NYSCPAJOURNAL_REV_FRAUD - Anatomy of a Financial Fraud Page...

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Searc Anatomy of a Financial Fraud A Forensic Examination of HealthSouth By Leonard G. Weld, Peter M. Bergevin, and Lorraine Magrath A forensic audit conducted by Pricewater- houseCoopers concluded that HealthSouth Corporation’s cumulative earnings were overstated by anywhere from $3.8 billion to $4.6 billion, according to a January 2004 report issued by the scandal-ridden health-care concern. HealthSouth acknowledged that the forensic audit discovered at least another $1.3 billion dollars in suspect financial reporting in addition to the previously estimated $2.5 billion. The scandal’s postmortem report found additional fraud of $500 million, and identified at least $800 million of improper accounting for reserves, executive bonuses, and related- party transactions. This billion-dollar-plus admission failed to garner financial media headlines, further evidence of the public’s inurement to financial reporting scandals. Contemporary corporate fraud in the United States has affected market values, decimated private 401(k) plans, and devalued public pension funds. Tyco, Dynegy, WorldCom, and others joined Enron’s fraudulent accounting ranks in 2002. Birmingham, Alabama–based HealthSouth became a member of that disreputable group a year later. Moreover, numerous lesser-known companies have also engaged in a host of improper and illegal accounting activities. The Magnitude of the Problem On January 23, 2003, the SEC issued its “Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002.” Section 704 directed the SEC “to study E - mail Story Print Story October 2004 Iss Enlarge Cover Features An exclusive interview w New York State Comptro fostering a fiscally respon culture in school districs The Evolution of Pension Accounting Anatomy of a Financial F The 150 - Hour Requireme CPA Candidates More This Issue | Past Iss Page 1 of 11 Anatomy of a Financial Fraud 9/10/2006 http://www.nysscpa.org/cpajournal/2004/1004/essentials/p44.htm
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enforcement actions over the five years preceding its enactment in order to identify areas of issuer financial reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management.” The study period began July 31, 1997, and ended July 30, 2002. Over the study period, the SEC filed 515 enforcement actions for financial reporting and disclosure violations arising out of 227 separate Division of Enforcement investigations. Those investigations fell into three categories: z Revenue recognition, including fraudulent reporting of fictitious sales, inaccurate timing of revenue recognition, and improper valuation of revenue. z Expense recognition, consisting of including improper capitalization or deferral of expenses, incorrect use of reserves, and other understatements of expenses. z
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NYSCPAJOURNAL_REV_FRAUD - Anatomy of a Financial Fraud Page...

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