The Sarbanes-Oxley Act of 2002: Ethics, Executive Compensation and HealthSouth Corp.

Authors

strategic management, case study, financial scandals, Sarbanes-Oxley Act, effects of legislation

This is a scenario case, describing a recent series of events in the legal and corporate

environments. Financial scandals involving large market capitalization firms

induced Congress to enact the Sarbanes-Oxley Act of 2002. This legislation affects

a range of corporate activities, including accounting practices, financial statement

preparation, corporate governance, and executive compensation. HealthSouth

Corp., which had grown rapidly in the 1990s through numerous acquisitions, became

the target of an SEC investigation in 2003. Subsequently, five financial officers

of the company plead guilty to falsifying financial statements and implicated

Richard Scrushy, HealthSouth s founder and CEO, in the fraudulent activities. Mr.

Scrushy was indicted on 85 criminal counts and was awaiting trial. Mr. Scrushy

contended that his subordinates acted independently and without his knowledge to

inflate the reported profits of HealthSouth by more than $2. 7 billion. His attorneys

were expected to challenge the relevance of these indictments under the Sarbanes-Oxley

Act.

2020-12-02

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