HealthSouthDiscussion Questions

Incentives for Fraud

  1. Your textbook discusses the concept of the fraud triangle in Chapter 5. At the top of the triangle is the concept of incentives and pressures. Both Weston Smith and a previous CFO of HealthSouth (Aaron Beam) make references to the pressure from Wall Street to “make the number” and how that pressure contributed to the climate of fraud at HealthSouth. Discuss the role of Wall Street in encouraging accountants in this role (CFO and similar positions within the corporation) to violate their ethical standards.
  2. Do you think that optimism played a meaningful role? Smith indicated that in the relatively early stages of the fraud, the company was growing rapidly and he thought the growth would provide the opportunity to correct the fraudulently reported numbers in future years. Discuss how this optimism might lead a CFO to go along with pressures to misrepresent the company’s financial results. Is (was) that appropriate?
  3. How large a role do you think the prestige of being the CFO of one of the fastest growing Fortune 500 companies played in Smith’s decision to participate? That is, do you think that in the beginning, Smith may have agreed to go along because of the value he personally placed on having such a high profile job? What about later on? Smith made several references to the concept of “golden handcuffs” during his presentation. What did he mean by that term and how did it keep him from walking away from HealthSouth when his superiors pressured him to commit even greater levels of deception?

Red Flags

  1. Consider the HealthSouth case in the context of William Black’s explanation of “control frauds.” First, did HealthSouth constitute a control fraud? If so, what kind of control fraud was it? Explain.
  2. Imagine that you were an auditor for HealthSouth, either internal or external. Aside from the analytical procedures that the audit teams presumably performed on the company’s accounts, what red flags should perhaps have been apparent to the company’s auditors that additional attention should have been paid to the possibility that management was misleading them?
  3. In retrospect, what do you think about the idea that all the members of the management team in the accounting department were prior employees of the outside audit firm? What about the fact that every member of the company’s management team was promoted from within?

Overview

  1. After watching Weston Smith’s presentation (video will be available on Wednesday), how would you assign responsibility for the HealthSouth fraud? How would you characterize Smith’s role in the fraud? What lessons would youdraw from his story?
  2. As you know, Mr. Smith was sentenced to 27 months in federal prison and a $7 million fine. He served 14 months in prison and 3 months in a halfway house upon his release. Do you think his punishment was adequate for his crime(s)? What other costs has he paid in connection with the role he played in the HealthSouth fraud?