WHITE-COLLAR CRIME

White-Collar Crime and the People Who Commit Those Crimes

Shannon M. Scarpello
Edison State College

WHITE-COLLAR CRIME

White-Collar Crime and the People Who Commit Those Crimes

Summary
Specializing in rehabilitation since 1986, HealthSouth quickly became one of the nations
largest healthcare providers, whose expansion to the United Kingdom, Australia, Puerto Rico,
Saudi Arabia, and Canada made it a global conglomerate. HealthSouth has been accused of
manipulating its financial statements since its inception in 1986 and is riddled with poor ethical
decisions by founder Richard Scrushy, as well as, by numerous top executives including
accounting personnel. Medical ethics dates back to the early 5th century, however, the first
modern code of medical ethics was developed in 1794 by Thomas Percival, an English
physician, who later expanded the code in 1803 (JAMA, 1965). The Code of Ethics was later
adopted by the American Medical Association in 1847 and has since been revised several times.
In 2003, one of the first publicly-held companies to be to be charged under the Sarbanes-Oxley
Act, HealthSouths founder was indicted on 85 counts of fraud by the federal government, which
were later reduced to 36 counts and included conspiracy to commit fraud; filing inaccurate
financial statements; in addition to securities, mail, and wire frauds (Stanwick & Stanwick,
2009). The manipulation of financial statements were alleged to have been approved and
encouraged by Richard Scrushy himself.
It is said that Scrushy was concerned with meeting the markets expected earnings each
quarter and if HealthSouths financial records did not meet those expectations, the senior
managers were to make adjustments and fix-it immediately so that the actual earnings met the
expected earnings; this manipulation was done using the contractual adjustments account in
small increments between $500 - $4,999 in an attempt not to raise any red flags by its auditor
Ernst & Young and included the generation of false invoices to support the manipulated accounts

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(Stanwick & Stanwick, 2009). What seemed like small ethical infractions and minor moral
breaches quickly became what is known today as white-collar crime. Overstated earnings
estimated around $5 billion inflated market values enough at HealthSouth to ensure continuous
flow of investment capital by both individual investors and institutional cash. Although, the
aggressive accounting policies adopted by HealthSouth employees were in compliance with
Generally Accepted Accounting Principles (GAAP), HealthSouths repeated attempts to alter its
financial statements and countless improper billing of outpatient therapies and inpatient
rehabilitations ultimately led to the 2005 convictions of numerous employees.
Case Questions
1. In 1998, Ernst & Young received an anonymous letter identifying accounting
irregularities at HealthSouth (Stanwick & Stanwick, 2009, p.293). At this time, then CEO
Richard Scrushy would have been notified, at least in some manner, of the allegations
surrounding HealthSouths financial statements. So, even though Ernst & Youngs own internal
investigation showed no signs of accounting problems, due to then unknown alterations of
invoices in order to prove purchases, Richard Scrushy would have been aware of the allegations.
At that point, he would then be held accountable in respect to reviewing the documents he was in
charge of. Although, prior to the creation of the Sarbanes-Oxley Act it is possible that a CEO
could be unaware of the actions of his subordinates, when taken one step further in thought that
possibility becomes mute.
For instance, how would altering financial statements in order to meet expected market
earnings affect an accountant versus say a CEO of a company? On the one hand, if the
accountant is ordered to alter the financial statements or risk losing their jobs that might be
incentive enough for an accountant to manipulate an accounting statement. On the other hand,

WHITE-COLLAR CRIME

the incentives for a CEO to alter financial statements in order to meet expected market earnings
can effect everything from bonuses and salaries, to the companys profits and stocks; and can be
a deciding factor as to whether or not the performance of the CEO is benefiting the company or
not. Therefore, it is unreasonable to think a CEO would be unaware of this type of fraud,
especially in this magnitude. Scrushys excuse that he just signed off on the documents given to
him with the expectation that the information was correct and accurate rather than actually
examining the documents fails to justify why he held the position of CEO; instead, companies
should have a computer sign the documents as it would be more cost effective.
2. Stakeholders: According to Stanwick and Stanwick, stakeholder groups include, but are
not limited to, employees (including management), suppliers, customers, persons in the
community and community groups, the government, competitors, and stockholders (p. 25).The
impact to stakeholders is endless and includes loss of employee jobs, pensions, and retirement
plans; a damaged corporate image and reputation; downsizing due to poor performance and
ethical misconduct; the ethical misconduct of stakeholders rights results in low investor
confidence and shareholder value; In the case of HealthSouth, specific stakeholders included:

HealthSouth. The impact is to HealthSouth is vast and leads to money lost, illegal use of
company assets, a damaged reputation and image, and a lack of faith in the community
and social responsibility as well as corporate governance.

