HealthSouth operates in the physical rehabilitative health care services industry. The company ‘s mark patients are people with physical disablements, senior citizens, and immature people with chiefly sports-related hurts. HealthSouth provides interdisciplinary intervention plans for patients who have suffered from a assortment of disablements caused by shot, orthopedic jobs, caput hurt, neuromuscular disease and sports-related hurts ( Annual Report, 2009 ) .
HealthSouth operates in five concern sections. The company ‘s inmate rehabilitation infirmaries provide patient attention services to patients after they are discharged from traditional ague attention infirmaries. HealthSouth ‘s outpatient rehabilitation installations ‘ aids restore patients ‘ mobility. It is an extension of the attention service provided by the inmate rehabilitation infirmaries. HealthSouth ‘s long-run ague attention infirmaries focus on pull offing complex medical jobs and satisfy multiple long-run wellness attention demands. HealthSouth ‘s place wellness plan provides service for patients who need home-based attention. This plan involves directing skilled nurses and curative specializers to patients ‘ places to supply physical, occupational or speech therapy. HealthSouth is besides a supplier of rehabilitation engineering to patients ( HealthSouth, 2010 ) .
Market Structure: Highly Competitive
The health care service industry in the United States is extremely competitory, but because of the aging U.S. population and the prevalence of functional disablement it is still a turning market. Companies in the health care industry have to fight non merely with decreased reimbursement from patients and their insurance companies, but besides with monetary value competition from houses supplying similar services ( Porter & A ; Teisberg, 2004 ) . Amalgamations and acquisitions are really common in the American health care industry. To stay the largest supplier of inmate and outpatient rehabilitative services, HealthSouth carried out a series of amalgamations and acquisitions across America. These important acquisitions brought HealthSouth to more than 2,000 locations across the United States ( Chaubey, 2006 ) . Generally, little companies have a difficult clip lasting in this extremely competitory market and big companies owned by investors absorb these little, less organized health care companies and so do them portion of their ain countrywide ironss. All companies in this industry have to confront the job of commanding their operating costs while keeping their quality of service in order to stay competitory within the industry. As a consequence of healthcare payment policy alterations, all rehabilitation infirmaries have been marketing themselves to the big payors and this state of affairs has made the monetary value competition much fiercer. The health care industry is non limited to for-profit companies. Not-for-profit organisations are besides HealthSouth ‘s rival. These Not-for-profit organisations provide rehabilitation services every bit good and merely like for-profit rehabilitation Centres, the NFPs besides increase their market presence through amalgamations and acquisitions ( Wheatle, De Jong, & A ; Sutton, 2005 ) .
HealthSouth and Rivals
HealthSouth ‘s rivals include nursing places, senior residential life installations, athletics
related hurt installations, psychiatric solutions, and other installations supplying inmate and
Outpatient attention. Select Medical Holdings, Sun Health Care Group, Rehab Care Group, and
National Healthcare Corporation are HealthSouth ‘s cardinal rivals.
HealthSouth Business Model
HealthSouth ‘s gross came from assorted payors such as Commercial Insurance and other managed attention programs ; Medicare ; worker ‘s compensation ; and payments from single patients. At 40.3 % , the largest beginning of HealthSouth ‘s gross was commercial insurance and managed attention programs. Medicare was the 2nd highest beginning of gross for HealthSouth in 1999, accounting for 33 % of gross.
There are four dogmas to HealthSouth ‘s concern Model, which include the integrating of services ; marketing to managed attention organisations and other payors ; cost-efficient services ; and enlargement of the national web ( Annual Report, 1999 ) .
Integration of Servicess: HealthSouth tries to incorporate its five concern sections for its payors by offering all or most of its services in the same metropolis. This incorporate system is convenient for big payors, such as insurance companies and Medicare, as they do non hold to cover with multiple companies to supply different signifiers of health care coverage for their participants. This system besides allows for increased gross for the company by agencies of patient cross-referrals between the different HealthSouth installations in the same metropolis ( Annual Report, 1999 ) .
