(1) The Red Flags that E&Y should have been aware of audit of Health South are:
- Net income rose nearly 500 percent while revenue grew only 5 percent, other different ratios could have been calculated and accordingly things would have been determined amd got hold of.
- Diligently checking contractual allowances.
- Significant increase in company valuation and earnings.
(2) Procedures auditors can perform to detect fraudulent entries made during the consolidation process:
As Health South accounting system was not in compliant with Enterprise resource planning, diligence would have been taken to check all the accounting systems and other systems getting data from it are properly synced, proper checks and balances would have been kept in place. Consolidation of results by hands should have been checked and discouraged as this leads to easy way of manipulating the figures.
(3) Auditors can determine the company true "tone at top" by the organizational structure the Health South was having as Scrushy was clearly a CEO with dominant position at the top of his company. In their preliminary audit work papers, they noted about HealthSouth that: “management is dominated by one or a few individuals without effective oversight by the board of directors or audit committee, management has no authority to take decisions they were not having access to corporate accounts of HealthSouth and “management was obsessed in maintaining or increasing the stock price or earnings trend.” These qualities of management created an environment at the top that is obsessed with earnings and has the power over their employees to allow a fraud. Scrushy had complete control over his company; he installed security cameras throughout headquarters to keep watch on his employees. He allowed rank-and-file employees into his executive suite only when he wanted to berate them.
(4) The appropriate response of Auditors for disgruntled employee Mr Vines, would have been, they would have checked and investigated the email from him instead of that they relied on explanation given by the managagement and termed him as disgruntled and pest. The accounts which Mr Vines pointed out should have been checked, verified and investigated by External Auditors. They failed to do so in this case.
(5) E&Y have the practise of filtering the transaction above $5000 and materially those entries got unnoticed. So to conceal the entries company used to average journal entry with $2,500 to avoid auditor detection and millions of entries with fake documentation used to be created in this manner. Auditors should have also kept check on volume of jounal entries instead of keeping check only on amount of journal entries. Patterns would have been formed if such large amount of transactions are recorded same should have been identified if entries are happening in such large scale.
Unhealthy Accounting at HealthSouth PROBLEM In 1996, key executives of HealthSouth, one of the nation’s largest...
HeathSouth is American’s largest provider of out-patience surgery and rehabilitation services. It owns or operates over 1,800 facilities across the country and serves 70 percent of the rehabilitation market. It was founded in 1984 by Richard Scrushy, a former respiratory therapist who believed the efficient one-stop shopping could be applied to the health care industry. From the time it went public in 1986, the Birmingham, Alabama, firm exceeded Wall Street Expectations, a pattern that would continue for the next 15...
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