“I Should Have Said No.”

A CFO who confessed to fraud wants business students to learn from his mistakes. An interview with Aaron Beam, former CFO, HealthSouth Corp.
Edward TeachJune 1, 2009

At 66, Aaron Beam is getting on with his life. Six years ago Beam made headlines by admitting that he cooked the books at HealthSouth Corp., the Birmingham, Alabama-based provider of inpatient and outpatient rehabilitation services that he co-founded. The four men who succeeded Beam as finance chief also confessed to the $2.7 billion accounting fraud, which took place between 1996 and 2002. All five CFOs pleaded guilty to criminal charges and testified that HealthSouth co-founder and CEO Richard Scrushy was behind the fraud. But the defense hammered away at their credibility during Scrushy’s 2005 trial, and Scrushy was acquitted of all charges. (He was, however, convicted of bribery in 2006, and is currently serving an 82-month sentence in a Texas federal prison.)

Released after three months in a minimum-security pen, Beam retreated to his small hometown of Loxley, Alabama. Having sold his $3 million dream home to pay restitution and legal fees, Beam now lives modestly and mows lawns for a living. But he is also developing another career: educational speaker. By telling his story to business students, Beam thinks he can teach a highly personal lesson in ethics that will stick.

Most CFOs can probably tell stories about the CEOs they’ve worked with, but in your case it sounds like an especially difficult relationship.
Unless you were there and experienced it, it’s hard to understand. You couldn’t tell [Scrushy] no on anything. I have seen him so mad over minor things that I actually feared for my physical safety. I often joke with students that if Richard Scrushy and Hannibal Lecter were in a fight, I would bet on Richard Scrushy.

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How did the fraud begin?

By 1994 or ’95 we were a Fortune 500 company and the largest company in Alabama; we had 40,000 employees in all 50 states. But as we matured, it got more and more difficult to make our numbers. You can’t keep growing at 20% to 30% every year on the bottom line. To keep the Street from lowering its estimates, we started lowering our reserves for bad debts; when we did acquisitions we would change the estimates of the companies we were acquiring so we could apply those estimates to our earnings as we went forward.

We committed fraud in the summer of ’96, when we could no longer change estimates to make earnings. We thought we could make a lot of entries small enough that the auditors wouldn’t detect them. So one night, during the second quarter of ’96, I said, “OK, let’s do it,” and we credited revenue that did not exist and we debited assets that did not exist.

You kept committing fraud until you quit in 1997. How did you feel during that time?
I felt rotten. It was terrible. My hope was that after we had done it once, we wouldn’t have to do it again. But after doing it for four quarters, I felt like it wasn’t going to end, so that’s when I left. We had dug ourselves a hole.

After you quit, did you ever talk to your successors about the fraud?
I never really had any conversations with them. I moved 250 miles away. Occasionally I’d be in Birmingham and I would run into somebody and they would always say, “You left at a good time.” By 2003 I was living under the assumption that the fraud had ceased and everything was OK. It was a huge surprise to me when it was reported that the fraud had continued for all those years. I was amazed that it had gone on that long — I didn’t think it could.

Weston Smith finally blew the whistle. Do you regret not having done so yourself?
The correct thing I should have done was, at the critical point when we weren’t going to make our numbers, I should have said no [to any illegal actions]. If I got fired, I got fired. Once you actually commit fraud and have blood on your hands, getting out of the trap is very difficult.

Today you travel to business schools and talk to students about your experience at HealthSouth. What do you hope to accomplish?
I’m trying to turn a big negative into a positive, because there is such a need for ethics in the business world today, and I’m in a unique position to talk about it. If we can teach college students that they’re going to face these kinds of temptations every day in the business world, we can make a difference.

Some people ask, Can you really teach ethics? I’ve been using the example of the pilot [Chesley Sullenberger] who landed the plane in the Hudson River [in January]. He was able to do it because he had trained all his life how to do it. It was almost instinctive. When you’re faced with the decision whether to commit fraud or not, you are in a crisis. And if you have ethical training to fall back on, it will help you in that situation. If we start pointing out to students that there are people out there who will push you to commit fraud, that there are tremendous pressures on finance managers to do things that are inappropriate, then hopefully the day they’re in that situation they will do the right thing.

Do you think your presentations are effective?
I’m told by professors who are trying to teach ethics that they are effective. I hope they are. One thing I stress is to look beyond executive rhetoric and try to understand the true nature of a company’s culture. If you get a feeling that something isn’t right, it may not be.

What kinds of questions do students ask?
I get a lot of questions about Sarbanes-Oxley. Do I think it will prevent these kinds of things? I believe that Sarbanes-Oxley is what made Weston Smith blow the whistle. He had [moved up to CFO], and the counsel for the company, who didn’t know about the fraud, explained to him what Sarbanes-Oxley meant.

What’s life like for you now?
It’s actually pretty good, even though I basically have no wealth now. I’m just back to being an ordinary guy. I went back to college and took a two-year certificate program in turf management. I have a lawn-service business — it’s one man and a lawn mower. I’m cutting grass and doing public speaking and working on a book about my experiences.

Are you at peace with yourself?
I am. My marriage survived through it all. People seem to respect what I’m doing in my speaking. It’s sad, though, and I tell people this: I was a founder of one of the most successful health-care companies in the history of the United States. Today HealthSouth is trading on the New York Stock Exchange and doing well. But I won’t be remembered for that. I will be remembered as one of the guys who committed the fraud. That hurts, and it hurt my family a lot. But, you know, you heal over time, and I’m OK today.