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Memo: HealthSouth Warned On Accounting 5 Years Ago

May 22, 2003 | USA TODAY

The congressional committee investigating wrongdoing at HealthSouth has unearthed a memo sent to the company's auditors five years ago that spells out some of the accounting tricks that went undetected until this March.

The memo, addressed to Ernst & Young from an anonymous ''fleeced shareholder,'' ticks off four suspicious accounting practices at HealthSouth, and asks, ''How did the E&Y auditors in Alabama miss this stuff?''

The discovery of the memo by the House Energy and Commerce Committee means that E&Y was warned at least twice in the past five years about accounting problems at HealthSouth.

The other warning was disclosed last month during a hearing in federal court here to determine whether former HealthSouth CEO Richard Scrushy, who has been accused by the Securities and Exchange Commission of orchestrating a $2.5 billion accounting fraud, should have access to his assets.

E&Y issued a statement Wednesday saying that after receiving the 1998 memo, it ''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.''

The firm provided a similar response in court last month, when auditor James Lamphron testified that E&Y told former HealthSouth president William Owens of another allegation of accounting fraud, received during 2002. Lamphron told the court that E&Y looked into the matter until it determined it was ''satisfied with the explanation that the company had provided to us.''

Based on its discovery of the 1998 memo, the House committee plans to interview Richard Dandurand, who was E&Y's primary auditor on HealthSouth at the time, and William Horton, who was then and still is HealthSouth's corporate counsel. Committee spokesman Ken Johnson says E&Y brought the 1998 memo to Horton's attention and that Horton supposedly told the auditing firm that HealthSouth would look into the matter. But the minutes of HealthSouth's board meetings from late 1998 through 1999, presented as evidence by the SEC last month, don't indicate that any such investigation took place.

Attorney Bob Bennett, who represents HealthSouth, said the company has cooperated with all government inquiries. He blasted the committee for going public with the memo before discussing it with Horton. ''The selective leaking of material like this is a tremendous abuse of power, and the committee should be ashamed,'' he said.

Reps. Billy Tauzin, R-La., and James Greenwood, R-Pa., who are heading the investigation, said, ''We now have evidence that five years ago, warnings were given to HealthSouth's corporate watchdogs about the accounting shenanigans at the company. Yet, no one appears to have listened.''

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