HealthSouth Countersues Ernst & Young

Last month the Big Four firm accused HealthSouth of exposing it to lawsuits and damaging its reputation.
Stephen TaubApril 7, 2005

HealthSouth Corp. is suing its former auditor, Ernst & Young, for breach of contract and negligence for failing to uncover the company’s $2.7 billion accounting fraud.

The lawsuit, filed in the circuit court of Jefferson County, Alabama, follows a suit filed last month by Ernst & Young, which accused HealthSouth of exposing the Big Four firm to lawsuits and damaging its reputation.

The lawsuit seeks unspecified damages for lost fees, profits, and business opportunities, as well as for legal fees and the cost of unraveling the fraud and restating earnings, according to Reuters.

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The wire service also pointed out the lawsuit’s assertion that “E&Y either intentionally and knowingly turned a blind eye to the accounting fraud, manipulation and misconduct perpetrated by [former chief executive officer Richard] Scrushy and the pleading officers and employees, or E&Y negligently, recklessly, wantonly breached its agreements and duties implied in law in failing to discover the accounting fraud and to report the fraud to HealthSouth’s board of directors and audit committee.”

That wording is significant, added Reuters, because it marks the first time that the company has accused Scrushy of spearheading the fraud.

During Scrushy’s ongoing trial, the wire service noted, a number of former HealthSouth finance executives have testified about how far they went out of their way to hide the fraud from E&Y. Further, Scrushy’s lawyers have noted that a number of those executives once worked for E&Y and knew how to manipulate financial reports in ways that would make it a lot less likely that the auditors would notice.

E&Y spokesman Charlie Perkins told the Associated Press that the HealthSouth fraud “was the direct result of the company’s former officers and employees’ calculated plan to deceive the external auditors.” The audit firm believes that “HealthSouth’s claims are without merit and should be resolved through arbitration,” he reportedly added.

Scrushy attorney Donald Watkins said the company’s charges about his client’s role in the fraud was a “reckless allegation,” according to the AP, citing a report in The Birmingham News. “You have to assume that they either have evidence of such a claim which they have not provided to the prosecutors or defense counsel or they have not been paying attention to the turn of events in Richard Scrushy’s favor in the criminal trial,” Watkins reportedly added.