VideoSo when did accounting firms get into the facilities management business?
According to a report in The Wall Street Journal, audit-related fees paid by HealthSouth to external auditor Ernst & Young in 2000 and 2001 included so-called "pristine audits."
And what are "pristine audits?" Information culled from the last seven 8-K filings, ranging from January 2002 to March 2003, identify pristine audits as unannounced spot checks of every HealthSouth facility based on a 50-point check list. The audits, say The Journal, were performed by E&Y junior accountants who were not involved with the HealthSouth financial statement audit.
The Journal claims E&Y's check-ups included inspecting toilets and ceilings for stains, making sure trash receptacles had liners, and attesting that magazines in the waiting areas were displayed in an orderly fashion.
Reportedly, these audits were the brainchild of former HealthSouth Chairman and CEO Richard Scrushy, who was fired -- along with E&Y -- after federal prosecutors charged the executive with accounting fraud for overstating profits by $2.5 billion. Scrushy maintains his innocence.
E&Y and HealthSouth representatives reportedly confirmed that the accounting firm suggested that pristine audits should be categorized an audit-related fee.
Former SEC chief accountant Lynn Turner told The Journal that "E&Y arguing that checking the cleanliness of a facility is 'audit related' goes well beyond the pale of sanity and common sense." Meanwhile, Walter Schuetze, another former SEC chief accountant claims that E&Y should stop insisting that the fees were properly characterized. "Not only does it fly in the face of facts. It suggests that Ernst & Young was covering up the facts."
HealthSouth proxy filings from 2000 and 2001 peg E&Y audit fees at $1.03 million and $1.2 million respectively. A Healthsouth spokesman, quoted in The Wall Street Journal said the 2002 financial statement audit bill is $1.1 million.
Perhaps more telling: the spokesman pointed out that the tab for pristine audits was about $1.3 million in 2000, and the same for 2001. For 2002, the audit fee climbed to $1.4, according to the source. That means that HealthSouth paid E&Y more for pristine audits than it did for its financial audit.
Non-audit related fees at HealthSouth were $66,107 in 2000 and $121,580 in 2001, according to documents filed with the SEC. If HealthSouth recategorizes the pristine fees as non-audit fees, which is what many experts say is the correct treatment, then investors would get a very different picture about the relationship between HealthSouth and E&Y.
For example, the 2001 fee structure would shakeout like this: $1.2 in audit fees; $1.1 in audit-related fees, and $1.4 in non-audit-related fees.
(Editor's note: While checking toilets may be an extreme example, CFOs say new regulatory requirements are changing the nature of external audits. How will audits morph over the next few years? Read The New Rules of Engagement,", a CFO.com exclusive.)
ImClone Takes $41 Million Waksal Hit
Last Friday, executives at ImClone Systems Inc. issued an 8-K, updating the company's financial statements to reflect the impending sentencing of former president and CEO Samuel D. Waksal. In the statement, company officials lowered the balance sheet liability for Dec. 21, 2002, by about $19 million; while raising the estimated charge against earnings by about $5 million.
Yesterday, four days after ImClone filed the 8-K with the Securities and Exchange Commission, Waksal was sentenced by a federal judge to more than seven years in prison after being found guilty of insider trading and tax evasion. The ex-CEO was also ordered to pay $3 million in fines and more than $1.2 million in back taxes on nine paintings. He will begin serving his sentence in three weeks, The Associated Press reported.
While the hit to the Dec. 31, 2002 balance sheet is estimated at $41.2 million, company officials also reckon that a charge of close to $30 million will be charged against earnings -- which includes about $25.6 million attributed to Waksal's withholding tax liability. Both estimated amounts are exclusive of penalties, interest and other related contingencies for which the company does not currently believe a loss is probable.
The company has yet to release its 2002 annual report, which apparently will include additional details on the charges.
In spite of the likely liability and related charges, company officials believe that the company's existing cash on hand, marketable securities, and what it collects from under licenses and other agreements, should enable it to maintain its current and planned operations through at least June 2004.
Mid-size Companies to Wall Street: Analyze This
Wall Street analysts have turned their back on many successful -- but small-- companies, denying them coverage and, consequently, access to the capital markets (see "Won't Somebody Cover this Company?").
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