Risk Management

Ex-Assistant-Controller Fingers Scrushy

A former HealthSouth accounting manager testifies against Richard Scrushy, adding to the growing list of finance officials who say the CEO knew abo...
Marie LeoneFebruary 24, 2005

A former assistant controller of HealthSouth Corp. testified yesterday that senior executives told him that Richard Scrushy, its one-time chief executive, was aware of accounting fraud being perpetrated by company executives, the Associated Press reported.

The accounting manager, Ken Livesay, was called in by the prosecution as a witness against Scrushy, who is being charged with orchestrating a $2.6 billion fraud at HealthSouth.

Livesay testified that he repeatedly asked former HeathSouth CFOs William Owens and Michael Martin whether Scrushy was being told about the fraud. “They assured me that he [Scrushy] knew,” Livesay told the court, according to the Wall Street Journal. “I just wanted to make sure that, that all the way to the top of the organization, it was known what we were doing,” he added.

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Livesay added that he and other members of the group of HealthSouth employees that dubbed itself “the family” abandoned their “aggressive accounting” techniques in favor of fraud when management realized the company would not meet Wall Street earnings expectations, according to the AP.

“At some point in 1996, we crossed the line. We could no longer use those aggressive methods,” the newswire quoted Livesay as saying. “We crossed the line from gray to black.”

During his testimony, Livesay described how he was instructed by Martin and Owens (who was controller at the time) to fill in financial gaps when results didn’t meet analysts’ earnings expectations. Livesay also testified that Owens assured him that the fraud would stop after HeathSouth completed a series of acquisitions. But the overstatements continued to grow, reaching $600 million by 1998, a considerable spike from the $70 million of inflated earnings that were booked in 1996, noted AP.

Owens and Martin pleaded guilty to fraud charges in 2003, and also testified that Scrushy was aware of the fraud. Livesay, who also pleaded guilty in 2003, accepted a plea bargain in March of that year, when the HealthSouth fraud scheme was discovered. As part of the deal, Livesay paid $760,000 in civil fines and criminal forefeitures, and served six months under house arrest, according to the newswire. He will also serve five years probation.

“I made a lot of money as a result of my actions,” Livesay said, according to the newswire. AP also reported that the former corporate accountant had amassed about $1.1 million in mutual funds and a $300,000 home by 1999, after receiving salary, bonuses and stock options from the company.

Scrushy is facing charges of inflating earnings at the Birmingham, Ala. -based company, and conspiring with other executives to illegally skim-off millions of dollars from the company in bonuses and salary. Other allegations include money laundering, obstruction of justice, perjury, and violation of the Sarbanes-Oxley Act of 2002.

Scrushy’s lawyers argue that the co-founder and former chief executive was kept in the dark by 15 former executives who have pleaded guilty for related crimes, says AP.