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April 22, 2003
Mr. James S. Turley
Chairman of the Board
Ernst & Young
5 Times Square
New York, NY 10036-6530
Dear Mr. Turley:
For the past two years, the Committee on Energy and Commerce has investigated
numerous corporate scandals relating to questionable accounting practices,
including the quality of management oversight by the respective boards of
directors, at publicly traded companies such as Enron Corporation, Global
Crossing, Qwest and Worldcom. The financial troubles at these, and other,
publicly traded companies have resulted in the loss of billions of dollars by
investors and hundreds of thousands of jobs. Based on numerous press reports,
criminal and civil court filings, and HealthSouth Corporation's ("HealthSouth")
own press releases, it appears that HealthSouth has now joined this list of
companies and will undertake a massive restatement of reported revenues and
earnings spanning several years due to fraudulent accounting practices. It is
our understanding that Ernst & Young was HealthSouth's accountant throughout
the time period in which it is alleged this accounting fraud took place.
In recent weeks, nine corporate officers of HealthSouth, including three
former Chief Financial Officers, have entered guilty pleas to Federal charges
relating to accounting fraud performed while acting in their duties as officers
of the company. Currently, Federal prosecutors and the Securities and Exchange
Commission ("SEC") allege that this accounting fraud resulted in
overstating HealthSouth's earnings by $2.5 billion dollars since 1997. According
to press reports, in Federal court proceedings last week a taped conversation
was played between William Owens, a former CFO of HealthSouth, and Richard
Scrushy, HealthSouth's former Chairman and Chief Executive Officer, in which Mr.
Scrushy told Mr. Owens, "We just need to get those numbers where we want
them to be. You are my guy. You've got the technology and the know-how."
Based on news reports and several guilty pleas by HealthSouth officers, it
appears that HealthSouth may have engaged in improper accounting practices and
falsely inflated its reported revenue and earnings as far back as 1986, when the
company first went public and that company officials never investigated employee
allegations of financial fraud. These allegations, if true, raise the specter
that HealthSouth's accounting practices may have had the effect of deceiving the
investing public and its employees as to its true financial condition for over a
decade. Further, the SEC recently filed additional charges against Richard
Scrushy, alleging that he committed insider stock trading beginning in 1991, by
selling 13.8 million shares of HealthSouth stock worth more than $170 million
dollars.
This Committee has jurisdiction over consumer protection, accounting
standards, and health care matters, including the Medicare and Medicaid
programs. The financial collapse of HealthSouth, and the allegations of fraud
within the company over many years, raises serious concerns about the auditing
practices of HealthSouth's internal and outside auditors. It is our
understanding that Ernst & Young was the auditor for HealthSouth during the
time the company is alleged to have created false reported revenues, earnings
and assets. The fact that the company's accounting practices and fraudulent
conduct appear to have encompassed many years and involved senior HealthSouth
accounting personnel, as well as HealthSouth's management, raises questions
about the extent to which Ernst & Young was diligently performing its
auditing duties. For example, the SEC has alleged that HealthSouth overstated
its reported earnings in 2001 alone by 4,700%. This massive discrepancy between
HealthSouth's actual and reported earnings, if true, raises questions about
whether Ernst & Young was sufficiently reviewing HealthSouth's financial
documents.
In addition, according to HealthSouth's SEC filings that Ernst & Young
presumably reviewed, the company disclosed, as far back as 2000, that it was the
subject of several qui tam lawsuits alleging that HealthSouth had fraudulent
billing practices for certain group therapy Medicare claims. The company also
disclosed in its 2001 SEC filings that it entered a settlement of a separate qui
tam lawsuit with the Department of Justice for $8.2 million dollars. It is our
understanding that once an audit client is convicted of or settles fraud
charges, auditing standards require the auditor to change the nature of the
audit to look more intensely at the company's controls and various fraud
indicators. Given these reported lawsuits that raised concerns about fraudulent
billing practices within the company, we are interested in learning what, if
any, additional or heightened auditing practices Ernst & Young employed to
address these concerns when preparing and auditing Healthsouth's financial
statements and why Ernst & Young apparently did not uncover any accounting
fraud at HealthSouth.
In light of the allegations surrounding HealthSouth's financial collapse, we
are requesting that, pursuant to Rules X and XI of the U.S. House of
Representatives, you provide the Committee with the information requested below
by Tuesday, May 6, 2003.
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All records provided by Ernst & Young to
the SEC in response to the SEC Division of Enforcement's letter of inquiry
received by HealthSouth in September 2002, and any subsequent requests by
the SEC.
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From 1996 through the present, all records
relating to communications that raise questions or concerns about
HealthSouth's internal or external financial reporting matters between Ernst
& Young and any of the following:
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HealthSouth's board of directors and any of
its committees;
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HealthSouth's executive officers;
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Employees of HealthSouth's accounting
department; or
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Any other HealthSouth employees.
In response to this question, also provide any annual or quarterly review
reports, management letters, communications required by auditing standards
of the SEC or any other presentations to (a) through (d) above.
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All records relating to communications between
or among Ernst & Young employees that raise questions or concerns about
HealthSouth's internal or external financial reporting matters including,
but not limited to, proposed or final accounting entries, financial records,
draft or final SEC filings and proposed or final statements to financial
analysts or investors.
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All records relating to the creation of
separate audit and compensation committees of HealthSouth's board of
directors in 2000.
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All records relating to the creation of a
corporate governance committee and special litigation committee of
HealthSouth's board of directors in 2002.
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From 1996 through the present, provide a list
of all the non-auditing work performed by Ernst & Young for HealthSouth
or entities in which any member of HealthSouth's board of directors or their
immediate family members have a controlling financial interest (or hold a
position as an officer, director or principal), and, for each project
identified, include in your response a summary description of the work
performed, date of retention, name of the Ernst & Young partner(s)
(including identification of the engagement partner) assigned to such
company's account, the amount that such company was billed, and the amount
such company paid.
