A disgruntled shareholder in HealthSouth Corp., the rehabilitation services company embroiled in a $2.5 billion accounting scandal, alerted the company’s auditors five years ago to alleged bookkeeping violations, a document released yesterday by a House committee indicates.
”You bring the smoke, I’ll bring the mirrors,” the unnamed shareholder wrote in the memo. It listed a series of such violations that included booking as revenue the charges to clinic patients even when insurers denied payment.
HealthSouth officials assured the Ernst & Young auditors, who received a copy of the November 1998 memo, that the company would undertake an internal investigation of the shareholder’s allegations, according to the House Energy and Commerce Committee. In fact, no such investigation was ever done, the committee said.
”Someone should have been suspicious when HealthSouth officials said, ‘Trust us, we’re looking into this,’ ” committee spokesman Ken Johnson said.
Other recipients the shareholder listed on the memo included the Securities and Exchange Commission’s enforcement division, the federal agency that oversees Medicare and Medicaid, and the head of the accounting industry’s self-policing group. Johnson said yesterday it was not clear whether all the parties had gotten the memo.
The committee chairman, Rep. Billy Tauzin, R-La., and Rep. Jim Greenwood, R-Pa., head of the investigative subcommittee, said the memo was evidence that Ernst & Young, and possibly federal regulators, were warned five years ago about the ”accounting shenanigans” at HealthSouth.
”Yet no one appears to have listened. Why?” they asked. ”This memo provides a road map leading to possible fraud.”
At the time the memo was sent, the stock of Birmingham, Ala.-based HealthSouth had dropped sharply, and state authorities were investigating its billing practices, according to the House committee.
The Securities and Exchange Commission filed a lawsuit against HealthSouth and fired Chief Executive Richard Scrushy in March, contending the rehabilitation services giant systematically faked earnings since 1986, the year it went public.
The Justice Department is conducting a criminal investigation that has resulted in guilty pleas from 11 former HealthSouth executives, including five former chief financial officers.
Scrushy, who has not been charged with any criminal offenses, has denied knowledge of the scam, estimated by the government at $2.5 billion since 1997.
”How can the (HealthSouth) outpatient clinics treat patients without precertification, book the revenue, and carry it after being denied payment?” the shareholder asked in the memo.
”How can the company carry tens of millions of dollars in accounts receivable that are well over 360 days? How can some hospitals have NO bad debt reserves? How did the (Ernst & Young) auditors in Alabama miss this stuff? Are these clever tricks to pump up the numbers, or something that a novice accountant could catch?”
The shareholder, describing himself or herself as ”fleeced,” noted the decline in the company’s stock and said, ”Wish I got out in time.”
”You people and I have been hoodwinked,” the shareholder wrote.
In a statement, Ernst & Young said it conducted a review at the time the allegations were made and ”upon examination, determined the issues raised did not affect the presentation of HealthSouth’s financial statements.”
SEC spokesman John Nester declined to comment.
Robert Bennett, the Washington lawyer representing HealthSouth, did not address the memo or the background of events but criticized the committee’s release of the document.
Joel Allegretti, a spokesman for the accounting industry group, the American Institute of Certified Public Accountants, said officials there had not yet seen the document and had no comment yesterday.
The House committee received the memo from Ernst & Young. The committee had asked the accounting firm, HealthSouth and its investment bankers, UBS Warburg, to provide documents as part of its investigation into the alleged accounting fraud.
The House lawmakers are concerned 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.
HealthSouth’s current chairman is longtime Nashville health-care entrepreneur Joel Gordon, who sold Surgical Care Affiliates to HealthSouth in 1996. HealthSouth also operates about two dozen outpatient rehabilitation and surgery centers in Tennessee. The company manages the Vanderbilt Stallworth Rehabilitation Hospital.