Selling to Individual Patients and Large Payors: Another of import component of HealthSouth ‘s concern theoretical account is a strong selling attempt geared towards single patients and big payors. HealthSouth understands the value of marketing to patients, irrespective of whether they have healthcare coverage or non. The selling program for each single installation is designed with the cardinal factors such as the country ‘s disablement statistics and population features in head. Equally of import as the selling run for each installation is, HealthSouth chiefly focuses on developing and keeping contractual relationships and national understandings with big insurance companies, employers, and managed attention organisations. ( Annual Report, 1999 )
Servicess provided at a Lower Cost: Offer services at lower costs is indispensable for retaining big payors who are frequently seeking the most cost-efficient health care supplier. With its strong selling attempt, HealthSouth charges less for its assorted services than the competition, and still prospers as it receives a big figure of patients. The company ‘s Outpatient surgery installations in peculiar are renowned for supplying cost nest eggs ( Annual Report, 1999 ) .
Expansion of HealthSouth ‘s National Network: A uninterrupted enlargement of HealthSouth ‘s web of health care installations is besides an of import portion of the company ‘s concern theoretical account. Internal growing and acquisition have made this enlargement possible. The company has become the largest supplier of health care services in the United States, and this place has allowed the company to recognize economic systems of graduated table and successfully vie for contracts with big national payors. As a consequence, the company is able to use greater purchasing power through centralised buying, ensuing in significant cost nest eggs ( Annual Report, 1999 ) .
HealthSouth ‘s Critical Success Factors
Some of the critical success factors for HealthSouth are:
Meeting gross marks and keeping the company stock monetary value ( Wall Street outlooks )
Supplying high-quality, cost-efficient wellness attention services
Efficaciously selling services to big payors and patients
Expansion of HealthSouth ‘s National Network
Attracting and retaining high-quality forces
Bettering patient rehabilitation clip
HealthSouth Fiasco: Brief Overview
At the terminal of 2002, after the Enron crisis, HealthSouth became a mark of the security exchange committee. The originative attack detracted attending from external hearers, authorities and stockholders. HealthSouth ‘s misrepresentation was comparable to the fraud committed by Enron and Worldcom. HealthSouth ‘s employees manipulated scrutinizing paths by changing and adjusted entries, bills. They besides carefully forged all back uping paperss.
Like other ill-famed accounting dirts, the fraud in HealthSouth was discovered by the SEC in 2002 when the CEO sold $ 75 million in his stock options merely yearss before the company announced important losingss. Within yearss, the Board of Directors instantly hired an outside adviser to analyze the company ‘s accounting records to look into these big losingss. After several failed efforts to associate HealthSouth CEO ‘s portion dumping to the company ‘s sudden fiscal loss, on March 18, 2003, FBI agents executed search warrants at the company ‘s central office in Alabama ( Chaubey, 2006 ) . With records collected, on March 19, 2003, the SEC filed a civil ailment against HealthSouth for important accounting misrepresentation ( SEC Litigation, 2003 ) . The trading of HealthSouth ‘s stock in NYSC was instantly suspended pending probe ( Laurence & A ; Voreaco, 2006 ) .
Evidence of HealthSouth ‘s delusory accounting astonished the jury, unsuspecting Board of Directors and stockholders. First, HealthSouth reported net gross by cut downing its contra-revenue balance, a modesty history that represents the estimated difference between the sum billed to patients and the expected insurance reimbursements. Contra-revenue accounting is allowed in the health care industry but it is capable to a batch of managerial discretion. HealthSouth ‘s unlawful decrease of its contra-revenue history meant that the company expected to roll up all sums billed to patients. In making so, the company concealed the impact of claims that would non be reimbursed by the insurance supplier. Second, to equilibrate these deceitful accommodations to the contra-revenue history, matching entries were made to non-existence fixed plus “ belongings, works, and equipment ” balance. Third, the seting entries did non transcend $ 4999 as executives knew that hearers merely questioned entries that exceeded that sum. This discretional accounting took topographic point in 2000 HealthSouth installations across the United States. This cumulatively resulted in approximately $ 800 million exaggeration in the works and belongings plus balance by Quarter 2, 2002. Since that big exaggeration was done in multiple installations it was really hard to observe.
