Accounting & Tax

Get in Line: E&Y Sues HealthSouth

Big Four firm claims executives at health-care company hid plot to artificially pump up earnings.
Stephen TaubMarch 31, 2005

Ernst & Young LLP is suing HealthSouth Corp. for alleged damages stemming from the medical rehabilitation chain’s huge accounting fraud. This, according to the Associated Press.

The accounting firm, which served as HealthSouth’s auditor from 1996 through 2002, claims the scandal exposed it to lawsuits and damaged its reputation. The lawsuit was filed on March 18 in Jefferson County circuit court.

In the suit, E&Y asserts that testimony from the ongoing trial of former HealthSouth CEO Richard Scrushy proves that executives at the health-care company hid a fraudulent financial scheme from the audit firm.

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Prosecutors allege that HealthSouth inflated earnings by about $2.7 billion so that the company would meet Wall Street expectations.

“The purpose — and the effect — of the company’s deception was to conceal the fraud from Ernst & Young and to frustrate the performance of its work,” the suit alleges, according to the AP.

It’s believed that E&Y wants the suit to go to arbitration. Apparently, the audit firm is seeking reimbursement for all litigation costs it must pay arising from the HealthSouth fraud, plus unspecified damages for lost business.

Reportedly, testimony during Scrushy’s ongoing trial indicates that a number of executives took specific actions to prevent E&Y from discovering the fraud.