House Grills HealthSouth Directors

HealthSouth Corp. directors on Wednesday testified to a House panel that they knew nothing about a $2.7-billion accounting fraud that prosecutors allege was orchestrated by fired Chief Executive Richard Scrushy.

Interim Chairman Joel Gordon, acting CEO Robert May and other directors said they had no idea that Scrushy oversaw a seven-year plot to inflate income, as prosecutors allege in an 85-count indictment. The directors said they learned of the fraud in March, when the first of 14 company executives pleaded guilty.

“Never once did anything come to my attention that would lead me to conclude there was anything wrong,” Sage Givens, an audit committee member, told House Energy and Commerce Committee members. “It is difficult to convey how shocked and saddened I have been since learning of the fraud.”

Directors testified that Scrushy, who built HealthSouth into the largest U.S. operator of rehabilitation hospitals, and the company’s former auditor, Ernst & Young, never gave a hint that five chief financial officers and other executives had cooked the books. The CFOs admitted their role in guilty pleas.

Committee members are investigating how directors, bankers and auditors failed to act on warning signs before fraud allegations surfaced that almost drove the Birmingham, Ala.-based company into bankruptcy.

Scrushy’s indictment, unsealed Tuesday, alleges that Scrushy used threats, payoffs and eavesdropping to enforce silence among conspirators. Directors, who face dozens of investor lawsuits for their roles, testified that Scrushy’s intimidation extended to them.

Lawmakers questioned why directors never saw a 1998 letter, signed by an anonymous “Fleeced Shareholder,” that detailed such accounting irregularities as year-old accounts receivable valued at tens of millions of dollars.

“This is about making sure that boards of directors exercise their fiduciary responsibility to shareholders and that their judgment is unclouded by conflicts of interest,” said Rep. James C. Greenwood (R-Pa.).

Shares of HealthSouth were unchanged at $2.78 in over-the-counter trading.