HealthSouth fires CEO, accounting firm
BIRMINGHAM, Ala. (AP) – HealthSouth Corp. dismissed Richard Scrushy as chairman and chief executive on Monday, severing ties with the company’s founder as a third executive agreed to plead guilty in a mushrooming accounting scandal. The company said Scrushy, who built HealthSouth into a leading health care chain, also was being asked to resign from the board.
In a further bid to wipe clean its slate, HealthSouth said it would fire longtime outside auditor Ernst & Young.
The New York-based auditing firm has said it is cooperating in a federal investigation of the company, which allegedly created false financial statements and entries to deceive auditors.
A spokesman for Ernst & Young did not immediately return phone calls seeking comment. Neither did two attorneys representing Scrushy.
The government filed a civil lawsuit this month accusing HealthSouth and Scrushy of overstating earnings by at least $1.4 billion since 1999 to make it appear the company was meeting Wall Street expectations.
As the company announced Scrushy’s ouster as chairman and CEO, federal prosecutors said Emery Harris, 33, vice president of finance and assistant controller of HealthSouth, agreed to plead guilty to charges including conspiracy to commit wire and securities fraud and falsifying financial information in annual statements to regulators.
A statement from the Justice Department said Harris and others on HealthSouth’s accounting staff held what were known as “family” meetings to artificially inflate earnings.
“At the meetings, they would discuss ways by which members of the accounting staff would falsify HealthSouth’s books to fill the “gap’ or “hole’ and meet the desired earnings. The fraudulent postings used to fill the “hole’ were referred to as the “dirt,”‘ the statement said.
Scrushy’s lawyers have filed papers saying he is the target of a federal criminal investigation, and two former chief financial officers have pleaded guilty to fraud charges and are cooperating with authorities.
More HealthSouth executives are expected to admit their guilt this week in plea-bargain agreements, U.S. Attorney Alice Martin said.
The company said Scrushy’s dismissal – approved unanimously by directors – was retroactive to March 19, when he was placed on leave as the accounting scandal broke.
Scrushy could be forced to repay any bonuses and extra compensation based on overstated profits should the company be forced to restate its earnings, the company told him in a letter Sunday.
Scrushy has not responded to the request for his resignation from the board, and other directors do not have authority to remove a director.
“If you could kick someone off the board, you would lose all your independence,” said Ernie Knewitz, a HealthSouth spokesman.
While lenders blocked the company from paying $367 million in bond and interest debt due Tuesday, moving the company closer to possible bankruptcy, Knewitz said HealthSouth is still able to pay bills for day-to-day medical operations.
“Vendors obviously are calling expressing concern, but we are assuring them we are paying,” he said. “We are operating without disrupting patient care services.”
The company is conducting an internal audit to determine its true value, Knewitz said, and it is looking at selling some “non-core” assets to raise cash.
The New York Stock Exchange suspended trading in HealthSouth shares and is seeking to delist the company. The company’s stock sold for about 8 cents a share in over-the-counter trading Monday morning, down from a high of more than $30 a share five years ago.
Based in Birmingham, HealthSouth calls itself the largest U.S. provider of diagnostic imaging, outpatient surgery and rehabilitation services. The company has almost 1,700 locations in all 50 states and abroad.