Assignment: The Healthcare Industry

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Assignment: The Healthcare Industry

Assignment: The Healthcare Industry

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In November 2003, Richard Scrushy, founder and former chair of for-profit HealthSouth, was indicted for 85 counts of conspiracy, fraud, and money laundering. The indictment alleged that Scrushy was the mastermind of a wide-ranging scheme to inflate the rehabilitation and outpatient-care company’s earnings to meet Wall Street expectations. The indictment further alleged that Scrushy added at least $2.7 billion in fictitious income to HealthSouth’s books during a multiyear conspiracy dating back to 1996. Scrushy became the first CEO (and as a result, healthcare became the first industry) indicted under Sarbanes-Oxley, which holds the CEO personally liable for financial misreporting. In what was characterized as healthcare’s trial of the century, the jury in the five-month Scrushy trial acquitted Scrushy of all federal charges after 21 days of deliberation. Even though five of HealthSouth’s CFOs testified against Scrushy, the jury chose to favor the defense’s portrayal of Scrushy’s character. Legal analysts also criticized the prosecution’s strategy to prove 85 counts over a six-month trial.

Both federal regulatory agencies and bond rating firms are paying special attention to the healthcare industry since the HealthSouth trial (Piotrowski 2003a). In 2015, Standard & Poor’s issued 83 credit upgrades and 46 downgrades in the healthcare sector, largely as a result of changing criteria and consolidation (Ellison 2016).

cHIef fInAncIAl offIcer

In larger healthcare organizations, the CEO delegates the authority for accomplishing the duties related to financial management to the CFO. However, the CEO has become increas- ingly involved in financial matters in recent years. In fact, in a 2015 survey conducted by the American College of Healthcare Executives (ACHE 2016b), CEOs ranked financial concerns as their top concern for the fourteenth consecutive year.

The Committee on Ethics and Eligibility Standards of the Financial Executives Institute has provided the following classic definition of the CFO’s duties (Berman, Kukla, and Weeks 1994):

1. Establish, coordinate, and maintain, through authorized management, an integrated plan for the control of operations. Such a plan would provide cost standards, expense budgets, sales forecasts, profit planning, and programs for capital investments/financing to the extent required in the business.

2. Measure performance against approved operating plans and standards, and report and interpret the results of operations to all levels of management. This function includes the design, installation, and maintenance of accounting policy and the compilation of statistical records as required.

3. Measure and report on the validity of the objectives of the business and on the effectiveness of its policies, organization structure, and procedures in

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