The accounting scandal at HealthSouth took on a political dimension on Tuesday as a Congressional committee launched an investigation into the largest US rehabilitation hospital, its directors and its outside auditors, Ernst & Young.
Members of the House Energy and Commerce committee, chaired by Billy Tauzin, a Republican from Louisiana, on Tuesday sent letters to Joel Gordon, the acting chairman of HealthSouth’s board, and to Ernst & Young requesting a variety of records and other potential evidence. The committee intends to hold a hearing on HealthSouth this summer.
Ten HealthSouth executives have already agreed to plead guilty to securities fraud and other charges as investigators peel back the layers of an accounting fraud that rivals those at WorldCom and other companies. The Securities and Exchange Commission claims that HealthSouth and its former chief executive, Richard Scrushy, improperly inflated earnings by $2.5bn since 1997, and that the alleged scheme may date back to 1986, shortly after the company went public.
Mr Tauzin’s hearings on Enron and Global Crossing were some of the biggest spectacles of the white collar crime investigations that led to Sarbanes-Oxley and other anti-fraud provisions.
The Congressional committee is also expected to extend the probe to scrutinise the behaviour of the board members and the accountants that served the company.
“Where was HealthSouth’s board during all this?” said Ken Johnson, a spokesperson for Mr Tauzin. “Was everyone so busy schmoozing with Mr Scrushy that they failed to notice the building burning around them?”
Jim Greenwood, chairman of the oversight and investigations subcommittee, said: “Frankly, some of the financial dealings between board members raise a lot of serious questions. I can’t wait to hear what these guys have to say under oath.”
Among other things, the committee has asked for all records and minutes of board meetings dating back to 1996, and any records of business relationships between board members or their immediate families and the company.
The committee requested from James Turley, Ernst & Young’s chairman, a record of all non-audit compensation the firm received from HealthSouth since 1996. It also called for records of internal communications from Ernst & Young auditors regarding the account.
HealthSouth said its “new management team” and board of directors were “committed to co-operating fully with the committee.”