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Ernst & Young Could Face New Liability in HealthSouth Case

Jul 14, 2003 | www.accountingweb.com Big Four firm Ernst & Young may face increased liability in relation to its former client HealthSouth. The New York Times reported Saturday that internal investigators at HealthSouth have found evidence of shoddy accounting by E&Y.
The Times account emphasized that there was no claim of fraud at HealthSouth against Ernst & Young.

The firm was fired as HealthSouth’s auditor in April. The investigation has focused on HealthSouth’s top executives who prosecutors believe inflated earnings by about $2.5 billion.

The Times reported that PricewaterhouseCoopers, HeathSouth’s new auditors, have uncovered instances where receivables from outside vendors were not properly valued, even when it was clear that they wouldn’t be paid something auditors clearly should have uncovered.

Ernst & Young had no comment on The Times’ story. "We believe that the ongoing governmental investigations into wrongdoing at HealthSouth should be allowed to proceed unimpeded by premature or piecemeal speculation before all the facts are known," Donald Howarth, a spokesman, told the newspaper.

The House Energy and Commerce Committee has been looking into the matter as well. On Thursday, its spokesman, Ken Johnson, said the panel's investigators spent eight hours grilling a former Ernst & Young partner who handled the firm's HealthSouth account. The former partner, Dick Dandurand, was "very cooperative" and helped the committee "fill in the blanks" of the investigation, Johnson said.

HealthSouth officials refused to discuss any plans to sue Ernst & Young. A spokesman for HealthSouth said there is a difference between the questionable accounting practices suspected at Ernst & Young including overvalued receivables and the past fraud that resulted in guilty pleas from about a dozen HealthSouth executives, the Times reported. Much of that fraud involved falsifying profits and assets.

"This area is different from the fraud that the PricewaterhouseCoopers forensic team is looking at, which involved transactions that did not exist," the paper quoted Andrew Brimmer as saying. "These are things that occurred."

However, these are still significant allegations for Ernst & Young, since by signing off on questionable accounting that affected HealthSouth’s bottom line, the firm increases its liability in civil and regulatory actions.

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