OPENING CREDIT by Unknown

Author:Unknown
Language: eng
Format: epub
Published: 2021-07-16T16:00:00+00:00

c) Other forms of revenue manipulation

HealthSouth, a US-based hospital operator, had apparently enjoyed rapid growth and a steadily growing share price throughout the 1990s. In 2003, the SEC filed civil charges against HealthSouth for misleading public investors by presenting fraudulent financial statements. A forensic investigation of the company’s accounts was conducted by PricewaterhouseCoopers to determine the extent and value of such activity that had taken place from 1997 through July 2002. After the investigation was completed, the CEO and key finance officers of HealthSouth were found to have boosted the company’s revenues in a variety of ways, including:

•Deferred revenues from prepaid health coverage had been recognised in full rather than applying the key principle of matching cost and revenue within the relevant time frame.

•The amorphously defined ‘other’ revenues from healthcare coverage had themselves been overstated.

•Sundry routine operational expenses had either been capitalised or, alternatively, deferred, thereby understating annual expenses and further inflating the company’s apparent profitability.

•‘Cookie jar reserves’ – a line item over which management exercised complete discretion – were used to conceal shortfalls in income. By this method, management effectively set aside a reserve of cash in the good times to be deployed to flatter earnings whenever it felt the need.

•An indication of this practice can often be shown by the presence of outsized write-downs, particularly in the final quarter of the fiscal year, which can subsequently be reversed in order to close the gap between actual earnings and earnings targets. Thus, perversely, in practice it can pay to be somewhat suspicious of companies that seem to be almost too reliable at hitting their own earnings forecasts.

At the end of its forensic investigation into HealthSouth’s accounts, PricewaterhouseCoopers had uncovered a total of $1.4bn in overstated income, beginning in 1999. A further overstatement of $1.1bn had also previously been identified by the US Justice Department after extensive discussion with executives of HealthSouth’s own finance department.

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