Birmingham, Ala. (June 3, 2004) -- HealthSouth Corp. said an internal investigation into accounting irregularities at the health care company identified $2.7 billion of fraudulent entries in its accounting system.


A report released this week by the committee that conducted the investigation said the size of the accounting fraud was in line with previous estimates. In January, HealthSouth estimated the effect of the fraudulent and inaccurate accounting entries to be between $3.8 billion and $4.6 billion.


"The accounting fraud at HealthSouth was by any standard both enormous and complex. Its concealment over the course of nearly seven years required considerable effort and, in some cases, luck," the report said. It continued, "Stated most simply, the fraud was accomplished by making over $2.7 billion in false or unsupported entries in the company's accounting systems."


The special audit review committee was established by HealthSouth's board and was assisted by its legal counsel, Balch & Bingham, and a forensic accounting team from PricewaterhouseCoopers. The report, which was delivered to a special committee of the company's board of directors this week, is the result of a 14-month review.


In its report, the committee said it didn't reach any conclusions as to whether the fraud should have been discovered before March 2003. It also said that an assessment of whether Ernst & Young, the company's former auditor, fulfilled its responsibilities "was beyond the scope of the committee's investigation," because it would require, among other things, E&Y's audit work papers, which it said weren't available to the committee.


The report comes as some of the company's former executives face sentencing for their role in the massive fraud. Among them is former HealthSouth assistant controller Kenneth Livesay, who was reportedly sentenced to six months’ home detention and five years’ probation this week by a federal judge in Alabama. Livesay was also ordered to forfeit $750,000 from bonuses, stock sales and after-tax profits taken between 1996 and 2003, according to published reports.


He is one of more than a dozen former HealthSouth executives who have pleaded guilty in the fraud. Former chairman and chief executive Richard M. Scrushy, who has been indicted on 85 criminal counts, faces trial later this year.


-- Melissa Klein Aguilar

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