HealthSouth fraud figures higher than thought

The embattled outpatient services giant HealthSouth now believes its accounting fraud could total as much as $4.6 billion, significantly more than previous estimates.

In a meeting with investors on Jan. 20, HealthSouth officials said an audit was expected to reveal between $3.8 billion and $4.6 billion in fraudulent accounting. In July 2003, the company estimated the fraud to total at least $2.5 billion.

The updated estimates were given as work on the audit was nearing its end. Guy Sansone, HealthSouth's acting chief financial officer, said the audit was "substantially complete" and that a report on it was being drafted.

"We'd like to put this behind us," Sansone said. "We'd like to concentrate on managing the business going forward, improving operations and growing the company. And while we know questions regarding this are going to continue, it's our hope that we can try to put this chapter behind us as soon as possible."

HealthSouth's accounting woes were first revealed in March 2003, when the government alleged that the company inflated earnings by about $2.5 billion to meet Wall Street expectations. Since then, 15 former HealthSouth executives have pleaded guilty to various criminal charges. Company founder and ousted CEO Richard M. Scrushy also has been charged in the scandal, though he has maintained his innocence and is awaiting trial.

In the company's July 2003 update to investors, HealthSouth executives said they expected the audit to find $2 billion in fraudulent entries, $500 million in aggressive accounting and an unknown amount in acquisition accounting and goodwill.

At January's investors' meeting, Sansone said the company had revised its estimates to expect $2.5 billion in fraudulent entries, $800 million to $1.6 billion in aggressive accounting and $500 million in acquisition accounting and goodwill. He said "gray areas" remained, making it difficult to calculate how much error in aggressive accounting would be found.

The latest meeting also served as an opportunity for HealthSouth leaders to update investors on its restructuring effort which was started soon after the scandal broke and at a time when many believed HealthSouth was headed for bankruptcy.

Bryan Marsal, the company's chief restructuring officer, said the major restructuring should be completed by the end of June. That includes the hiring of several new executives as well as an overhaul of the board of directors. "[We will] have a new culture and a new company that can get back on offense as opposed to defense."

Marsal also told investors that HealthSouth expects about $4 billion in revenue for 2004 with about $650 million in earnings before interest, taxes, depreciation and amortization -- a key measure of profitability. He said the company's total net debt has been reduced by roughly $250 million from about $3.1 billion last July to about $2.85 billion.

Still, Marsal said HealthSouth continues to face challenges, including questions from the Centers for Medicare & Medicaid Services about whether the accounting fraud resulted in the company getting over-reimbursed by Medicare.

Sansone said the company is still waiting to learn whether the Dept. of Justice will indict HealthSouth for the fraud. "Right now we're just continuing to cooperate with the government in any way possible and building up a reform plan," he said.

Sansone told investors that finalized audited financial statements should be completed by the end of the first quarter of 2005.