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Health South Corporation Fraud Case Questions

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1. What were the underlying reasons or economic motivations for the fraud?
The underlying reasons or economic motivations for the fraud can all be
attributed to the CEO at the time, Richard Scrushy. Scrushy caved to the
financial pressure to continue his company’s growth, along with this
pressure there were also many grey areas surrounding accounting laws at
the time which paved the way for certain unethical practices (Lupica,
2014).
2. What was the specific nature of the fraud? Which financial statements were
inaccurate due to the fraud?
The specific nature of the fraud was a deliberate misrepresentation of
earnings in order to convince shareholders and the stock market that the
company was more successful than they truly were. The financial
statements that were inaccurate due to the fraud included income
statements and balance sheets (McKee & McKee, 2017).
3. Who were the HealthSouth external, independent auditors? What did they receive
in fees for 2001?
The external/independent auditor for HealthSouth was E&Y (Ernst &
Young). They received $3.7 million dollars in audit and other fees in the
year 2001 (Countryman, 2003).
4. Did the external auditors uncover the fraud? Why or why not? If not, how was the
fraud uncovered?
Ernst & Young were not able to uncover the fraud, due to the fact that
HealthSouth had implemented many steps in order to avoid detection and
had involved many individuals throughout the company to help with these
steps. HealthSouth also employed many former E&Y employees that
knew the ins and outs of how the company performed their audits, which
allowed HealthSouth to be ahead of them when it came to hiding the fraud
(Lupica, 2014). The fraud was uncovered by a former CFO for
HealthSouth, Weston Smith, who tipped off federal investigators (Lupica).
5. Were any employees criminally indicted, and, if so, what were their positions
with HealthSouth Corporation?
Five CFO’s were criminally indicted, as well as the CEO, Richard Scrushy
(Lupica, 2014). In the end 15 HealthSouth accounting and finance
executives pled guilty on top of the five CFO’s that were indicted.
6. Has anyone gone to jail over the fraud? If so, who and for how long?
Yes, several employees did go to jail over the fraud. Richard Scrushy was
sentenced to seven years in prison, Weston Smith was sentenced to 27
months, and Aaron Beam was sentenced to three months (Lupica, 2014).
7. What were the consequences of the fraud to stock investors in HealthSouth
Corporation?

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One of the major consequences of the fraud was the stock price of
HealthSouth plummeted to as low as $.35 cents a share, causing stock
investors to lose millions of dollars (Lupica, 2014).
8. What financial metrics (ratios) might have pointed to the fraud before it was
discovered?
Some financial metric (ratio) that might have pointed to the fraud before it
was discovered include accounting anomalies that show increasing
revenues without cash flows to back them up, another indication would be
consistent sales growth while competitors struggle, or a significant surge
in performance for a company during their last reporting period of the
fiscal year (Bloomenthal, 2021).
9. What is “hindsight bias,” and how might it affect your answer to the previous
question?
Hindsight bias is a psychological phenomenon that “Allows people to
convince themselves after an event that they had accurately predicted it
before it happened. This can lead people to conclude that they can
accurately predict other events.” (Chen, 2021). This phenomenon affects
the answer to the previous question because while some of the metrics
would have indicated that fraud was occurring sooner if they had been
examined more thoroughly, those factors were not as obvious at the time.
10. What, if any, lessons can we learn from this fraud?
There are many lessons to be learned from this fraud, but the most relevant
one is to not simply go along with something just because someone
influential says so. If someone had intervened earlier on, and gone against
what Richard Scrushy wanted, then this fraud would have been avoided or
been much less extensive. This case should also push more auditors to not
take a company's word for their finances, and instead auditors should
examine financial statements much more closely.

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1. What were the underlying reasons or economic motivations for the fraud? ■ The underlying reasons or economic motivations for the fraud can all be attributed to the CEO at the time, Richard Scrushy. Scrushy caved to the financial pressure to continue his company’s growth, along with this pressure there were also many grey areas surrounding accounting laws at the time which paved the way for certain unethical practices (Lupica, 2014). 2. What was the specific nature of the fraud? Which financial statements were inaccurate due to the fraud? ■ The specific nature of the fraud was a deliberate misrepresentation of earnings in order to convince shareholders and the stock market that the company was more successful than they truly were. The financial statements that were inaccurate due to the fraud included income statements and balance sheets (McKee & McKee, 2017). 3. Who were the Hea ...
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