1 “…not until I sell my stock.” -Richard Scrushy, CEO/Chairman Healthsouth Chuck Boguslaski Martin Cullen Dean Moore

2 HealthSouth: A Large Healthcare Provider Headquartered in Alabama Nation’s largest provider of outpatient surgery, diagnostic imaging and rehabilitative services Operates over 1,800 different U.S. and international facilities

3 HealthSouth Materially Inflated Earnings

4 HealthSouth’s Fraud Scheme Income Statement Gross Revenues Allowance for Insurer Payments Net Revenues Costs Net Income Balance Sheet Property Plant and Equipment Cash Inventory Goodwill Decreased Allowance Increased Net Income Increased Assets/ Decreased Liabilities Balance sheet changes were spread over multiple accounts to prevent auditor discovery

5 Costs of the HealthSouth Fraud Equity investors lost billions from the peak stock price Forensic audit is expected to show fraudulent entries of between $3.8B and $4.6B –SEC case initially alleged $1.4B in fraud –Restated audit not expected until 2005 Fraud investigation expected to cost HealthSouth $91mm –Legal fees, restructuring experts, forensic accounting, etc… Ongoing shareholder lawsuits –Accountants and bankers sued as well

6 HealthSouth’s Stock Price 1) Don’t our earnings look great? The company has never been stronger!!! 2) Executives dump stock representing 83% of their average holdings. $160mm in insider trading proceeds. 3) Cover-up #1: “Earnings will suffer due to price reductions from managed care providers”. 5) Cover-up #2: “2002 earnings will be lower by $175mm due to a new interpretation of a Medicare reimbursement policy. Scrushy gives up CEO position. SEC starts investigation. 4) Dump more stock!!! 6) SEC charges CEO with fraud

7 The Players Richard Scrushy, CEO –First CEO to be charged in violation of Sarbanes-Oxley –Accused of making $278mm off the fraud –Free on $10mm bond, awaiting August 2004 trial Wearing a fashionable electronic ankle bracelet Guilty pleas from 15 other HealthSouth executives –Including 5 former CFOs –VPs of accounting –Assistant VPs and controller of accounting

8 Detection: Should Ernst & Young Known? E & Y claims HealthSouth execs altered documents and financial accounts –Small adjustments to many, many accounts –Financial audits hard to detect fraud when execs are determined to commit a crime E & Y should have been on the lookout due to specific fraud risk indicators: –Medicare fraud lawsuit in 2001 –Domination of management and BOD by a single person –New regulatory requirements that could impair profitability –Related-part transactions: members of the BOD had significant business dealings with the company