HealthSouth Corp. has filed suit accusing its former outside auditor, Ernst & Young, of intentionally or negligently failing to uncover a massive accounting fraud at the medical services chain.
The suit filed in Jefferson County, Ala., circuit court late Friday is an answer to Ernst & Young's recently filed suit against HealthSouth. That suit claimed the Birmingham, Ala.-based chain hid the fraud from the auditing firm, exposing it to lawsuits and damaging its reputation.
Both suits were filed during the corporate fraud trial of fired HealthSouth Chief Executive Officer and Founder Richard Scrushy. The government contends Scrushy directed a scheme to inflate earnings by nearly $2.7 billion from 1996 into 2002; 15 former HealthSouth executives have pleaded guilty in the fraud.
HealthSouth, now run by a mostly new team of corporate executives, contends Ernst & Young's failure to uncover elements of the fraud represents a breach of contract, negligence or conspiracy to defraud. It seeks damages including the legal costs and business losses caused by the fraud.
"E&Y either intentionally and knowingly turned a blind eye to the accounting fraud, manipulation and misconduct perpetrated by Scrushy and the pleading officers and employees, or E&Y negligently, recklessly, wantonly breached its agreements and duties implied in law in failing to discover the accounting fraud and to report the fraud to HealthSouth's board of directors and audit committee," the suit says.
Charlie Perkins, a spokesman for Ernst & Young, said Tuesday the HealthSouth fraud "was the direct result of the company's former officers' and employees' calculated plan to deceive the external auditors.
"We believe HealthSouth's claims are without merit and should be resolved through arbitration," he said.