Top Ten? HealthSouth Ex-Treasurer Pleads Guilty

McVay 10th executive to be charged with wrongdoing at health-care company; served briefly as CFO. Plus: HR execs say ethics not rewarded, while Senate looks into tax shelters flogged by E&Y, KPMG.

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Right now, the chart for the condition of Malcolm McVay’s career reads “critical.”

McVay, reportedly fired last week as HealthSouth Corp.’s treasurer, agreed to plea guilty to charges of conspiracy to commit wire fraud and securities fraud and of falsifying the company’s books, a federal prosecutor announced on Tuesday. McVay, who served briefly as HealthSouth’s chief financial officer, becomes the fourth former CFO of the company to plead guilty (or agree to plead guilty) to wrongdoing since an accounting scandal enveloped HealthSouth last month.

All told, 10 current or former HealthSouth executives at the operator of rehabilitation clinics and surgical centers have been charged with counts of criminal conspiracy and fraud. Reportedly the 10 have agreed to cooperate with the FBI and U.S. Attorney’s investigation of HealthSouth and fired chief executive officer Richard Scrushy. Some speculate that the Securities and Exchange Commission may also come after McVay and others with civil charges at a later point.

The government’s case alleges that HealthSouth officers deliberately overstated earnings by $2.5 billion since 1997 for the purpose of fraudulently enriching themselves. McVay and another former HealthSouth CFO, Michael Martin, will plea guilty at a date to be determined by a Birmingham judge.

McVay served as HealthSouth’s CFO from August of last year to January, when he was demoted to treasurer amid a management reorganization. While finance chief, he certified the company’s 2002 third-quarter results to the SEC, knowing that they did not fairly present the financial condition and results of operations of HealthSouth, U.S. Attorney Alice Martin alleged in a statement.

Still, McVay has enough to keep him and his lawyers busy in the plea deal: Between the charges of conspiracy and knowingly causing false certification of the financials, he faces 15 years in prison and $1.25 million in fines.

The plea bargains would indicate that both men are willing to roll over on Scrushy, their former boss. But to date, Scrushy’s attorney maintains that his client is innocent—and was in fact set up by executives in HealthSouth’s finance department.

Scott Sullivan Pleads Innocent, Again

On Tuesday, former WorldCom CFO Scott Sullivan pleaded innocent to new charges that he lied on financial statements to secure $4.25 billion in credit for the troubled telecom.

Sullivan has already pleaded innocent to charges of conspiracy, securities fraud, and false SEC filings. Investigators allege that he orchestrated WorldCom’s $11 billion accounting fraud, the largest in U.S. history.

Sullivan could not be immediately reached for comment, Reuters reported. His attorney did not immediately return calls seeking comment, the wire service said. Sullivan, who lives in Boca Raton, Florida, remains free on a $10 million bond.

Four former WorldCom executives have already pleaded guilty to securities fraud and have agreed to cooperate with federal investigators. Management at WorldCom, which last week changed the company’s name to MCI, is said to be cooperating with the investigation. The besieged telco plans to emerge from bankruptcy later this year.

If convicted of all of the charges, Sullivan would reportedly face a maximum prison term of 185 years. The sentence, however, would likely be far less under federal sentencing guidelines.

U.S. District Judge Barbara Jones rescheduled Sullivan’s trial on all 11 charges to January, instead of September, a spokesman for the U.S. Attorney’s office in New York told Reuters.

WorldCom’s former chief executive Bernie Ebbers has thus far not been charged with any crime.

The wire service further notes that two reports reviewing WorldCom’s past accounting practices have been delayed at the request of prosecutors. The concern is that early public disclosure of the information may harm their criminal investigations of Ebbers and other former WorldCom executives, according to court filings.

Senate Subcommittee Asks Big Four Firms for Tax-Shelter Data

A Senate subcommittee has requested tax-shelter documents in recent months from Ernst & Young and KPMG—all part of a broader inquiry into promoters of potentially abusive tax schemes for both corporations and individuals. This according to Tuesday’s Wall Street Journal, which cites people familiar with the investigation.

