A massive fraud that rocked HealthSouth Corp. and led to criminal charges against 10 former executives was accomplished using simple, manual entries in a computer system, according to testimony in federal court Tuesday.
Invoices received by the company typically are entered into an advanced software system that conducts a “computer audit.” The system also creates reports as it generates checks, said Barbara Patton, who manages HealthSouth’s accounts payable department.
Patton said participants in the fraud waited until monthly operating reports were completed by the computer, which allowed them to sidestep the system’s checks and balances.
After the reports were completed, the participants typed in false information elsewhere in the computer system that was later merged into consolidated corporate statements.
“It’s real easy,” said Patton, who designed her department’s systems of checks and balances but said she was unaware of how the fraud was accomplished until she read media accounts.
Patton testified as U.S. District Judge Inge Johnson considered whether to maintain a temporary freeze on the assets of fired HealthSouth chief executive and chairman Richard Scrushy.
The Securities and Exchange Commission filed suit last month accusing the company and Scrushy of overstating earnings by $1.4 billion since 1999 to meet Wall Street expectations. The amount increased to $2.5 billion since 1997 as investigators went further back.
Ten former HealthSouth executives have either pleaded guilty or reached plea deals with the government. Scrushy has not been charged, but his attorneys have said he is the target of a criminal investigation.
Under questioning from Scrushy attorney Tom Sjoblom, Patton said she doubted Scrushy would have known about the faked accounting entries she described.
“I’m not sure he was that detailed. You had to read the general ledger line by line to see it,” she said.
While the government claims in the lawsuit that Scrushy directed the fraud, Sjoblom contends Scrushy didn’t know about the scheme until two days before the suit was filed.
James Goodreau, Scrushy’s former bodyguard and the head of corporate security at HealthSouth, testified that Scrushy was away from the company’s headquarters in Birmingham much of the time from May 2001 to January 2002, when the government claims the fraud was happening.
The hearing will continue Wednesday.
Founded by Scrushy in 1984, HealthSouth describes itself as the biggest U.S. provider of outpatient surgery, diagnostic and imaging and rehabilitative health care services. The company has nearly 1,700 facilities and 51,000 employees in every state and abroad.