E&Y Has New Definition For A 'Clean Audit'

The Wall Street Journal is reporting this week that Big Four firm Ernst & Young encouraged audit client HealthSouth Corp. to classify some rather unusual services under the umbrella of audit-related fees. The Securities and Exchange Commission may have a different view of the way in which these services should be described.

The services in question were devised under the direction of former HealthSouth Chairman and CEO Richard Scrushy, who was removed from his post earlier this year after being accused of inflating HealthSouth's earnings and who faces insider trading charges by the SEC. Mr. Scrushy devised a program called "Pristine Audits" whereby Ernst & Young auditors were hired during 2000 and 2001 to perform inspections of the cleanliness and physical appearance of HealthSouth's approximately 1,800 surgical and rehabilitation facilities.

The auditors were given a 50-point checklist as a guide in their examination of such features as stains on toilets and ceilings, liners in trash receptacles, and the orderliness of magazines in waiting rooms.

Ernst & Young was paid more for the Pristine Audits than for financial audits, but all of the services were categorized as audit-related fees on HealthSouth's financials. Since 2000, the SEC has required publicly held firms to identify how much is paid to audit firms for non-audit-related services.

E&Y Spokesman Donald Howarth has stated, "E&Y believes that HealthSouth's fees were properly classified," but The Wall Street Journal quotes HealthSouth spokesman Andrew Brimmer as saying, "We do not consider the pristine audit work to be related to the financial audit."

Former SEC chief accountant Lynn Turner described the issue: "E&Y arguing that checking the cleanliness of a facility is 'audit related' goes well beyond the pale of sanity and common sense."

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