Fraud Failure

Weston Smith says he lay awake late at night with his “entire life on rewind” one December night in 2005. All he could think was: “How on earth did you let your life get to a point where you are lying in bed in a federal prison?”

Smith was in that bunk bed for no small infraction. As chief financial officer of HealthSouth Corp., he was involved in one of the biggest financial statement fraud scandals ever.

In just a dozen years, the health care company had grown to 2,000 locations in all 50 states and five countries. The public company where he was an executive was found to have committed financial statement fraud amounting to nearly $3 billion over 15 years. In 2003, Smith turned whistleblower.

How does a company that was growing commit such massive fraud? Smith says it all started small. Though he was scared to death that night he went to prison, there was another feeling that was stronger than the fear — relief. “Thank God the lying is over,” Smith thought.

Smith spoke with the Business Observer following a recent University of Tampa ethics lecture. The following are some of the lessons he shared.

Big mistakes start with a small step across the line.

Smith says the financial statement fraud started small, when the company realized it wasn't going to meet Wall Street's expectations. It was the first year after the company went public, and it was $40,000 short of estimates.

Smith says executives thought, “If we don't make our numbers, we're going to be toast,” so they decided to make some adjustments.

The executives looked at it as a one-time thing, believing “we'll grow our way out of this,” Smith says.

Only Smith says the lying continued as the company grew, particularly when leaders were able to rationalize their actions.

When acquiring other companies, the executives saw that in around half of the deals they looked at, the companies were also playing with their numbers. But it's not a good excuse to say “everyone else is doing it,” Smith says.

Don't operate a business with the mindset of 'doing whatever it takes.'

The company's CEO, Richard Scrushy, had all the traits of a good leader and motivator, which “can also be used for the negative as well,” Smith says.

Executives started “fixing the numbers” at the end of every quarter. Instead of looking at where they were, they were looking at what they needed to adjust to meet expectations.

After adjusting the numbers several times, Smith says they knew that they couldn't stop. If the company all the sudden reported lower numbers, they would draw questions from everyone — investors, the Securities and Exchange Commission, the Department of Justice, the IRS. “We all had blood on our hands at that point.”

Scrushy was worth $600 million, and Smith says excessive spending at the organization became a norm. The company had a dozen corporate jets and even promoted girl bands, along with many other activities that had nothing to do with its business, Smith says.

“I'm ashamed I was part of this,” Smith now admits.

Tone starts at the top.

The “tone set up at the top can be very destructive,” Smith says. It's something he frequently brings up. To avoid issues creeping up from the lower levels of an organization, an executive should get involved in all areas, really get a pulse for the business and ask a lot of questions, Smith adds.

He also advises that companies take ethics complaints seriously. For a lot of fraud-related cases, there was some sort of internal reporting done earlier, but the reporting system was not effective.

Intimidation plays a role.

When the Sarbanes Oxley Act came out, it required the CEO and CFO attest the “numbers were good.” The individuals were personally liable and could face up to 20 years in prison. “That was my wake up call,” Smith says. He quit two weeks before he was to attest to the numbers at the beginning of August 2003, but he says he was later pressured to stay.

On Aug. 27, 2003, the company pulled back its forecast, citing an impact from Medicare changes.

Fraud can leave thousands as innocent victims.

Not only were employees and investors victims of the scandal, Smith says, but those people's spouses and children, who had no idea what was going on, were affected. There were construction projects the company was in the middle of, where several hundred construction workers were told to go home because the bills wouldn't be paid. The company's vendors and suppliers were also hit. “It wasn't just a business issue. Ethics is personal,” Smith says. “What greater victims than my own kids?”

Don't fall for group think.

“I wish I would have recognized what I was getting into at the time when it was small,” Smith says, “I thought I was being a team player.”

The biggest problem was group think, Smith says. “I was part of the problem for a long time. I was involved with accounts receivable reserves and Medicare issues, and I would come to the group and say, 'Here's what my needs are, I have to have the following reserves,' so I'd put them further in the hole.”

Smith says the collusion on the part of the executives created a culture where the numbers were just another problem to be fixed. They were not looked at as an ethical dilemma. “It was that dangerous group think of, 'We're all in this together, we'll get out on the other side. We'll fix this problem.'”

If he could go back, Smith says, he would approach the group that was originally asked to alter the numbers and ask them if they wanted to push back. He could have told his CEO that he's building a great company, “fuel his ego,” but also tell him, “we don't need to take shortcuts.”

Understand and fully appreciate the consequences.

For a long time, Smith thought the auditors would make some adjustments if the numbers weren't right. H says he he didn't fully appreciate the consequences.

Smith was sentenced to 27 months behind bars, spending 14 months in prison and four months in a halfway house.

“With felony conviction, it is career suicide,” Smith says. He lost his professional license and “the lifelong implications are still there,” he adds.

His assets were seized and he destroyed his marriage for a while. Six years ago, he remarried his wife. Though the money is gone and stuff is gone, he says his marriage is richer now that he's no longer living with lies, and his “priorities are back in the right place.”
Although he does make some money from his speeches about fraud, Smith claims that it brings in less money than he made when he graduated in 1982 from the University of North Alabama. More so, “that's therapy for me,” he says.
Smith would like to get back in the industry, but doesn't know if he'll ever be able to do accounting for more than small companies.

Take time to self-assess and invest in your own belief system.

Above all, Smith says it's important to understand if you have a propensity to cross the line or get too caught up in the moment.

Smith says he had a normal childhood and believed he was a person of ethics and integrity — but where were those values when it really mattered? “You don't want to have that conversation with yourself when you're in a wildfire,” he says.