Keeping Secrets

Like their counterparts at Clinton, Mississippi-based WorldCom, the hometown boys of HealthSouth faced a paucity of other job opportunities. And HealthSouth paid them well. By way of comparison, Sloan D. Gibson IV, the CFO of AmSouth Bancorp (one of the few other public companies in Birmingham), received salary and bonus totaling about one-quarter of the $2.4 million Martin received in his first year on the job.

The absence of other options and the close personal and business ties among members of the group (all had worked for HealthSouth's bank or auditor or with Scrushy before joining the company) no doubt reinforced group loyalty at the expense of a broader public. It's easier to hurt a nameless, faceless mass of investors, says Prentice, than to endanger yourself and the people you know — a point Scrushy was quick to exploit. "If you want to go public with all this, get ready to get fired, and everyone goes down with you," Scrushy told Owens, according to the transcript of the recording Owens made of Scrushy.

Stifling Dissent
Apart from the organizational culture, what made the fraud possible on a structural level was Scrushy's elevation of so many decisions to the executive level, which limited checks and balances along the way. The accounting systems in the field did not interface with the corporate enterprise-resource-planning software, making it necessary for results to be consolidated by hand at the corporate level (again, in an echo of WorldCom). That made it easy to fudge numbers, since the internal-audit staff was directed to review only the field numbers, not the consolidated numbers. In fact, E&Y auditors noted in 2001 that "management is dominated by one or a few individuals without effective oversight by the board of directors or audit committee." E&Y also observed that the internal-audit function was understaffed, undertrained, and lacking in independence.

Employees who tried to voice concerns were stymied. Diana Henze, vice president of finance in 1998, told a congressional panel in 2003 that as early as 1998 she noticed that earnings would jump with each iteration of quarter-end consolidations. At first, she accepted the explanation that some reserves had been reversed, but her doubts increased as the unexplained earnings "bumps" continued throughout 1999. She confronted then-controller Owens, accused him of fraud, and later told her boss, Kenneth Livesay, that she intended to report the fraud.

When Henze went to corporate compliance director Kelly Cullison in November 1999, however, she found that Cullison lacked the authority to investigate her allegations. Cullison, who became compliance director in 1997 at the tender age of 26, corroborated the story, also before Congress. "I did not have access to the supporting documents to determine whether or not the journal entries were legitimate," she said. She stated that she brought the case to her supervisor, co-founder Tony Tanner, who told her the complaint had been resolved and that the case was closed. "Because of the way HealthSouth was structured, a complaint like Diana's had to go up the chain of command to be properly investigated," adds Cullison, who left the company in 2001 to start her own business.

Soon after making her complaints, Henze missed a promotion she felt she had earned. She testified to Congress that Owens told her she had been held back for refusing to comply with the fraud. Soon after, she requested and received a transfer out of accounting and into the IT group. She is currently vice president of accounting systems and controls.

At long last, Owens blew the whistle himself. He testified that his wife's threat to file for divorce convinced him to go to the FBI. But by that time, the jig was up: major investors were calling for Scrushy to quit; new Sarbanes-Oxley directives were making the cover-up harder to maintain; and a plan to take the company private through a leveraged buyout failed because the company lacked the cash to cover its portion of the deal.

The Aftermath
Since Scrushy's ouster, HealthSouth has begun to regroup. Guy Sansone, of Alvarez & Marsal, came in as interim CFO in March 2003 to help stave off bankruptcy and begin the refinancing process as well as regulatory settlements. Last fall, Sansone was able to turn over the reins to John Workman, former CEO and CFO of U.S. Can Corp. "We're looking forward to not having to deal with the sins of the past," says the new CFO, who has helped oversee a reconstruction of the 2000-2003 10-Ks that will take about a million hours of work by approximately 300 consultants.

New policies, such as hiring an outside firm to handle whistle-blower calls and scheduling the board to meet independently with auditors, have been instituted. The new CEO, Jay Grinney, is deliberately relaxing the culture in hopes of assuaging employees' learned fears about speaking the truth. The once-forbidden executive suite is now open to all, and lower-level managers are being given more authority over areas like purchasing.

Personal turnarounds for the former CFOs remain uncertain. So far, they have received relatively light sentences, and no jail time. But federal prosecutors are already appealing these decisions to a higher court. And Scrushy's defense team has pilloried the "family," exposing some unseemly details of their private lives. For instance, defense attorneys prodded Beam to admit that he had engaged in adulterous relationships and had even helped one of his girlfriends get a job at HealthSouth before retiring in 1997. And Martin admitted to punching former treasurer Leif Murphy at his going-away party because he felt "betrayed." (Murphy was apparently the only person who quit immediately upon learning of the fraud.)

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