HealthSouth’s Internal Probe Uncovers Deficiencies; Former Executive Sentenced

New filings with the Securities and Exchange Commission show that HealthSouth’s internal review found more than $2.7 billion in "false or unsupported entries in the company’s accounting systems, Dow Jones Newswires reported.

The forensic accounting report also uncovered an additional $632 million in "aggressive or questionable" transactions, leading some to wonder why it took so long to discover the irregularities within the health care company.

According to the internal report, one former HealthSouth chief financial officer "expressed surprise that the fraud did not come to light sooner," Dow Jones reported.

The fraudulent entries spanned from 1996 to 2002 and included exaggerated reported revenue—mostly by reductions to contractual adjustment accounts—and the failure to accurately characterize and record operating expenses, Dow Jones reported.

In January, the company announced that it was aware the internal review would show fraudulent and inappropriate accounting entries that would add up to between $3.8 billion to $4.6 billion.

The report was done by a special audit review committee with assistance from legal counsel and a PricewaterhouseCoopers forensic accounting team, which found the $632 million in questionable accounting transactions are "the likely subjects of additional financial statement adjustment," Dow Jones reported.

The internal review team was not asked to figure out who was responsible for thinking up and executing the fraud nor was it asked to determine if the fraud should have been uncovered before March 2003, Dow Jones reported. However, the report did show several instances when the fraud could have or should have been uncovered.

The report states that the magnitude of the fraud and the length of time it covered leads to questions about role of the firm’s former outside auditor, Ernst & Young. However, a deeper look at Ernst & Young’s role in the fraud would have required access to audit work papers, which was denied by Ernst & Young, Dow Jones reported, adding the firm denied the request unless the information it provided would be unavailable to HealthSouth.

In a related development, former HealthSouth Corp. assistant controller and chief information officer Kenneth Livesay was sentenced to probation for his role in the accounting fraud, the Birmingham Business Journal reported. Livesay is the sixth of 15 former HealthSouth executives who pleaded guilty to be sentenced in the matter.

The case is the first sentencing under the Sarbanes-Oxley Act, designed to impose severe penalties on top executives who sign false financial statements.

Livesay last year pleaded guilty to charges of criminal fraud and wire fraud related to the scandal, which the federal government says involved more than $2.7 billion in faked assets and earnings since 1996, the Birmingham Business Journal reported.

On Wednesday, U.S. District Judge Clemon sentenced chief financial officer, Malcolm "Tadd" McVay to six months of home detention and a $10,000 fine, and ordered him to forfeit $50,000, an amount based on his HealthSouth compensation, after taking into account his cooperation with the investigation.

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