Accounting Terms

10Qs and 10Ks

Quarterly reports and year-end reports that publicly traded companies are required to file with the SEC.  These are then public documents that can be inspected by investors and analysts in order to make decisions about the health of the company.  The Sarbanes-Oxley Act of 2002 required the CEO and CFO of the company to sign and extra layer of certification, certifying that they knew the documents were true and accurate.  The Act increased the penalties for signing false documents.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization – This is a measure of gross earnings, and is often considered a yardstick for analysts and investors to evaluate the relative progress of a company.

EPS

Earnings Per Share – This is the revenue divided by the number of outstanding shares of stock.  This is often cited by investors as their most important guideline.  During the fraud, the EPS would often spike in the third month of the quarter to as much as four times the prior two months, as the books were loaded with fraud in order to meet quarterly expectations.

PP&E

Property, Plant and Equipment – These are the physical assets of a corporation. By 1998 the conspirators began padding the PP&E accounts, or creating fictitious assets in order to add fraudulent income to the books.  One of the problems this eventually created was they had to work off depreciation on assets they didn’t actually own.

Aggressive Accounting

Aggressive Accounting – is a method of accounting that can make analysts nervous and give auditors fits.  The reason for this uneasiness is that aggressive accounting can often be a bridge between standard accounting practices and fraud.  It is believed that HealthSouth used aggressive accounting practices in order to make the earnings projections until all aggressive tricks and techniques could not make the actual numbers meet these expectations.  That is when the line was crossed. 

Blue-Sky

In the Leif Murphy binder, a word was crossed out on several of the pages.  Both Murphy and Martin said the word before earnings was ‘fabricated.’  Martin was the one who crossed out the word, saying it was too strong.  The defense claimed or suggested that the word could have been blue-sky.  According to the on-line Small Business Dictionary, blue-sky is “an anticipation or projection of future business that is not realistic-in fact, so imaginary that it is unattainable.”  So although the jury might not know this ‘blue-sky’ and ‘fabricated’ actually have similar meanings.

Contractual Adjustment

This term has been explained enough times in the courtroom that most observers should have a passable grasp or understanding of its significance, yet it still remains a jury-unfriendly term.  This is because it is not concrete and does not resolve to a simple figure or term or a document.  This could be both good and bad for both sides, but it particularly beneficial for the defense muddy-the-water program.  Contractual Adjustment is a term that applies to companies that are in the healthcare sector.  The company bills the going rate for their various medical procedures, and sends the bills to the insurance companies.  They know that the insurance companies will not generally pay the full price of the bill, but will pay out according to their own formulas.  Therefore, they adjust the amount they expect to collect in recognition that they will not get the full price of the bill.  Making a correct estimate can be difficult, because the amount they will collect will vary depending on the procedure and the insurance company.  The defense has said that at least some of the inflated earnings could be accounted for by errors in contractual adjustments, but the prosecution has maintained that the amount of the fraud was so massive that errors in these formulas could not account for even a tiny fraction of the inflated earnings. 

HealthSouth Terms

The King

This was an internal term for Richard Scrushy.  It only came into the trial once but was objected right out because it was expressed as a general reference.  But enough sources and published materials have used this term, that I believe it is and accurate term that was used by HealthSouth employees to describe Richard Scrushy.

Monday Morning Meetings

It was a HealthSouth tradition every Monday there would be a meeting attended by all the top level executives.  Richard Scrushy would often give a short presentation, highlighting something from the past week or of a future goal, and each manager would have a couple minutes to give a report about what they had accomplished, planned to accomplish, or failed to accomplish and the report would often get commentary Scrushy.  In the trial, these Meetings have been one of the whispered subtexts that have barely found its way into testimony.

There are at least two reasons why these meetings are important, but only one will find its way to the jury’s ears.  The meetings tend to illustrate how involved Richard Scrushy was with the day-to-day operations of the company, and make it difficult for the defense to show or claim that a massive fraud could have been going on at HealthSouth, without him knowing about it.  The second thing, which usually gets shut out of the trial, is that the Meetings also demonstrate his autocratic style, and Scrushy’s refusal to listen to suggestions or advice.

Conspiracy Terms

The Family/Family Meetings

The members of The Family were Ken Livesay, Kay Morgan, Emory Harris, Sonny Crumpler, Susan Jones (now Smith, unindicted), Angela Ayres, Virginia Valentine, Cathy Edwards, Catherine Fowler.

Bill Owens defined a Family Meeting as anytime two or more conspirators met to discuss the fraud.  Under this definition, and according to his allegations, meetings between Scrushy and Owens would be Family Meetings.  Beam said he wasn’t familiar with the term and his involvement probably predated the coining of the term.  Martin considered only the people making entries in the balance sheet to be part of The Family, this would exclude the CFOs.

First Run [Consolidated Worksheet]

After all of the numbers had come in from the field, they were consolidated together and presented in a single worksheet.  The numbers were sometimes adjusted or added to as additional figures came in, but within a few days, they would have a single spreadsheet to tweak from.  These were actual numbers.  There was no fraud in them.  These numbers were not given to the facilities in the field.

Final Run

After the First Run document was prepared, the conspirators gathered in a Family Meeting, and compared the actual numbers to the market expectations.  Then fraudulent entries were added to the books.  Cash was created.  Assets were padded or made up.  The eventual document created as a result of these changes was called the Final Run.  After they had inflated the earnings to the desired levels, they were supposed to destroy all copies of the First Run documents.  In the trial, we saw First Run documents with Diana Henze’s name on them that had not been destroyed.

Dirt, Hole and Gap

These were three words conspirators used to describe the process of adding fraudulent entries to the books.  The gap was the difference between the actual numbers and market expectations.  The term gap could also be a source of confusion because it is also a legitimate accounting term.  So every time an accountant says there is a gap does not mean they are involved in fraud.  The holes were places on the balance sheet where conspirators intended to book fraudulent entries.  The dirt was the entries themselves.  The dirt was used to fill the holes, which in turn filled the gap.

The “Manner of Speaking” of the Conspiracy

“Code words” (Parkman)

The defense characterized the conspirators “manner of speaking” as code words.

“Fudge the numbers” (Scrushy to McVay)

“Playing games with the numbers” (Scrushy to Smith)

“Fix the numbers” (Scrushy to Beam and Owens)

“If we do this deal we are all going to jail.” (Martin to Scrushy)

“We won’t have to do this much longer” (Scrushy to Livesay)