Former CFO Aaron Beam Revisits the HealthSouth Accounting Fraud

If you were asked to cook the books, would you? You may think, “Of course not.” Yet, why do CFOs do it? Aaron Beam was a co-founder of HealthSouth and their first CFO when his boss, Richard Scrushy, told him to fix the numbers so that the share price would not drop. Aaron faced an ethical dilemma.

During this episode of the CFO Bookshelf Podcast, Aaron Beam tells us it’s not enough to just know right from wrong.

Aaron Beam Interview Highlghts

Background

• Aaron explains why most accountants and investors do not remember the HealthSouth accounting fraud as they do Enron’s and WorldCom’s.
• Aaron’s path to the CFO’s office was a bit different. His degree was in economics.
• His first accounting job was working as a bookkeeper.
• He finally took the CPA exam after having taken enough accounting courses to sit for the exam.
• Aaron explains how he came to work for Richard Scrushy as his controller.

The HealthSouth Years

• The early start-up years was fun – everything was new, and everyone was learning.
• Richard leaned on Aaron a lot and respected him – that later changed.
• Growing to 40k employees was more work and not as much fun.

The Troubled Years

• Revenue recognition and a game of estimation.
• HealthSouth did not have a WorldCom problem whose business model was deteriorating.
• Instead, HealthSouth’s problem was that the CEO was over-promising investors and analysts on Wall Street.
• The accounting fraud was driven by the CEO’s desire to keep the stock price from dropping because … (and Aaron shares this in the interview and his book).

I Want to Be the Richest Man in Alabama

• Who was Richard Scrushy?
• Narcissism – what is it?
• Who flies to the office from their home just blocks away in a helicopter?
• Why a millionaire wants more.
• A CEO who creates fear in others.

Why Fraud?

• Fear of disappointing investors.
• Fear of losing money.
• Fear of losing family.
• Fear of the leader above.
• Fear of losing a job.

The Role of Insiders When Fraud Occurs

• The fraud started with just about 5 people involved – the CFO, controller, and a few accountants.
• That number swelled over the next 6 years.
• 5 CFOs following Aaron’s departure continued the accounting fraud.
• All CFOs were hired from within.

Prison Time

• Aaron was in prison for 90 days.
• How was the food?
• Were the showers safe?
• Was it boring?

Other Key Insights

• Aaron explains how to acquire another company without cash.
• Ethics training does work according to Aaron – the approach is critical.
• We grow up with negative connotations attached to telling on others – that’s why whistleblowing is not easy. Aaron provides wisdom on when and how to blow the whistle.

The Aaron Beam Books

Aaron has written two books. My interview was based around HealthSouth – The Wagon to Disaster. If you read and liked Cynthia Cooper’s Extraordinary Circumstances, you’ll enjoy Aaron’s book. He’s transparent and was able to grab my attention from the first page – I was hooked and read it within 2 evenings.

Aaron’s other book is Ethics Playbook – Winning Ethically in Business. He wrote this book because of the types of ethics questions he was getting after each speech he made to accounting groups. The book reads fast, and several colleges are using it in their accounting curriculum.

Aaron’s Reading List

One of my favorite discussions with guests is finding out what they are reading. Aaron did not disappoint, and I appreciate that he tends to feast on non-business books.

Aaron especially likes history, and one of his recent reads is These Truths by Jill Laporte.

Aaron also gives a thumbs up to The Colfax Massacre.

The next title might raise an eyebrow, but before you do so, The Soul of an Octopus by Sy Montgomery is averaging a 4.6 rating on nearly 2.1k Amazon reviews.

Rising Tide by John Barry is about the Mississippi flood of 1927.

The last non-business book that Aaron mentioned looked so good, that I bought the Audible edition and will start listening to it immediately. The title is Huey Long by T Harry Williams. Unfortunately, there is not a Kindle version.

Aaron also recommends Dan Ariely. We did not mention specific titles, but my favorite is Predictably Irrational.

An Ethics Book

As mentioned earlier, if you only want to read one ethics book, read Aaron’s book mentioned earlier.

However, Aaron does recommend a book by Marianne Jennings – The Seven Signs of Ethical Collapse.

Check Out Aaron Beam’s Podcast

Aaron started his podcast in March when the pandemic hit the states. It’s called Aaron Beam speaks. To learn more, you can start at his website which is AaronBeam.net.

We Want Aaron Back on the Show

In a few months, I’m hoping to bring Aaron back to talk for a deeper dive into his second book on ethics. I want to especially learn how small businesses can teach ethics to their employees in a way that’s engaging without a command-and-control mentality.