Analysing Fraud - Healthsouth Case Study

Table of contents:

Table of contents:        1

Introduction:        2

1.        Theoretical Framework:        2

1.1.        Theoretical Model of Fraud:        2

1.2.        Health south case and Fraud triangle:        2

1.3.        The motivations behind the accounting fraud at HealthSouth:        2

2.        Social Framework:        3

2.1 Culture of the organization in which fraud occurred        3

2.2. Company’s management impacted by the fraud and the investigation        3

2.3. Employees of the company impacted by the fraud and its investigation        3

2.4. Impact on the public by this fraud:        4

3.        Ethical Framework for the auditors and fraud examiners:        4

3.1 Fraud Examination as a global designation:        4

3.2 Fraud examiners adherence to code of ethics in HealthSouth case:        5

3.3 How could have deception been used in interviewing and is it an ethical way:        5

3.4 Appropriate way of conducting investigations:        5

4.Legal Framework        5

4.1 Impact of Court rulings        6

4.2 Adjudicating the case civilly        6

4.3 Criminal prosecution:        6

Conclusion        6

References:        7

Introduction:

Accounting Frauds have been going on in the US and world over since the past two decades. HealthSouth Fraud case is one among them. This paper analyses the HealthSouth accounting fraud using the Fraud triangle theory and also discusses the social, cultural, ethical and legal framework of the Fraud and its investigations.

1. Theoretical Framework:

1. Theoretical Model of Fraud:

The theoretical model that best applies to the health south fraud case is the fraud triangle model.  Fraud triangle model uses three factors that influences the commitment of fraud by the corporations. And these factors include pressure, opportunity and rationalization. These three factors provide the reasoning for an employee to commit workplace fraud. The pressure on the individual is the prime motivation behind any accounting fraud and this can either be financial pressure like debt problems or a revenue shortfall. This pressure is seen as unsolvable by traditional and legal routes and hence the employee might resort to committing fraud. Maintaining the lifestyle to which one is used to is also seen as a pressure as was noted in the case of Scrushy. Pressure can be in the form of financial difficulty to the organization, maintaining the expectations of customers and investors and also in the form of fear of losing the corporation’s position and statues to the public(Lawrence, 2003).

The second factor in the fraud triangle is the opportunity to commit the fraud. Poor Auditing systems and inefficient internal control provides opportunities for employees to commit fraud; similarly the cultural issues and ethical issues also provide the employees to have their opportunities to commit the fraud.  The third factor is the rationalization  where the company’s employees or senior management provides excuses that could provide some help in transforming their illegal behavior to a reasonable one(ERICKSON, HANLON, & MAYDEW, 2006).

1. Health south case and Fraud triangle:

Some of the features in HealthSouth accounting scandal include the need to make fraud to release pressure was felt by its founder Richard M. Scrushy. There was lack of internal control which made the employees and managers to act unethically. The culture of the company was not strong enough to instill good ethical standards among its employees and the main thing was that the management team believed that they would not get caught as they are false reporting only in little amounts. The Healthsouth case can be well explained using the three factors in the Fraud triangle as there was a pressure to meet the stockholder’s requirements and for this purpose the earning were inflated to $1.4 billion. And there was lack of strong internal control due to the fact that Healthsouth made a number of mergers and acquisitions in the previous decade which led to the loss of control over the new employees who came into the corporation as a result of these mergers(Weld, Bergevin, & Magrath, 2004).

1. The motivations behind the accounting fraud at HealthSouth:

There are various motivations behind the accounting fraud that occurred at health south and the main motivation behind it was to keep the stockholders away from the knowledge of slumping profits by misstating the financials. There was also opportunities for the healthsouth CFO to intimidate the external auditors who were unable to stand up against the CFO by disclosing the fraud. There were also fantasies among the CFOs that the company would eventually generate profits which were enough to make up for the adjustments made in the revenue portion of the current financials. There were particular motivations for Scrushy who was one among the highest paid CEOs in the US. The incentives and the bonuses he received kindled his greed to overstate the financials and earn more.