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June 07, 2004 01:00 AM

Fuel to the fire

HealthSouth review confirms fraud; no jail for execs

Julie Piotrowski
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    The already tarnished reputation of HealthSouth Corp. was further sullied last week by an internal forensic review confirming estimates of a multibillion-dollar accounting fraud at the giant rehabilitation and outpatient surgery company.

    "The accounting fraud at HealthSouth was by any standard both enormous and complex," the review said. "Its concealment over the course of nearly seven years required considerable effort and, in some cases, luck."

    Verifying previous company estimates that the cumulative effect of accounting errors in prior financial statements was between $3.8 billion and $4.6 billion, the review was released as former high-ranking HealthSouth executives were spared jail time when a judge rejected prosecutors' recommendations that the executives receive prison terms. The government has accused the company of committing at least $2.7 billion in accounting fraud.

    The long-awaited review is part of the Birmingham, Ala.-based company's effort to reconstruct its financial statements. It did not address whether the massive fraud should have been discovered before last March-when the allegations were made public-or who ultimately orchestrated the intricate deceit.

    HealthSouth, under new executive leadership, continues to try to distance itself from its previous management. But with the criminal trial of former Chief Executive Officer Richard Scrushy set to begin in September and the ongoing reconstruction and expected reissuing of years of financial results, HealthSouth's corporate identity rehabilitation is far from over.

    Moreover, an ongoing, aggressive battle with company bondholders, who are threatening to demand early repayment of HealthSouth's debt unless the provider compensates the groups for its inability to file accurate financial statements, continues to pose additional challenges.

    Newly appointed CEO Jay Grinney (See story, p. 32) said in a letter to employees that the results of the forensic review, which was completed with assistance by legal counsel Balch & Bingham and an accounting team from PricewaterhouseCoopers, would not affect HealthSouth's operations.

    "Our operations and cash flow continue to be strong and we remain focused on building a future of solid growth and profitability," said Grinney, a former HCA executive who began his tenure at HealthSouth last month. He added, "I look forward to continuing to focus on our important, day-to-day business of providing outstanding care to our patients throughout the country."

    The forensic review was conducted to examine misstatements in HealthSouth's publicly issued financial statements from 1999 through 2001, said Jon Hanson, chairman of the committee that conducted the review. At the request of HealthSouth and in response to inquiries from the U.S. Justice Department and the U.S. attorney's office, the committee also reviewed financial statements and accounting issues from 1996 through 1998.

    Meanwhile, more former HealthSouth executives were spared prison terms last week by a Birmingham federal judge who rejected prosecutors' arguments that the employees' accounting abuses were grounds for jail time. Nine of the 15 former HealthSouth executives who have pleaded guilty to criminal charges in relation to the accounting scandal have been sentenced with only one-Emery Harris, former vice president of finance and assistant controller-receiving a prison term.

    In the latest round of penalties, U.S. District Judge U.W. Clemon sentenced former HealthSouth Assistant Controller and Chief Information Officer Kenneth Livesay, 43, and former Chief Financial Officer Malcolm McVay, 42, to five years of probation for falsifying financial information filed with the Securities and Exchange Commission. Clemon also ordered both men to serve six months of home detention and pay a $10,000 fine in addition to forfeiting money gained through the fraud. Livesay will forfeit $750,000 and McVay will forfeit $50,000.

    Also sentenced last week were Richard Botts, 45, former senior vice president of taxes at HealthSouth, and Catherine Fowler, 37, former vice president of treasury and cash manager at the company. Prosecutors had been seeking a three-year prison term for Botts, who received six months of home detention for providing false tax information, a $10,000 fine and was ordered to forfeit $265,000. Prosecutors recommended that Fowler receive six months in prison, but she received two years of probation and a $5,000 fine.

    'The accounting fraud at HealthSouth was by any standard both enormous and complex. Its concealment over the course of nearly seven years required considerable effort and, in some cases, luck.'--A review from an internal investigation at HealthSouth Corp.

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