The key participants in the HealthSouth fraud included five former CFOs ( Weston L. Smith, Tadd McVay, Aaron Beam, Michael Martin, and William Owens ) and 15 executives. Ex-CFOs and top executives all pleaded guilty to knowingly take parting in the misunderstanding of the company ‘s fiscal statements and argued that the former CEO, Richard Scrushy, pushed them exaggerate net incomes in order to run into Wall Street and shareholders outlook. However, Scrushy has continued to deny any wrong-doing despite being sentenced to prison for six old ages on June 28, 2007.
The debacle in HealthSouth was made possible by a failed direction control system based on loose cultural controls and consequence controls that had unwanted results. To maintain hearers ‘ communicating in cheque, top direction limited the hearers ‘ internal communicating with senior direction and staff to merely two directors ( Congressional Hearing, 2002 ) . Hearers ( Ernest and Young ) were non wholly independent as they provided other consulting services to HealthSouth, and some board members had close relationship with the CEO. From 1996 to 2003, HealthSouth had inflated about $ 2.7 billion of overstated assets and fabricated net incomes. ( United States Court File, 2004 ) . Exhibit 1 shows a elaborate time-line of HealthSouth ‘s accounting fraud.
Management Control System
Harmonizing to Jay Grinney, current CEO of HealthSouth, Health South had highly weak cheques and balances before the fraud occurred ( Whitmire, 2009 ) . Grinney argued that the company operated under a system that did non acknowledge the importance of transfusing a good direction control system. However, like most organisations, HealthSouth did hold a basic direction control system in topographic point before the debacle. The company had an established internal scrutinizing group that examined journal entries and its supporting paperss, and ensured that diaries were decently signed by appropriate forces. HealthSouth besides had reputable external hearers ( Ernest & A ; Young ) who claimed that they followed due diligence in describing the company ‘s fiscal statements.
HealthSouth ‘s Organizational Culture before the fraud
HealthSouth had a strong organisational construction where determinations were made from the top down. The company ‘s CEO was a magnetic leader. Employees who testified at HealthSouth ‘s congressional hearing called Scrushy ‘s everyday reappraisal meetings a “ Monday-morning whippings ” procedure. Employees explained that Scrushy, who chaired the meetings, would publically roast employees that failed to run into his unrealistic outlooks ( Abelson & A ; Freudenhim, 2003 ) .
In his book, “ HealthSouth, The Wagon to Disaster ” , Aaron Beam, HealthSouth ‘s former CFO, explained that Scrushy instilled fright in all of his employees including cardinal analysts, internal hearers, and CFOs. He even instilled fright in the board of managers. Beam explained that unfastened communicating was impossible in HealthSouth. Analysts presented their studies to Scrushy and waited in fright for his judgement. The employee who testified against HealthSouth explained that analysts had small opportunity to construe their findings before they were stopped by Scrushy ‘s ill-famed phrase, ‘That was the stupidest thing I of all time heard ” ( Abelson & A ; Freudenhim, 2003 ) . Beam explained that Scrushy invariably reminded everybody that HealthSouth was his company and that things needed to be done his manner.
Senior direction was closely involved in the twenty-four hours to twenty-four hours operations of the company. Helyar ( 2003 ) explained that Scrushy most frequently visited rehab centres randomly for review without any notices. “ Like a drill sergeant, he would run a finger along the tops of a image frame, and so pass over it on the sport jacket of the centre ‘s decision maker. Any seeable grade meant points deducted – and possible dismissal. ” ( Haddad, Weintraub, & A ; Grow, 2003 ) . Scrushy cultured a group of fearful subordinators with inordinate obeisance and flattery ( Abelson & A ; Freudenheim 2003 ) .
