Expert Describes Doctoring of Numbers at HealthSouth

HealthSouth Corp.’s physical therapy centers and other facilities sent accurate financial reports to company headquarters, where accountants would cook the books to make the numbers look better, a forensic accountant told a federal court Friday.

About 80% of the company’s $2.7 billion in fraudulent accounting, aimed at painting a better picture of earnings, came by inflating the payments reported by these facilities, said Harvey Kelly, a forensic accountant at PricewaterhouseCoopers, who reviewed HealthSouth’s books after executives were accused of fraud.

Kelly, whose firm put 23,000 man-hours into examining the books, gave testimony in U.S. District Court in Birmingham, Ala., which is trying former Chief Executive Richard Scrushy, the alleged mastermind of the accounting fraud.

Kelly said the company’s physical therapy, outpatient surgery and X-ray centers would send their accurate operating results to HealthSouth’s headquarters, where accountants would make adjustments to the numbers.

“That’s where they cooked the books,” Kelly said, noting the adjustments almost always increased income. “The fraudulent journal entries were made very late in the game, right before the company reported its numbers.”

Scrushy denies the allegations, and his attorneys said the scheme was created by other executives.

“I’m learning as you are learning it,” Scrushy said to reporters regarding Kelly’s testimony of the accounting maneuvers.

More than a dozen former executives have pleaded guilty to accounting fraud charges.

Another approach HealthSouth used to paint a rosier picture of its financial health was to have deliberately vague descriptions of the company’s assets, Kelly said.

Kelly told the court that accountants came across HealthSouth’s failure to book an $11-million loss on the sale of technology it developed and later sold in 2001 to Source Medical, a company that counted Scrushy and other HealthSouth executives among its investors.

HealthSouth sold 1.7 million shares of Caremark Rx Inc., which has its roots as a physician practice management firm called MedPartners, in 2001 but tried to create false transactions in July and August 2002 to account for the sale, Kelly said.

HealthSouth wired money between its own accounts to create the appearance of a stock sale, said Kelly, who will resume his testimony Monday.