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E&Y 'Warned About HealthSouth In 1998'

May 22, 2003 |

Ernst & Young was on Wednesday hit by further allegations over its work at HealthSouth when it emerged that the auditor was warned about problems at the clinic operator as far back as 1998.

Some 11 people who worked at HealthSouth have now been charged in connection with an alleged $2.5bn fraud that threatens to bring down the company. The fraud is alleged to have started in the mid-1980s. E&Y had said that it was alerted to potential accounting problems in June last year.

But, after the House Energy and Commerce Committee in Washington released a memo from November 1998 alleging a host of accounting problems, E&Y confirmed that it had been sent the document.

E&Y said it had sent a team to HealthSouth headquarters in Birmingham, Alabama, in 1998 following the memo's receipt. Ken Johnson of the House committee said E&Y had told investigators that it had been assured by William Horton, HealthSouth's head lawyer, that an internal investigation would take place.

Mr Horton is still HealthSouth's corporate counsel and has not been named in any federal investigation. Mr Johnson said that HealthSouth's shares were already dropping at the time the memo was written.

"Someone should have been suspicious when HealthSouth said it would look into this [Mr Horton] may not be in the Justice Department's crosshairs, but he's certainly in ours."

E&Y said after its 1998 investigation that it had "determined the issues raised did not affect the presentation of HealthSouth's financial statements".

Committee investigators said there was no mention anywhere in minutes of HealthSouth board meetings from 1998 and 1999 of any internal investigation.

The release of the memo is the latest blow to E&Y and demonstrates how the involvement of the House committee, headed by Billy Tauzin, its chairman, increases the number of public revelations concerning corporate controversy.

"You bring the smoke, I'll bring the mirrors," the anonymous memo from 1998 says. "I have a list of questions which I hope might interest you."

The writer accuses the company of having tens of millions of dollars in unrealistic accounts receivable since the amounts were still unpaid after more than a year. The memo is incredulous that some of the company's hospitals had no bad debt reserves. It also accuses the company of booking revenue from patients before checking that it would be reimbursed by insurers, and continuing to record the revenue once reimbursement was denied.

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