Result Control: Performance Measurement
HealthSouth executive compensation during 1996 to 2002 included important hard currency fillips every bit long as cardinal public presentation standards were met. The public presentation measuring was based on one-year quantitative marks. The fillip pool for the executives and direction was calculated as the lesser of the sum of one-year net income transcending targeted net income set by the Board of Directors and 10 % of the existent net income achieved. No fillip was awarded if the one-year net income does non run into the budgeted income.
Individual fillips were assigned on a instance by instance footing alternatively of a expression. There was no preset relationship between any specific public presentation index and sum of fillip. The Incentive plan was the primary component of the executive compensation and Committee believed that it could excite executives to accomplish aggressive ends set by board ( Reuters, 2003 ) .
Fiasco in Health South: Behavioral Causes
Organizational Culture: Culture is an of import environmental factor act uponing accounting patterns and direction control systems ( Chan, Hung, Lin & A ; Mo, 2003 ) . Senior direction set bad examples themselves through inappropriate behavior, which was seen as acceptable portion of the organisation civilization. HealthSouth civilization of working together as a household instilled a strong sense of co-operation among employees. Because employees viewed each other as brothers and sisters corrupt patterns were easy swept under the tabular array. During HealthSouth ‘s congressional hearing senior direction was described as being a Mafia household that did anything to protect its household members. A 1998 voice mail left by former CFO, Mike Martin, reminded employees finishing the company ‘s year-end fiscal coverage of the regulations and ordinance of household. Harmonizing to the transcripts Martin told the helper CFO, Emery Harri, that “ there were a batch of people numbering on you to do things go on this one-fourth. Were anticipating large things, you know. If you don t lay down for the household, you ‘ll acquire whacked ” . The employee who testified explained that accounting staff would run into on a regular basis to discourse ways to unnaturally blow up HealthSouth ‘s net incomes. He described these meetings as “ household ” meetings, and the attendants were known as the “ household ” ( Hamilton, 2008 ) .
Employee choice and Placement: HealthSouth was really strategic in choosing its employees in the accounting and finance section. HealthSouth recruited employees with extended instruction, accounting experience and past success. For case, CFO, William Owens, was antecedently employed by Ernst and Young. These employees were a good tantrum for the company ‘s household based civilization and were knowing about what hearers would look for during the audits.
Weak Board of Directors: The close relationships that existed between some board members and HealthSouth was besides seen by many as the ground why the board members failed to carry on enquiries of Scrushy or any of his determinations. A great figure of critics stated that Scrushy ‘s Alliess dominated most of HealthSouth ‘s board and that this deficiency of truly independent managers contributed to the fiscal fraud. For illustration, a longtime manager, Dr. Phillip C. Watkins, co-owned a Florida based holiday place with Scrushy ( New York Times, 2002 ) . In other words, HealthSouth ‘s Board of Directors had the ability, but failed to command the behavior that finally led to the fraud at HealthSouth.
In add-on, several board members were investors in companies that HealthSouth acquired or did concern with. For case, C. Givens had been a member of the scrutinizing commission on the HealthSouth board since 1985. In 1995, Givens founded her ain company, Acacia Venture Partners, and HealthSouth was one of the first to put in it. HealthSouth made an initial investing of $ 3.5 million in Acacia Venture Partners ( New York Times, 2003 ) . The rightness of these types of fiscal relationships has been questioned, peculiarly whether they look after their ain involvements or stockholders ‘ benefits.
Hearers ‘ understandbility of duty: During the test of HealthSouth, Ernst and Young argued that they had followed due diligence in scrutinizing. The hearers argued that they met the satisfactory demands of a series of by and large accepted stairss in analyzing HealthSouth fiscal consequences, but did non analyse beyond declared stairss. Regardless of ruddy flags bespeaking deceitful accounting patterns, Ernest & A ; Young failed to advise the board of managers as they were more focussed on finishing the satisfactory auditing stairss, disregarding the elaborate process. For illustration, it was improbable that a company like HealthSouth whose gross depended on its history receivable aggregation, did non account for bad debt disbursals. Bad debt disbursals are ineluctable in wellness attention services. The hearers ‘ inability to understand the simple relationship between bad debt disbursal and the wellness attention industry allowed for the fraud to go on for a long period of clip. Although Ernst & A ; Young ‘s president, James Turley, continued to reason that “ even the best audit may non observe a conniving attempt designed to conceal things from the hearers, ” the hearers inability to understand the elaborate process of analyzing other paperss allowed for unsatisfactory behavior even though the complete accounting process was performed ( Schneider, 2003 ) .
