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House Panel Seeks HealthSouth Documents

$2.5b scandal to be probed

Apr 23, 2003 | AP A House panel has started an investigation and requested financial records from HealthSouth Corp., the rehabilitation giant embroiled in a $2.5 billion accounting scandal that has led to plea deals between the government and 10 company executives.

The House Energy and Commerce Committee, which last year investigated the wave of corporate scandals that began with Enron, asked for documents yesterday from HealthSouth's longtime auditor, Ernst & Young. Committee chairman Billy Tauzin, Republican of Louisiana, senior Democrat John Dingell of Michigan, and the top members of its investigative subcommittee gave HealthSouth and Ernst & Young until May 6 to turn over the documents.

''The financial collapse of HealthSouth, and the allegations of fraud within the company, raise serious concerns about the oversight and management of the company by the board of directors over the span of several years and about the auditing practices of HealthSouth's internal and outside auditors,'' the committee leaders wrote to acting company chairman Joel C. Gordon.

The company and the auditing firm pledged to cooperate.

New York-based Ernst & Young said it ''looks forward to working with the members of the House Committee on Energy and Commerce in the examination of the accounting fraud at HealthSouth, just as we have been working with both the SEC and the Department of Justice.'' The lawmakers also noted that HealthSouth may have submitted hundreds of thousands of claims for reimbursement to Medicare and Medicaid based on improper billing of certain rehabilitation therapy claims.

''We are concerned that HealthSouth may have known that certain of its billing practices for rehabilitative therapy did not comport with [Medicare and Medicaid] rules but continued its questionable billing practices nonetheless, resulting in higher reimbursements for HealthSouth,'' they wrote.

With the Justice Department's criminal investigation of HealthSouth only a month old, 10 top executives have reached plea agreements, and four of the company's five former chief financial officers have been accused in the allegedly fraudulent scheme. While not accused of any crime, fired chief executive officer Richard M. Scrushy, who built the company and whose name is on buildings throughout Alabama, is the target of a criminal investigation, according to his attorneys. Scrushy has denied any wrongdoing.

In civil charges, the Securities and Exchange Commission last month accused Birmingham, Ala.-based HealthSouth of overstating earnings by $1.4 billion since 1999 to meet Wall Street forecasts. The amount has swelled to $2.5 billion in allegedly falsified earnings since 1997 as investigators went further back.

The government contends that a group of top company accounting executives known as the ''family'' met to determine how to falsify HealthSouth's accounts. Fraudulent postings known as ''dirt'' allegedly were created to fill the ''hole'' between analysts' expectations and the company's true performance.

The House panel's move came as Scrushy, who has hobnobbed with sports stars and politicians, returned to court in his bid to unfreeze his assets -- which include four houses and land valued at more than $9 million.

Documents the lawmakers are seeking include HealthSouth records provided to the SEC for its investigation, communications between the Ernst & Young auditors and HealthSouth officers and directors, records of HealthSouth employees raising questions about its financial reporting, documents about Scrushy's business relationships with a series of companies and individuals, and records related to the company's accounting practices and Medicare billing and reimbursement.

Committee spokesman Ken Johnson said the panel planned to conduct ''a very aggressive investigation'' with an eye toward holding a hearing by the summer.

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