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The Shareholder Online The alumni magazine of Auburn University’s Raymond J. Harbert College of Business

Former HealthSouth CFOs address accounting students

Former HealthSouth CFO Weston Smith blew the whistle on the accounting fraud in 2003.

They credited revenue HealthSouth didn’t make, and debited assets the company didn’t have. By doing so, they helped turn the Birmingham-based outpatient medical rehabilitation clinic into a financial giant, with accounting numbers that didn’t exist. From 1996 to 2002 HealthSouth falsely reported $1.3 billion in profits but actually lost $2.4 billion in its attempt to meet Wall Street expectations.

Former HealthSouth Chief Financial Officers Aaron Beam and Weston Smith addressed Harbert College of Business accounting students in separate presentations March 27 and April 3, telling stories of corporate greed, corruption, guilt and lessons learned.

Aaron Beam, HealthSouth CFO from 1984 to 1997, shows students the 'Pull the Wagon' drawing that once occupied many HealthSouth offices.

Aaron Beam, HealthSouth CFO from 1984 to 1997, shows students the ‘Pull the Wagon’ drawing that once occupied many HealthSouth offices.

“In 1806, Webster’s published the first dictionary and it defined success as being generous, prosperous, healthy and kind. Today, that definition is the attainment of wealth, fame and rank,” said Beam, who served as CFO from 1984 to 1997 and once constructed a replica LSU football field in the backyard of his Loxley, Ala., home, paid cash for luxury automobiles, owned condos in the French Quarter of New Orleans, and bought more than $30,000 worth of silk neckties.

Beam and Smith were among five former HealthSouth executives to plead guilty to federal fraud charges in 2005. Beam was sentenced to three months in prison, while Smith – who blew the whistle on the corruption – served 14 months. Former HealthSouth CEO Richard Scrushy, who both men said instructed them to falsely inflate profits on quarterly reports, was acquitted of all criminal fraud charges, but lost a civil suit in 2009 and was ordered to pay $2.9 billion in restitution.

“I made my own bad decisions. I deserve to be punished for what I was a part of,” said Smith, who became CFO in 2001 and privately met with federal agents at the Wynfrey Hotel in Birmingham on March 11, 2003, exposing the fraud. “There were thousands of innocent people who were hurt from my reckless actions and the reckless actions of other folks.”

Smith charged students not to cross the line of ethics.

“It’s easy in the classroom to say ‘I would never get into something like this,’ but the real pressure is later on down the road,” he said. “You worked hard for that job. You want this promotion. You want to do this deal. So-and-so is competing against you. You’ve got a mortgage to pay. That’s when the rubber hits the road right there and if you don’t have a strong system of values or ethics at that point, it’s going to be much more difficult to say ‘no’ than it would be otherwise.”

Why did it happen? “Greed,” Beam said.

“Not just greed, but the desire to make money without having any reference to ethics … do anything to make the numbers to keep Wall Street happy because we were all getting filthy rich. It was particularly an obsession with Richard. He wanted to be the richest man in the state of Alabama. He understood as long as HealthSouth stock kept going up he could reach his goal … He always promised Wall Street that we were going to have another record year so they would keep a strong buy on the stock, and the stock would keep going up.”

How did it happen? A little here, a little there. Beam said former HealthSouth executive Bill Owens, once an auditor with the company who eventually succeeded Beam as CFO, had a plan. Owens served 43 months in prison.

“He said, ‘Look, we have 2,500 general ledgers,’” said Beam. “I can make entries small enough and spread them through those ledgers. I know what the auditors’ thresholds are for examining ledgers. They won’t look at these entries and I will get these numbers to where they need to be.’ Richard thought about it for a little while and said, ‘Guys, this is our best option. This is what we need to do. We’ll only do it this one time. Nobody will lose their jobs. Stockholders won’t get hurt. Everybody does this kind of thing.’

“At that point, I should have stood up to Richard and said ‘no.’ But, I stand before you today telling you I was a coward, I was intimidated by Richard. I did not want to be the one to cause his net worth to go down by several hundred million dollars. There was a part of me that didn’t want the party to end. It was fun being rich. That night, I let Bill Owens cook the books. The next day when I came into work I felt very different. I felt like people were staring at me. I felt like I had blood on my hands. I wanted to put the genie back in the bottle. Richard had already prepared the earnings release. It was too late.”

In 2003, Smith blew the whistle on the operation, and Beam, four years into retirement, gasped when he saw the news on television — “Massive accounting fraud at HealthSouth” — and immediately retained an attorney. “I knew I was in trouble,” he said.

Today, both men are sought after speakers on the HealthSouth controversy and ethics, in general.

Smith, who told students Scrushy once demanded him to sign the Sarbanes-Oxley Act, a federal measure to protect investors by insuring the disclosure of finance reports were accurate, instructed future auditors in the classroom to investigate suspicious activity in the future.

“Even if you’re not involved in something that shouldn’t be going on – if you’re suspicious of something wherever you are, check it out,” he said. “Follow your gut. Follow your instincts. Do you really need to be there? Hopefully it’s nothing, but get to the bottom of it. See if it has merit or not. If it’s something that you can correct, then fantastic. If it’s something you can’t correct, you’re going to have to make a hard decision: Do I stay here, or what do I do? A lot of people at HealthSouth lost their jobs over this who weren’t involved at all.”

Smith added that power in numbers, or co-workers, can help in fixing potential corporate negligence.

“If we, as a team, in the early days of HealthSouth, had gone to Richard and said ‘We’re not going to do this,’ he couldn’t have fired the entire accounting department at that point. A person needs to ask, ‘Do I have allies?’ ‘Do I have like-minded individuals?’ who can stop this or not. If they are not surrounded by like-minded individuals, maybe they don’t need to be at that place. Maybe it is time to go.”

Smith said he walked away from his meeting with federal agents, “Scared to death.”

“But I had another emotion,” he added. “And that was thankfulness. The lying is over. It’s time to accept responsibility.” That doesn’t mean he always advocates blowing the whistle.

“Whistleblowers are usually the victims in these things,” he said. “It’s very hard for whistleblowers to find subsequent employment. They have that stain of not being a team player. There are situations where people need to do that. I’m not going to say ‘never,’ but realistically, that should be viewed as a last resort. Try to fix it. If you can’t, then walk away.”

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