Unhealthy Accounting at HealthSouth Essay - 648 Words

1. What are several red flags that EY either was or should have been aware of in the audit of HealthSouth? Overall, there were three â€Å"red flags† EY was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. EY should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints. 2. What procedures can auditors perform to detect fraudulent entries made during the consolidation process? Most of the time, fraudulent activity is found by†¦show more content†¦4. What is the appropriate response by auditors to information from â€Å"disgruntled† employees? Depending on the severity of the fraud, the appropriate response can be different from firm to firm. A good way to detect fraud would be to listen to information provided by a disgruntled employee. This holds true unless the employee was disgruntled before the fraud occurred. The information will probably be false and misleading because the employee has held animosity for a while. Regardless, you should take the information seriously when it is first presented to you. 5. HealthSouth has sued EY, and EY is the target of a federal securities class action suit. What are EY’s likely defenses against HealthSouth? Against the class action suit? One of the main defenses EY took during the early stages of the HealthSouth suit was the fact that the SEC had no well-defined rules with regards to audit-related practices. Another defense was the mere fact that EY never faced a criminal indictment for the HealthSouth fraud. This was mainly due to the statute of limitations placed on securities fraud. It sets it at the earlier of (a) 2 years after the discovery of the facts constituting the violation or (2) 5 years after such violation. Thus, the DOJ was unable to file criminal charges against the firm because the partner on the audit (G. Marcus Neas) was â€Å"unaware† of the fraud in 1993. 6. HealthSouthShow MoreRelatedGeneral Electric60506 Words   |  243 Pagesquestionable business opportunities and insist all aspects of company strategy reflect high ethical standards. 6. Recent instances of corporate malfeasance, ethical lapses, and misleading or fraudulent accounting practices at Enron, WorldCom, Tyco, Adelphia, Dynergy, HealthSouth, and other companies leave no room to doubt the damage to a company’s reputation and business that can result from ethical misconduct, corporate misdeeds, and even criminal behavior on the part of company personnel