Abstract

This case recounts the founding of HealthSouth Rehabilitation, its rapid growth, financial mishandlings and the struggle former CFO Aaron Beam had in dealing with a conscience that kept him awake at night. Beam had met HealthSouth founder Richard Scrushy when applying for a job with Lifemark Hospital Corporation in Texas in 1980. After Lifemark was bought by AMI in 1983, Scrushy invited Beam to join him in the launching of his new company in Birmingham, Alabama. The uniqueness of the hospital was that it would provide inpatient surgery for those who had suffered an injury, but it would also provide outpatient services such as rehabilitation, nutrition guidance and psychological counseling. This type of structure was appealing to insurance companies because it would move the patient out of the hospital much quicker and save the cost of extended hospitalization. The company experienced rapid growth and went public within three years of launch. By 1996, the top executives of the company realized that they would not be able to meet Wall Street analysts’ forecasts which would affect the price of their stock and reduce their holdings. They decided to “cook the books” temporarily to meet quarterly expectations. However, once the financial mishandling had begun, the executives found it difficult to reverse their actions and report accurate numbers to the public. Beam decided to retire from the company in 1996; and after this action, he continued to find it difficult to sleep at night because of his involvement in the fraud. The issue in the case is whether Beam should consider coming forward and revealing to the Securities and Exchange Commission how the books had been doctored so that he could salvage his damaged conscience.