Fiasco in Health South: Consequence focused Causes
Stockholders Emphasis on Gross: Harmonizing to Jared Harris, and Philip Bromley, “ companies that turn in a really good twelvemonth have a leaning for forging Numberss the following yearaˆ¦ ” ( Uco, 2005 ) and HealthSouth investors fell into this trap. HealthSouth stockholders comprised of investors ‘ whose primary involvement was the company ‘s gross projections instead than its overall public presentation as a company. When HealthSouth went public in 1986 the company ‘s gross was one of the highest in the health/rehabilitation industry and this attracted a big figure of investors. To increase their return, investors continually expected high grosss and direction felt obliged to run into outlooks.
Management Compensation: Like many corporate dirt in the United States, direction fillips and compensation is a driving force behind the use of fiscal records. During congressional hearings, employees of HealthSouth described Richard Scrushy is as an American CEO that believed he would be the highest paid Chief executive officer in United States history. Scrushy received a entire compensation bundle of $ 11Million despite the charges placed on the company ‘s direction ( Chaubey, 2006 ) . In 2001, Scrushy collected $ 3.96M in salary entitlement, $ 6.5M for making agreed gross revenues marks and $ 1.2M in stock options ( see table 1 for dislocation ) . The deficiency of control around direction inducements at HealthSouth allowed for doubtful behavior and the board of managers failed in set uping a mechanism that prevented fraud ( NewYork Times, 2005 ) . Harmonizing to Borden ( 2003 ) , when the board of managers linked big direction inducements with ambitious gross ends, they were inquiring for problem.
Table 1- Scrushy ‘s Wage From 1996-2002
Hearers ‘ Conflict of Interest: The failure of Ernst & A ; Young to present genuinely indifferent study to HealthSouth investors was a primary driver to HealthSouth direction debacle. Ernst & A ; Young overlooked HealthSouth ‘s direction inducements to accomplish short-run fiscal returns because of the other profitable concern it had with HealthSouth. Ernst & A ; Young were non merely HealthSouth hearers, but besides provided non-auditing related services to HealthSouth. Between 2000 and 2001, E & A ; Y provided janitorial, cleanliness and physical visual aspect review for all HealthSouth locations in the United States. To protect their concern involvement in Ernest and Young, research workers argue that the hearers were in a quandary and compromised on their independent fiscal monitoring duty. Ernst & A ; Young provided a clean measure of wellness to HealthSouth, which HealthSouth executives used in supporting their big compensation bundles and investors assurance ( Chaubey, 2006 ) . Table 2 shows the exaggeration of HealthSouth ‘s net incomes, approved by Ernst & A ; Young.
Table 2- Overstated Net incomes
Income ( Loss ) before Income Taxes and Minority Interests ( in $ 1000000s )
For 6 Calendar months ended June 30, 2002
– $ 191
Beginning: COMSATS INSTITUTEOF INFORMATIONTECHNOLOGY
Power of Wall Street ‘s voice: Aaron Beam, in his book argued that the fraud was encouraged because Wall-Street ‘s voice was so strong that it was impossible for Scrushy to let down analysts. Harmonizing to Beam, loaners and investing bankers would invariably name the company inquiring for gross projections and emphasizing the importance of non neglecting to run into expected projections. This pushed direction to do unrealistic projections to procure loans and hard currency from portion gross revenues. This was peculiarly of import to procure loans for planned amalgamations, acquisitions and installation enlargements.
Evaluation of HealthSouth ‘s MCS
What Was Desired? In order to efficaciously measure HealthSouth ‘s direction control systems, it is of import to understand what direction desired. In HealthSouth ‘s instance, direction was focused on meeting gross marks and increasing the company ‘s stock monetary value.
