Outside auditors for HealthSouth Corp., Birmingham, Ala., and perhaps officials at the Securities and Exchange Commission were warned of possible fraud at the company in 1998, according to congressmen investigating the company. A 1998 memo to HealthSouth's auditor at the time, Ernst & Young, from a shareholder "provides a road map leading to possible fraud," said Reps. Billy Tauzin (R-La.) and James Greenwood (R-Pa.) in a written statement. Tauzin is chairman of the House Energy and Commerce Committee and Greenwood is chairman of the committee's Subcommittee on Oversight and Investigation. Ernst & Young provided the memo to the committee as part of its cooperation with the investigation. "You bring the smoke, I'll bring the mirrors," the shareholder wrote in the memo, a copy of which was obtained by Modern Healthcare's Daily Dose.
The shareholder questioned revenue accounting at HealthSouth hospitals and asked Ernst & Young to investigate his charges. Ernst & Young said that in response to the memo the company conducted a review by individuals outside the audit team and determined the issues raised "did not affect the presentation of HealthSouth's financial statements." It was unclear whether the memo actually was received by other parties on its distribution list, including the CMS and the SEC's enforcement division. -- by Julie Piotrowski