I’m sure many of you have heard of HealthSouth, it’s one of the largest operators of inpatient and outpatient hospitals. However, many of you might not have heard about the huge financial scandal that occurred in the early 2000s. Many people talk about Enron and WorldCom, but few ever mention the scandal that occurred at this company.
In my financial statement fraud class, we took an in-depth look at some of schemes perpetrated by the executives. One of the first steps in a fraud examination is to determine where you are going to look for fraud. This requires an analysis of the company to identify any weak points.
The first thing we did in class was horizontal and vertical analysis on the financial statements from HealthSouth. Horizontal analysis looks at the changes in accounts from period to period while vertical analysis expresses each number as a percentage of a total amount to view the relationships between accounts.
With these analyses, we were able to identify certain accounts that showed inconsistent numbers or sharp jumps from period to period. HealthSouth was fixing its contractual adjustment account in order to inflate its revenue. This account is an estimate, and is the difference between the gross amount billed and what insurance will pay; it reduces revenue.
The financial statement fraud class helps us identify fraud schemes by giving us real data with a real company in order to try to find the fraud. This was just one company we looked at this semester. We have also looked at Adelphia and North Face to identify the fraudulent schemes in their statements and performed similar analyses.