Cardinal Actions to Achieve Desired Results
To accomplish success, the coveted actions should hold involved cardinal schemes such as supplying high-quality, cost-efficient wellness attention services ; efficaciously selling services to big payors and patients ; enlargement of HealthSouth ‘s National Network ; and pulling and retaining high-quality forces. However, because of the CEO ‘s desire to accomplish gross marks through bastard agencies, HealthSouth focused on pull stringsing the Numberss and hammering back uping paperss to pull off the auditing trail.
Results Controls Evaluation
Wage For Performance
Consequence controls in the signifier of big executive compensation made it highly moneymaking for the executives to run into net income marks. The 1990 ‘s was a clip of economic prosperity in the US and investors were rather careless in what factors they looked at when puting in companies. Equally long as HealthSouth could accomplish these net income marks they could go on to raise capital to spread out their operations.
Lack of congruity between Results Controls and Strategic Aims
Execution of consequences controls has four stairss: specifying public presentation dimensions, mensurating public presentation, puting public presentation marks, and supplying wagess for run intoing those public presentation marks. In the instance of HealthSouth, the most relevant component to see is the public presentation dimensions for the executives. The Compensation Committee provided immense hard currency fillips to executives who contributed to the public presentation dimension by run intoing investors ‘ outlooks for gross growing ( 1 ) . Meanwhile, the company ‘s 1999 one-year study stated that the primary elements of the company ‘s scheme were to implement their incorporate service theoretical account in appropriate markets ; successful selling to managed attention organisations and other payors ; proviso of high-quality ; cost-efficient health care services ; and enlargement of national web ( 2 ) . Therefore this cardinal public presentation dimension of run intoing investors ‘ gross outlooks was clearly non in congruity with the overall strategic aims of the organisation and when this happens, the people who work within these dimensions are encouraged to make incorrect things. This resulted in what ‘s known as behavioral supplanting and in HealthSouth ‘s instance it resulted in immense indirect costs one time the dirt was discovered. Behavioral supplanting happens when the MCS encourages unwanted behavior that is non in line with the organisations scheme and aims. Behavioural supplanting occurs typically occurs because of either direction ‘s hapless apprehension of coveted consequences or inclination to concentrate on concrete and quantifiable consequences ( 3 ) . In this instance it was because direction had a hapless apprehension of coveted consequences. Management was excessively focused on run intoing “ Wall Street ” outlooks when they should hold worked towards bettering more of import success factors such as liquidness, return on assets, quality of service, cut downing operating costs, beef uping trade name acknowledgment, etc.
Tone at the Top Encouraged Accounting Fraud
HealthSouth ‘s civilization was chiefly shaped by the type of cultural control known as Tone at the Top. This strong cultural control established by the magnetic CEO, Richard Scrushy, instilled fright and bullying in senior executives and board of managers. Employees were told what to make, when to make it, and how it should be done. This prevented other employees from oppugning the determinations of the executives. Bullying and fright were shared norms that were portion of the MCS at HealthSouth and these conditions created an environment that was contributing to perpetrating fraud.
Group Rewards Encouraged Misconduct
Group wagess were a signifier of cultural control that existed at HealthSouth. The group wagess were the fillips that were paid if the sections met Scrushy ‘s suggested net income marks. Motivation to accomplish these wagess was non the chief force that was affected by this cultural control. Common monitoring and communicating of outlooks were the forces that were positively affected the most by this cultural control. This is usually a desirable and positive consequence, but in the instance of HealthSouth, the fillips merely ensured that employees and direction monitored each other so that the company could gull stockholders and the general populace.
Action Accountability Ensured Accounting Fraud was Conducted with Preciseness
HealthSouth ‘s direction executed action answerability controls cleanly. They defined, communicated, and tracked the actions that employees took with regard to fraudulently seting entries, bills, and support paperss.
HealthSouth has to re-evaluate its current concern procedures and behavior. The redesigned direction control system should be designed to aline direction and employee actions to the organisations schemes to achieve coveted consequences every bit good as guarantee that the company forces are moving in the best involvements of its stockholders. See exhibit 2 for actions taken by the company after the dirt in comparing to our recommendations.
