Ernst & Young said on Wednesday that it had been alerted to potential accounting problems at HealthSouth as far back as June last year, some nine months before the healthcare company was accused of widespread fraud by federal investigators.
James Lamphrom, a partner at E&Y, was giving evidence at a court hearing in Alabama about a freeze on the assets of Richard Scrushy, HealthSouth?s ex-chairman and chief executive.
Mr Lamphrom said an employee of HealthSouth had written to the E&Y audit team suggesting that in three specific areas of the accounts there could be problem. E&Y had checked out the allegations, Mr Lamphrom said, and determined that there had been no wrongdoing.
Mr Scrushy, alleged by federal investigators to be the orchestrator of a scheme that saw earnings inflated by billions of dollars for over 15 years, is attempting to gain control of some of his assets.
Some 10 employees of the company, which has headquarters in Birmingham, Alabama, have admitted their guilt in part of the fraud. Mr Scrushy has not been criminally charged, though that is widely expected. He has been named in a civil suit filed by the Securities and Exchange Commission.
The federal court papers surrounding the fraud explain that the scheme was concocted to stay under the independent auditor?s radar. The accounts were changed by small, different amounts in a huge number of different places.
However E&Y will still have to explain how it signed off fraudulent books for so long.
Accounting experts have also raised questions about E&Y?s actions on specific issues. At one point HealthSouth?s balance sheet overstated the amount of cash one of the easiest items to check by $300m.
Wednesday?s admission that problems had been communicated to E&Y could prove a topic of a separate investigation opened this week by politicians in Washington.
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 E&Y requesting a wide variety of records and other potential evidence. The committee will hold a hearing on HealthSouth early this summer.
Mr Tauzin?s hearings on Enron and Global Crossing were some of the biggest spectacles of the white collar crime investigations that led to sweeping corporate governance legislation last summer.