An Ernst & Young spokesman told the paper that the firm was aware of the requests and that it is “cooperating.” A KPMG spokesman declined to comment.

PricewaterhouseCoopers said it hasn’t received a request from the subcommittee, and a spokeswoman for Deloitte & Touche was not immediately available for the Journal‘s story.

The Internal Revenue Service already had a field day with shelter promoters last year, suing three accounting firms, including KPMG, to turn over shelter-related documents. Customers who claim they were sold faulty tax shelters have filed their own complaints against KPMG and E&Y.

Last summer PwC paid about $1 million to the agency to settle matters relating to tax-shelter registration. IRS rules require promoters to register shelters that the agency has identified as potentially abusive and to keep lists of investors. Penalties can run as high as 1 percent of all sheltered funds.

(Yesterday Amerco, a former PwC client, sued the consulting firm for $2.5 billion for allegedly giving the company bad advice about a special-purpose entity. To find out more about the suit, read “Amerco to PwC: U-Pay.”)

Carl Levin, senior Democrat on the Permanent Subcommittee on Investigations, set the Senate subcommittee’s broader investigation in place last year. And in January, then-chairman Levin sent a letter to the SEC stating: “Our investigation has determined that a number of accounting firms are heavily involved in devising tax shelters and selling them and related services to clients, including audit clients, for substantial sums.”

Levin also took issue with some of the language in the Sarbanes-Oxley Act. He noted that law allows auditors to provide their audit clients with “traditional tax preparation services,” but does not define the term tax services or provide other regulatory guidance on this issue.

The formation of tax shelters, he said, would violate the four basic principles safeguarding auditor independence.

Levin told the Journal that the investigation is still in the early stages and a final report could be many months away.

Businesses Reluctant to Reward Ethical Conduct, Survey Says

From the early days of the Enron accounting scandal to the more recent developments at HealthSouth, corporate managers have been skewered for their purported lack of ethics.

But a new study indicates that nearly half of human resources officers believe ethical conduct is not rewarded in business.

Specifically, HR professionals say that during the past five years, they have felt increasing pressure to compromise their organizations’ ethics standards. The survey, the 2003 Business Ethics Survey, was a joint research project of The Society for Human Resource Management (SHRM) and the Ethics Resource Center (ERC).

To be sure, HR heads also indicated they have personally observe significantly fewer acts of misconduct in the workplace. The survey offers the opinions of 462 respondents, yielding a 22 percent response rate.

Interestingly, the study found that HR professionals are less concerned now with retaliation from coworkers or senior management, or being seen as whistle-blowers.

Yet needing to follow a boss’s directives—and wanting to be a team player—remains high on the list of pressures that may lead HR professionals to compromise the company’s ethical standards. The mixed results show that maintaining corporate ethics must be seen as an ongoing process rather than as a destination or an objective.

Other key findings from the survey:

• 24 percent of HR professionals feel pressured to compromise ethics standards all the time, fairly often, or periodically. By comparison, 13 percent indicated they felt pressured in 1997.

• The top five causes pressuring HR professionals to compromise an organization’s ethical standards are the need to follow the boss’s directives, meeting overly aggressive business/financial objectives, helping the organization survive, meeting schedule pressures, and wanting to be a team player (27 percent).

• 83 percent of those surveyed indicated that employees follow written ethics standards all the time or often.

• 85 percent of respondents said senior management supports HR professionals’ adherence to organizations’ written ethics standards.

• 35 percent of HR professionals often or occasionally personally observed ethics misconduct in the past 12 months, down from 53 percent in 1997.

Nevertheless, about 40 percent of the respondents said that HR is not part of the ethics infrastructure and is only brought in to help clean up ethics violations. The respondents also listed the most common types of misconduct. The winners? Misreporting of hours worked, employees lying to a supervisor, and management lying to employees, customers, vendors, or the public.

And the sectors where unethical behavior was most often observed? No surprises here: government, health, and wholesale/retail trade. Those numbers could be amplified at companies with effective ethics programs, however. As the study pointed out, HR executives at some companies are simply more aware of what constitutes misconduct.

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