Reinforce Code of Conduct
HealthSouth should revamp its codification of behavior and make a set of best patterns that would steer employees to decently execute their responsibilities. Employees must decently understand the importance of following the codification of behavior and using it to their day-to-day duties. This concern codification of behavior should be framed and placed around offices, and installations where client and employees can see it, understand it, and utilize it. Furthermore employees should hold to subscribe a statement saying that they have read and understood the codification of behavior.
HealthSouth should assist employees understand new values and ethical concern behavior by offering seminars, online classs related to moralss, town hall meetings organized by executives, and a manual on whistle blowing.
Implement Balanced Scorecard
Introduce Kaplan and Norton`s balanced scorecard that will include a combination of public presentation steps that will let direction to concentrate on both fiscal and non-financial marks ( Pg 473 ) . From a fiscal position HealthSouth`s consequences controls should be redesigned to halt concentrating on Wall Street`s net income outlooks and concentrate more on bettering runing income and ROE. From a client position a consequences controls should be designed to assist HealthSouth`s direction focal point on bettering the rehabilitation clip of clients and increasing overall patient satisfaction. From an internal, invention and larning position, consequences controls should besides be designed so that direction focuses on bettering runing efficiency with regard to the attention services HealthSouth provides. Bonuss should be awarded based on all of these public presentation steps in order to aline management`s actions and motivations with that of the stockholder and overall wellbeing of the company.
Changing Board of Directors
Board of managers that had vested involvements in the company and or were affiliated with HealthSouth forces should be removed and replaced. This should let for more transparence and will assist towards constructing investor assurance.
Application of GAAP
HealthSouth besides needs to analyze and reexamine the company ‘s current accounting patterns and decently use GAAP where it was non applied before.
Giving More Independence to Hearers
There were specific communicating processes between employees and external hearers during the dirt. Any concerns from the hearers had to be addressed by two specific directors. External hearers should be allowed to talk with anybody that they need to talk with to guarantee a proper audit. Internal hearers should besides be independent and should non hold to describe to the CEO.
Table 3 – Group Recommendation VS. Company ‘s Actual Actions
Beginning: Grant Thornton LLP
Health South ‘s Actual Actions
Reinforce Code of Conduct
Modified its corporate administration guidelines and charters in order to conform
Implement Balanced Scorecard
Research shows no grounds of the execution of balance scorecard
Changing Board of Directors
Removed a figure of Board of Directors that had concern traffics with the Chief executive officer and company
Application of GAAP
Conducted reappraisal of GAAP ‘s pertinence and implemented losing rules
Giving More Independence to Hearers
Company switched to KPMG and gave more independency to them every bit good as internal hearers
Management controls is an highly of import country in a company that can frequently be overlooked. Most fiscal frauds that have happened in history are a consequence of failed direction control systems. HealthSouth is an illustration of a company that had a flawed internal control system. Due to the failure of HealthSouth ‘s internal control system, senior direction was able to enrich themselves at the disbursal of stockholders.
The CEO created a civilization of fright in the organisation which encouraged employees to join forces with each other to perpetrate fraud. The company emphasized the importance of run intoing Wall Street ‘s fiscal outlooks to maximise direction fillips and run into debt compacts. This failed direction control system lasted for about a decennary. This was made possible because hearers failed to carry through their fiducial responsibilities ; the board of managers created strong confederations with the CEO ; direction compensation was tied to net income ; and the market emphasized unrealistic gross outlooks.
HealthSouth survived this dirt but to forestall a similar incident from happening, the company needs to reenforce a new codification of behavior that enforces a strong ethical tone from the top and creates a set of best patterns that would steer employees to decently execute their responsibilities. Management should make and implement a balance scorecard that emphasizes facets of the concern other than merely the fiscal position. All Board of managers must be independent with no formal ties to the CEO or the company. Accountants must be trained to understand GAAP and all of its cardinal rules.
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