Ernst & Young is no longer HealthSouth's auditor. That's no surprise, especially when you read the following statement on the HealthSouth Web site: "In light of recent investigations into HealthSouth's financial reporting and related activity, the financial statements currently found on this Web site should no longer be relied upon."
But HealthSouth isn't the only one getting scrutiny. Last week, there was a Wall Street Journal article which pointed out that in HealthSouth proxies filed with the SEC for 2000 and 2001, approximately $4 million in fees were paid to Ernst & Young for each year. As required, the types of fees were identified, with the bulk listed as audit or audit-related. Only $66,107 for 2000 and $121,580 for 2001 were noted as nonaudit-related fees according to the Jounal.
The issue that is now being raised involves the appropriateness of labeling fees as audit-related. In particular a $2.6 million fee that HealthSouth paid E&Y to conduct so called "Pristine Audits" over the two-year period. The paper indicates that E&Y encouraged HealthSouth to label those fees as audit-related.
HealthSouth describes a pristine audit as "a yearly, unannounced audit of each facility. Administered independently by Ernst & Young LLP, this program grades all facilities using a standardized 50-point checklist that measures each facility from the patient's perspective. This audit ensures that all of our patients enjoy a truly pristine experience during their time at HealthSouth. The average score for 1999 was 98 percent, with more than half of our facilities scoring a perfect 100 percent."
The WSJ gives a little more detail about some of the items on the checklists. E&Y staff were to check if magazines in waiting rooms were stacked orderly, the toilets and ceilings were free of stains, trash receptacles had liners, heating and cooling vents were free of dust, clean laundry was neatly folded and stored, and dirt laundry kept in covered containers.
Is the $2.6 million then an audit-related on nonaudit-related fee? The answer is particularly important because the argument is being made by many that audits can't be independent and still protect investors' interests if they are receiving huge consulting fees from the companies they audit.
The problem is who determines what the term "audit-related" means? My guess is that if we have a few more instances that follow a similar approach as above, the regulators will issue a strict definition and focus more on the impact that consulting fees have on auditors.
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