SEC alleges HealthSouth inflated earnings by $1.4 billion

Outpatient surgery may not be sufficient to cure what ails HealthSouth Corp.

The U.S. Securities and Exchange Commission has charged the publicly traded, Birmingham, Ala.-based health care company with massive accounting fraud, alleging that earnings were inflated by at least $1.4 billion since 1999.

Locally, officials of HealthSouth's five Ozarks locations report they are as yet unaffected by the corporate scandal.

Wall Street expectations

According to the SEC complaint, the massive overstatement by HealthSouth (NYSE: HRC) occurred because HealthSouth founder, CEO and Chairman of the Board Richard M. Scrushy, "insisted that HRC meet or exceed earnings expectations established by Wall Street analysts. When HRC's earning's fell short of such estimates, Scrushy directed HRC's accounting personnel to fix it by artificially inflating the company's earnings to match Wall Street expectations."

HealthSouth's 2001 Form 10-K overstated the company's earnings by a staggering 4,722 percent, the SEC has discovered. By third-quarter 2002, the company's assets were inflated by at least $800 million.

HealthSouth's board of directors has since placed Scrushy on administrative leave. Scrushy pleaded guilty March 19 to criminal fraud charges filed by the U.S. Department of Justice.

While federal investigations are ongoing, trading of HealthSouth's shares on the New York Stock Exchange is halted. A March 25 NYSE news release announced the exchange is applying to the SEC to delist the security.

HealthSouth's approximately 1,600 facilities provide outpatient surgery, diagnostic imaging and rehabilitative health care services. There are five outpatient rehabilitation centers in the Ozarks, two in Springfield at 1343 E. Kingsley St. and 2828 N. National Ave.

Local operations

According to local HealthSouth administrator Chuck Renner, the corporate financial turmoil has not changed operations in the company's Ozarks facilities.

"There really is no interruption in operations at any of the facilities we have around here," Renner said. "This is a corporate issue. We're not anticipating any staff reductions or any changes locally."

There are 15 employees in Springfield with another 15 employees among locations in Branson, Joplin and Harrison, Ark., which Renner also oversees.

Despite the federal investigations, Renner said he feels secure in his job. "I have no concerns or worries about that. We have a good, strong presence in Springfield," Renner said. "We have served our patients well here over the years. I am not really concerned about any layoffs or reductions in this area."

Renner became involved with HealthSouth when the health care services giant purchased Renner's three Ozarks area rehabilitation treatment facilities in 1995.

Moving forward

HealthSouth has hired Alvarez & Marsal Inc., the turnaround advisory firm recently engaged by Arthur Andersen LLP, to address financial and liquidity concerns, said Ernie Knewitz HealthSouth spokesperson. Also, a forensic auditing team from PriceWaterhouseCoopers is investigating the financial reports that drew the ire of the SEC.

In a news release, the SEC cautioned broker-dealers, shareholders and prospective purchasers of HealthSouth stock.

"HealthSouth's fraud represents an appalling betrayal of investors," said Stephen M. Cutler, the SEC's director of enforcement. "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."

In its complaint, the SEC claims that HealthSouth made false journal entries to the income statement and balance sheet accounts in a manner calculated to avoid detection by its outside auditors, and created false documents to support its fictitious accounting entries.

The SEC also is requesting documents from HealthSouth's outside auditors, the accounting firm of Ernst & Young.

While analysts have speculated the company could file for bankruptcy, HealthSouth's Knewitz declined to comment.