A world unraveled

[LSU alumnus and supporter Aaron Beam watched his life fall apart as his role in the HealthSouth fraud was brought to light.]
 

By Seth Fox , Staff writer, Business Report
 

August 1, 2006
 

As Aaron Beam heads toward the start of his second decade of retirement, he tells anyone who asks he was an accountant during his working years. But for the people who know--the ones who whisper when he walks into Birmingham restaurants--Beam will be forever linked to perhaps the biggest case of corporate fraud since Enron. His role as CFO of HealthSouth during the time the Alabama-based corporation was falsifying financial numbers took him from a $500,000 salary to scrubbing urinals in prison.

Beam first met former HealthSouth CEO Richard Scrushy in Houston in 1980. Beam, a Bossier City native and E.J. Ourso College of Business graduate, had spent time in the Navy and as controller at two private Houston companies. After earning his CPA in 1978, Beam went to work at Lifemark Corporation, where he was introduced to Scrushy. "I told my wife, 'I've either met the most brilliant businessman I'm ever going to meet, or the biggest con artist I'm ever going to meet,'" says Beam.

Lifemark was purchased by a California company, leading to layoffs in its Houston office. Venture capitalists came looking for victims of the buyout and pegged Scrushy as a prime candidate to lead a startup company. Scrushy had an idea to provide physical and respiratory therapy, as well as other services, on an outpatient basis. Beam, Scrushy and three others moved to Birmingham and founded HealthSouth in 1984.

Beam came close to losing his job two years later as the company was going public. In an interview with an analyst, he said future changes in Medicare might pose problems. When the analyst published the paper casting Beam's response in a more negative light than was intended, Scrushy warned Beam never to mention anything that could be construed as a negative for the company.

And while Beam denies HealthSouth record-keeping was fraudulent from the start, he says the company was very aggressive with its accounting practices and a little deceitful at times. As the company pushed toward going public, it was vital it appear profitable. Instead of expensing startup costs, the company began capitalizing them. "It started a trend," says Beam. "Richard saw you could change the numbers."

The aggressive accounting continued as the company grew. The earnings impact of acquisitions were consistently understated. If a second center was added in a city, it was accounted for as an extension of the existing center.

The beginning of the end

HealthSouth went public at $6.50 a share in 1986, falling short of its $8 to $10 projection, due partly to the company's unique niche. Scrushy's dynamic appearances on behalf of the company helped to gather momentum, but the company needed to hit its numbers consistently for stable investor support. For 10 years, that was not a problem.

Then the second quarter of 1996 happened.

HealthSouth had grown to a $3 billion company and, for the first time, missed its numbers. The company leadership met with Scrushy to tell him they were going to have to announce a $50 million shortfall. Scrushy disagreed.

Using the 2,000 or so ledgers throughout HealthSouth, Chief Accountant Bill Owens made a series of journal entries in which he debited suspense accounts (a sort of catch all account) and credited revenue. While the total entries covered the shortfall, no individual entry was large enough to catch the attention of an auditor. Beam says HealthSouth's internal auditor answered directly to Scrushy and was told not to audit the corporate office.

Beam thought the company would only fix the books for that quarter. That, along with his fear that reporting the shortage would cripple the company he viewed as his own, robbed him of any courage or moral strength to oppose the move. "I knew if we did report bad earnings, it would be disastrous," says Beam. "I let myself slip into agreeing to commit fraud."

But it wasn't a one-time event. As the fraud continued through subsequent quarters, the company leadership again met with Scrushy, who warned them to do whatever they wanted, but if the fraud were discovered he would deny everything.

Getting out, almost

Beam was honored by the Ourso College of Business in 1997 when he was named to the Hall of Distinction. It was one of the few positives Beam had experienced since the previous year. "Your whole perception of yourself, once you start living a lie, you don't have a good feeling about yourself," says Beam.

That feeling prompted Beam's retirement from HealthSouth the same year. He walked away from the lucrative salary and stock options at the relatively young age of 53. He distanced himself from the company and assumed it had rebounded and returned to legitimately hitting its numbers, which was not the case.

Scrushy would prove to be the unraveling of the HealthSouth leadership, but not for fixing the books. The company was coming under intense federal scrutiny while Scrushy was being investigated for insider trading. Weston Smith, the company's CFO, reported the fraud.

The story broke in March 2003 with the U.S. attorney handling the case, urging anyone with knowledge to step forward. Beam did and agreed to plead guilty to bank fraud and testify against Scrushy. He was given no promises for leniency in his sentencing, only that his truthfulness and helpfulness would be considered. He sat in limbo over the next two years as prosecutors tried to build a case against Scrushy, wondering how much of the 30 years in jail and $1 million maximum fines he would eventually face.

Discredited and imprisoned

Scrushy's trial began in January 2005. A total of 15 former HealthSouth employees, including five CFOs, testified Scrushy was involved in the fraud.

Beam's testimony in the case lasted five days, with the defense attorneys working diligently to paint him as a liar, bringing up issues ranging from his involvement in the HealthSouth fraud to infidelity. "They did a masterful job of discrediting me," says Beam.

The Scrushy verdict came out that summer: not guilty. The 15 people who testified against him all faced fines and probation, including a half dozen who ended up serving jail time. Scrushy walked out of the courtroom a free man. "I literally broke into tears. It really upset me that he could he get off," says Beam. "How does a jury decide that 15 guys were all lying?"

Beam was sentenced to three months in prison. Coupled with a quarter-million dollars in attorney fees, he also paid $285,000 to the government in fines and forfeitures. "Financially, my world came unraveled," says Beam. "A lot of the material things I accumulated evaporated."

On Nov. 1, 2005, Beam reported to the federal prison at Maxwell Air Force Base in Montgomery, Ala. He spent most of the next three months reading books and cleaning toilets. But compared to the two years of not knowing what lay in store, Beam didn't find his service particularly difficult. "Very quickly, I became comfortable that nothing was going to happen to me in the shower," he jokes.

He was released from prison Feb. 1, 2006 and spends his days gardening, fishing, following LSU sports and ignoring the goings-on in the business world. He has also started booking speaking engagements to share his story and warn others. "It helps me live with myself a little," he says.