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From 1986 through the present, identify all
Ernst & Young partners and senior managers assigned to the HealthSouth
account, including his or her title, whether the person ever became an
employee of HealthSouth (and if so, his or her title at HealthSouth), and
most recent contact information.
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From 1986 through the present, state the annual
total of the gross revenue received from HealthSouth and for each year,
provide separately the total amount of revenue generated from performance of
the quarterly and annual audits and non-audit related work.
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From 1996 through the present, state the
percentage of Ernst & Young's annual gross revenue that the HealthSouth
account generated. Include in your response what percentage of Ernst &
Young's Birmingham, Alabama office gross revenues the HealthSouth account
generated per year.
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State when and how Ernst & Young was first
informed about the charges against HealthSouth in U.S. ex rel. Madrid v.
HealthSouth, Civ. No. CV-97-H-3206 (N.D.Ala.) and whether Ernst &
Young's auditing practices of HealthSouth were changed or altered in light
of HealthSouth's settlement of this case with the U.S. Department of Justice
in May 2001. If the auditing practices were changed, provide a summary
response detailing the reasons for the changes, when the changes were
implemented, and the specific changes made by Ernst & Young in auditing
HealthSouth on a going-forward basis.
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State when and how Ernst & Young was first
informed about Blue Cross/Blue Shield of Alabama's investigation of
HealthSouth's billing practices for rehabilitative therapy claims beginning
in 1996 and whether Ernst & Young's auditing practices of HealthSouth
were changed or altered in light of this investigation and/or its findings.
If the practices were changed, provide a summary response detailing the
reasons for the changes, when the changes were implemented, and the specific
changes made by Ernst & Young in auditing HealthSouth on a going-forward
basis.
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Excluding any changes detailed in Question Nos.
10 and 11, from 1986 through the present, state whether Ernst & Young
made any material changes to its auditing practices of HealthSouth. For each
such change, provide a summary response detailing the reasons for the
changes, when the changes were implemented, and the specific changes made by
Ernst & Young in auditing HealthSouth on a going-forward.
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All records relating to business relationships
between HealthSouth and members of the HealthSouth Board of Directors or
their immediate families (or any entity in which any such person has a
controlling financial interest or holds a position as an officer, director
or principal).
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All records relating to the following: Marin
Inc., GG Enterprises, 21st Century Health Ventures, Capstone Capital,
Diagnostic Health, MedCenterDirect, Source Medical Solutions, HealthTronics
Surgical Services, Pathology Partners, the National Football Foundation and
the College Football Hall of Fame.
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All records relating to HealthSouth's and
Richard Scrushy's business relationships with Michael D. Martin, Daryl Brown
and James Bennett, including, but not limited to, all records relating to
Cannongate Partners LLC, Capstone Capital Trust, HealthTronics Surgical
Services, Inc., Crescent Capital Partners LLC, 21st Century Health Ventures,
AmSouth Bank, Integrated Health Services, Healthcare Realty Trust, Surgical
Solutions, Source Medical Solutions, Pathology Partners, and Physicians
Solutions, Inc.
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Identify all projects performed by Ernst &
Young for any member of HealthSouth's board of directors or his or her
immediate family (or any entity in which any such person has a controlling
financial interest or holds a position as an officer, director or principal)
excluding the work identified in Question 6. For each project identified,
provide the name of the HealthSouth board member or family member, the name
of the corporate entity associated with the project, and the annual amount
billed by Ernst & Young and paid by such member or entity.
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From 1996 through the present, all records
relating to letters of confirmation sent out by Ernst & Young in
connection with its auditing of HealthSouth's financial statements.
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From 1996 through the present, all internal and
external communications relating to the policies and procedures used by
HealthSouth to bill Medicare and Medicaid for rehabilitative therapy
services including, but not limited to, all records relating to the 1998
investigation by Blue Cross/Blue Shield of Alabama ("BCBSA") of
these billing practices and all communications between or among HealthSouth,
Ernst & Young, and BCBSA concerning that investigation.
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All records relating to the financial impact of
the Centers for Medicare and Medicaid Services ("CMS") Transmittal
1753, issued on May 17, 2002, on HealthSouth's revenues and earnings, and
any actions taken by HealthSouth or Ernst & Young in response to that
transmittal, including all internal and external communications of
HealthSouth and Ernst & Young relating to that transmittal.
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From 1996 through the present, all records
relating to HealthSouth's quarterly earnings conference calls with financial
analysts and an October 2002 call with Providence Capital, including, but
not limited to, draft statements, internal communications concerning
explanation of earnings and financial filings, and communications between or
among HealthSouth and Ernst & Young.
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All records relating to the announcement by
HealthSouth on August 27, 2002 that its earnings projections for 2002 would
be reduced by $175 million dollars, including, but not limited to, any
communications concerning financial analyses performed by Ernst & Young
or HealthSouth to determine the effect of the Centers for Medicare and
Medicaid Services' Transmittal 1753 on HealthSouth's revenues and earnings.
Please note that, for purposes of responding to this request, the terms
"records" and "relating" should be interpreted in accordance
with the attachment to this letter. If you have any questions, please contact
Kelli Andrews, Majority Committee Counsel, at (202) 226-2424, or Edith Holleman,
Minority Committee Counsel, at (202) 226-3400.
Sincerely,
W.J. "Billy" Tauzin
Chairman
John D. Dingell
Ranking Member
James C. Greenwood
Chairman
Subcommittee on Oversight and Investigations
Peter Deutsch
Ranking Member
Subcommittee on Oversight and Investigations
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