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Probe of HealthSouth Expanding, to Include KPMG Tax Firm

Apr 2, 2003 | The Wall Street Journal

Federal investigators are expanding their investigation of accounting fraud at HealthSouth Corp. , scrutinizing the company's operating units and asking questions about the work of the company's tax firm, KPMG LLP, people familiar with the matter told The Wall Street Journal.

So far, 11 finance and accounting executives at the Birmingham, Ala., operator of rehabilitation clinics and hospitals have reached plea agreements with the Justice Department. In a sign that the government believes the scandal reaches into other areas of the company, federal investigators are asking questions about a half dozen executives who worked in HealthSouth's operating units, according to the people familiar with the situation.

Prosecutors from the Justice Department and attorneys from the Securities and Exchange Commission have alleged that HealthSouth overstated profits by at least $2.5 billion since 1997. The scheme, in part, included the use of fictitious assets and fake invoices, according to documents and court testimony.

"There were people outside the finance department who had knowledge of the fraud," said Alice H. Martin, the U.S. Attorney for the Northern District of Alabama, who is working with the Justice Department's corporate fraud team in Washington. "There are people who allowed this fraud to occur year after year," she added.

Craig Dahle, an FBI spokesman in the Birmingham office, said the investigation still is in the early stages, adding that it began only six weeks ago. In mid- March, two former finance chiefs, Weston Smith and William T. Owens, began cooperating with the Justice Department in moves that sparked the accounting- fraud investigation.

Investigators are also starting to ask questions about the tax work provided to HealthSouth by accounting and tax firm KPMG, according to people familiar with the situation. HealthSouth's longtime auditor, Ernst & Young LLP, has already received subpoenas from the Justice Department and the SEC. Ernst & Young, which was fired by the company after the accounting scandal erupted, has said it is cooperating. Several plea agreements have stated the fraud was conducted to hide it from HealthSouth's outside auditor.

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