Corporation and its CEO, Richard Scrushy. Scrushy was also charged with knowingly miscertifying the accuracy and completeness of the company’s financial statements. Consequently, Scrushy became the first CEO to be charged under the governance-reforming Sarbanes-Oxley Act of 2002. Although five Health-South CFOs testified that Scrushy had knowingly directed the fraud, on June 28, 2005, the Alabama jury acquitted him of all thirty-six criminal charges, and later some civil charges were initially dismissed.