Four Friends (who invested $50, 000);

The public; The impact can create an unsure environment in which patients question
whether or not they are getting the treatment necessary to ensure a full recovery based on
the patients needs. Numerous individuals whose healthcare might have been disrupted
due to the downsizing of HealthSouth after the allegations and convictions;

WHITE-COLLAR CRIME

The fifty states including the United Kingdom, Australia, Puerto Rico, Saudi Arabia, and
Canada in which HealthSouth operated;

All HealthSouth employees; thousands of employees lost their jobs and their pensionplans have been severely depleted, if not completely lost, due to the falling shares of
stock;

Three celebrities chosen to boost the image of HealthSouth Tom Glavine, Bo Jackson,
and Jason Hervey;

Go For It road show and 3rd Faze developed by Richard Scrushy;

HealthSouths former auditor Ernst & Young;

HealthSouths new auditor PricewaterhouseCoopers;

HealthSouths fifteen senior-level executives, including CFO Michael Martin, CFO Tad
McVay, CFO Bill Owens, CEO Jay Grinney, CEO Weston Smith, former president and
chief operating officer James Bennett;

Board member C. Sage Givens, Larry Striplin, George Strong, and Charles Newhall

Lead attorney Jim Parkman;

The Teachers Retirement System of Louisiana; and

The Government. The impact reflects changes in legislation and corporate governance.
Punishment

Even with statements from former Healthsouth controller and CFO Bill Owns claiming that
Richard Scrushy did in fact know what lower-management was doing and claimed that the fraud
resulted in personal gains, Scrushys lead attorney Jim Parkman, stated that there was not a
single piece of evidence that linked Scrushy to the fraud Scrushy was found not guilty by jurors

WHITE-COLLAR CRIME

(Stanwick & Stanwick, 2009, p295). Unfortunately for the government, building its case against
Scrushy involved too many individuals whose backgrounds were questionable and not enough
evidence proving Scrushys involvement beyond a reasonable doubt (Stanwick & Stanwick,
2009). The surprising decision by the jurors enabled Scrushy to walk out of the courthouse, and
keep all of his assets, including the ones obtained through ill-gotten means. The government
simply failed to look into the proper evidence necessary to prove a conviction. Other employees
involved in the corporate fraud were not so lucky. The consequences for the role they played in
the fraudulent activities at HealthSouth ranged from 6 months house-arrest to extended time in
prison, and hundreds-of-thousands of dollars in fines and legal fees. The prosecutors inability to
build a strong case against Richard Scrushy, due to lack of evidence, was a huge blow to the
stakeholders and highlighted the short-comings and flaws in the legal system.
Not surprising however, is one year later Scrushy was convicted in a 2006 court hearing of
bribery involving the governor of Alabama, Don Siegelman. The conviction included bribery,
conspiracy, and mail fraud (Stanwick & Stanwick, 2009). Also, in 2006 the Alabama Supreme
Court ordered Richard Scrushy to repay HealthSouth $47.8 million in bonuses that were paid to
him during the accounting fraud after a shareholder sued Scrushy stating that the former CEO
received the bonuses without justification because HealthSouth was losing money during the
payment period of the bonuses (Stanwick & Stanwick, 2009, p.297). His federal prison sentence
will be completed at the satellite camp of the U.S. Penitentiary in Beaumont, Texas after he was
sentenced on June 28, 2007. His sentence will consist of 82 months in federal prison, three
years probation, $267,000 in restitution and a fine of $150,000; including 500 hours of
community service (Hamiltion, 2009, p. 4).

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Case Questions
3. In 2009, Scrushy was found liable d a civil trial in Jefferson County for the accounting
fraud at HealthSouth and was order to pay $2.8 billion in damages. Part of the final judgment
stated that Scrushy be banned from serving as an officer or director of any company that holds
securities under the Securities exchange Act of 1934 (Faulk, 2013). Today Richard Scrushy can
be found residing in Houston, Texas. His federal prison sentence ended in 2012. He is currently
requesting a judge to lift a ban on his becoming an officer in a new healthcare business he wants
to start since the ban could be removed after five years (Faulk, 2013, para. 10). His new
business venture includes building cost effective urgent-care and emergency centers, surgical
centers, and out-patient facilities such as rehabilitation centers (Faulk, 2013, para. 28). Its
unfortunate that someone with the innovation to develop more efficient health care has ulterior
motives in which moral integrity and ethical standards can be thrown aside in the face of greed.

WHITE-COLLAR CRIME

8
References

Faulk, K. (2013). Former HealthSouth CEO Richard Scrushy seeks to form new healthcare
business with opportunities opened by Obamacare (updated). All Alabama. Referenced
from http://blog.al.com/spotnews/2013/05/former_healthsouth_ceo_richard_2.html.
Hamilton, Chris. (2009). HealthSouth: A case study in corporate fraud. Arxis Financial, Inc.
Referenced from http://www.arxisfinancial.com/images/pdfs/FraudHealth_South_Case.pdf
Jama.(1965). Thomas Percival (1740-1804) codifier of the medical ethics. JAMA The journal of
the American Medical Association; 194(12): 1319-1320. Doi:
10.1001/jama.1965.03090250053021. Referenced from
http://jama.jamanetwork.com/article.aspx?articleid=657392
Lawrence, D. 2003. HealthSouth fraud impacts millions. Peoples world. Its your world.
Referenced from http://www.peoplesworld.org/healthsouth-fraud-impacts-millions/
Stanwick, P., & Stanwick, S. (2009). Understanding business ethics. (1 ed., p. 25 & 35; 291299). Fall River, N.J.: Pearson