Auditors Find Fraud at HealthSouth Could Total $4.6 Billion

Auditors looking into the fraud at HealthSouth have found it to be far more extensive than originally thought—as much as $4.6 billion in all.

Initially, estimates put the fraud at $3.5 billion at the Birmingham, AL-based operator of rehabilitative clinics. The new number comes from a forensic audit by PricewaterhouseCoopers. Importantly, auditors found just $6 million in Medicare fraud. If Medicare fraud had been massive, the company could have lost its Medicare business.

According to the New York Times, auditors found instances of accounts receivable on money owed to HealthSouth being booked as income. "The victims of the fraud were the security holders, the equity holders," Bryan P. Marsal, the company's chief restructuring officer, told the New York Times in an interview before briefing investors in New York.

Marsal said the fraud included $2.5 billion in fraudulent accounting entries from 1996 to 2002, $500 million in incorrect accounting for goodwill and other items involved in acquisitions from 1994 to 1999, and $800 million to $1.6 billion in "aggressive accounting" from 1992 to March 2003.

HealthSouth’s founder and former chief executive, Richard Scrushy, was indicted last fall on 85 federal criminal charges related to the fraud. He has denied any role in the activities that led to inflated earning statements. Fifteen former executives, including five former chief financial officers, have pleaded guilty to charges related to the fraud.

A suit filed earlier this month in U.S. District Court in the Northern District of Alabama charges that HealthSouth’s former auditors and investment bankers knew about fraud within the company long before it became public last year.

The suit, brought on behalf of stock and bond investors who bought into the company between 1998 and 2002, claims that its former auditors at Ernst & Young, and former investment bankers at UBS Warburg, knew about fraud within the company even as they signed off on financial statements and sold HealthSouth securities to the public, the New York Times reported.

The lead plaintiff is the Alabama Retirement Systems, which invested $35 million in the company’s bonds, losing half of it when the fraud was uncovered, John P. Coffey, an attorney representing the Alabama pension fund, told the New York Times.

Doug Jones, a lawyer for HealthSouth shareholders and bondholders who are suing the company and its previous auditors and investment bankers, Ernst & Young and UBS Warburg, told the New York Times yesterday that the new report was "a candid admission about the value of this case."

Marsal told the Times that he expects HealthSouth to issue audited financial results for four years, 2000 through 2003, in the first quarter of next year. Despite its troubles, HealthSouth expects to show a profit in 2005.

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