Case 21: HealthSouth (2003)

In 2002, WorldCom, Tyco, Adelphia and several other U.S. companies joined Enron’s fraudulent accounting ranks. One year later, Birmingham, Alabama-based HealthSouth Corp. also became a member of that disreputable group. In March 2003, the SEC charged HealthSouth and its founder, chairman and CEO, Richard M. Scrushy, with accounting fraud. SEC director of enforcement Stephen Cutler stated in a press release that “HealthSouth’s standard operating procedure was to manipulate the company’s earnings to create the false impression that the company was meeting Wall Street’s expectations”. (Of course, this motive was not a new one.) HealthSouth managed to match Wall Street’s expectations for 48 consecutive quarters. That unerring track record could have been attributed to predictable operations or legal income-smoothing techniques, but hindsight proved otherwise. It became apparent that for many years, HealthSouth’s financial disclosures had neither represented economic reality nor conformed to GAAP.

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