Richard Schrushy, the CEO of HealthSouth, denied knowing about the fraud at his company. He says that executives working under him kept knowledge of the fraud from him.
a. Is this a possible explanation for his involvement in the HealthSouth fraud described in the chapter? If this is the case, how would he explain his certification of the financial statements indicating he was aware of the decisions the company made to prepare the financial statements?
b. When asked how the accounting fraud could have occurred while the firm audited the statements, Ernst & Young, HealthSouth’s auditor, replied, “When individuals are determined to commit a crime, as the case with executives at HealthSouth, a financial audit may not detect that crime.” Evaluate that statement made; is it a “good” excuse? What could have been its motivation to offer such an explanation?
c. Members of HealthSouth’s board of directors, including a member of the audit committee, had significant business dealings with the company. What role could this factor have played in the fraud?