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1998 Letter Warned About HealthSouth

House Investigators Find No Evidence of Follow-Up

May 22, 2003 | Washington Post Congressional investigators yesterday released a 1998 letter from an anonymous writer that warned auditors at Ernst & Young of serious accounting problems at HealthSouth Corp., about 41/2 years before regulators swooped down on the Alabama company.

"You people and I have been hoodwinked," a self-described "fleeced shareholder" wrote in the letter, dated Nov. 11, 1998. "This note is all I can do about it. You all can do much more, if all you do is look into it to see if what I say is true."

The letter writer raised questions about debt reserves at some HealthSouth rehabilitation hospitals, the company's handling of accounts receivable, and how the company booked revenue. Ernst & Young recently turned the letter over to the House Energy and Commerce Committee, which is investigating HealthSouth's collapse.

Ken Johnson, a spokesman for the committee, said the letter was "a road map leading to possible fraud" at HealthSouth and questioned why the charges were not investigated thoroughly.

The Securities and Exchange Commission this year charged HealthSouth and its chief executive, Richard M. Scrushy, with a long-running, multibillion-dollar fraud. Eleven former HealthSouth executives have pleaded guilty to criminal charges. Scrushy has not been charged with a crime. He was fired March 31.

Johnson said Ernst & Young officials recently told committee investigators that after receiving the letter in 1998, Ernst & Young auditors approached Michael D. Martin, who was HealthSouth's chief financial officer at the time, and William W. Horton, the company's general counsel. Horton told Ernst & Young that the company would investigate, Johnson said.

When congressional investigators reviewed minutes of HealthSouth's board of directors from 1998 and 1999, they found no mention of the anonymous letter or an internal investigation, Johnson said.

Martin has since pleaded guilty to conspiracy to commit fraud. Horton has not been charged with a crime.

A lawyer for HealthSouth criticized the committee for releasing the letter. "HealthSouth is fully cooperating with all government investigations," said Robert S. Bennett. "The selective leaking of material such as this letter is a terrible abuse of the committee's power and is irresponsible. Had the committee shown us the courtesy of telling us about the allegations, we could have made an inquiry into the facts. They should be ashamed of themselves."

In a prepared statement, Ernst & Young said: "In response to the communication and at the time it was received in 1998, Ernst & Young conducted a review by individuals outside of the audit engagement team and, upon examination, determined the issues raised did not affect the presentation of HealthSouth's financial statements. Ernst & Young continues to work with the Committee and to cooperate with the Department of Justice and SEC investigations into the HealthSouth fraud."

Rep. W.J. "Billy" Tauzin (R-La.), chairman of the House committee, and Rep. James Greenwood (R-Pa.), head of the investigations subcommittee, will send letters this week requesting interviews with Dick Dandeurand, a retired Ernst & Young partner who handled the HealthSouth account in 1998; Martin; Horton; and HealthSouth board members.

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