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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Scrushy Scratchings
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Posted by: Jack Ciesielski 6/29/2005 7:11 AM
Yesterday's big news was the Scrushy/HealthSouth verdict. Dumbfounding. And it looks like dumb works in a trial, after all.

Fortune's Bethany McLean summed it up better than anyone so far in yesterday's "Street Life" column: "The lessons? Get a hometown jury. Give money—lots of money—to local causes. Get a website. Houston, we have a solution. (You can bet that Ken Lay and Jeff Skilling's lawyers are going to be all over this. And Lay already has a website.) The last lesson is that Sarbanes-Oxley—Scrushy was the first CEO to be charged under the 2002 law—is not a cure-all. But it's not all over for Scrushy, who still faces civil charges. Maybe the most relevant precedent will turn out to be O.J."

The 10-K filed the day before showed some pretty remarkable revisions to history. Looking further into the enormous filing, you can find a neat little summary in Note 2, regarding restatements. Consider these revisions:

- Acquisition accounting and related items. Overstated by $1,264,352,000.
- Existence and valuation of property and equipment. Overstated by $697,406,000.
- Additional asset and liability adjustments. Overstated by $611, 513,000.

There are plenty more, and the net total of all the adjustments was a downward revision to retained earnings at January 1, 2000 of $3 billion. Those adjustments turned retained earnings into an accumulated deficit of $2 billion.

These aren't minor amounts that were just spirited into the books by ill-intentioned bookkeepers. By now, you've read the same accounts of the trial as I have; it's hard to believe that a CEO could be so innocently blind to such gross overvaluations of assets if he's doing any kind of managing at all - yet that's what Richard Scrushy got the jury to believe. One thing for sure: no one will ever accuse him of being a micro-manager...
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