Healthsouth Financial Fraud Analysis

Financial Fraud Analysis Project: HealthSouth Corporation
HealthSouth Corporation was, from the mid-1990s to early 2000s, one of the largest publicly traded health care companies in the United States and the largest provider of rehabilitative care and outpatient procedures. Between 1996 and 2002 it was estimated that the company had made over 2.7 billion dollars’ worth of false entries coming mainly from inflating reported revenues and improperly recording operating expenses (1). The SEC started to become suspicious of wrongdoing in 2002 when CEO Richard Scrushy suddenly sold ¾ of his company stock which led to an investigation by the SEC and FBI that same year. The financial ratios and comparison to their competitor Kindred Healthcare

This was done to keep stockholders satisfied and exceed the expectations on Wall Street (1). The fraud took place under the leadership and direction of former CEO and Chairman of the board, Richard Scrushy. According to a litigation release by the SEC, Scrushy would have his senior officers present over actual earnings quarterly and if they fell short of market predictions, he would have them “fix it” to match the estimates (2). Scrushy benefited personally from this as he would share company stock and receive hefty bonuses for favorable company earnings by the

The ratios were also calculated for Kindred as this specific competitor was similar in average annual net income and market cap. In comparing the book values per share for the years 2000-2001 of HealthSouth and Kindred, it can be noted that the value of HealthSouth’s shares were more than 8 times greater than Kindred’s with HealthSouth with ratios of 45.53 and -6.16 respectively, for 2000. The book value per share illustrates the amount each share if they were to be liquidated as stated in the company’s financial reports. This stark contrast in book value per share supports the notion that stock valuation was being largely overstated and falsified by HealthSouth. EBITDA margin was another ratio that showed drastically different numbers than those of Kindred with the ratios for 2000 being 27 (HealthSouth) and 2.85 (Kindred). The stark difference can be accounted to the falsification of operating expense and revenues by HealthSouth. EBITDA was used instead of gross profit margin as a profitability indicator since the industry in which the companies operates (healthcare) does not sell goods or have notable cost of goods sold, but rather offers services. Measures on liquidity (current, quick and debt-to equity) were more comparable, as debt and total liabilities were not largely comprised as part of the