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ALABAMA Accountant: No trail linking Scrushy to fraud



Published: Tue, February 1, 2005 @ 12:00 a.m.



The prosecution contends CEOs rarely leave their name on fraudulent papers.

BIRMINGHAM, Ala. (AP) -- A $700-an-hour accountant who investigated the huge earnings overstatement at HealthSouth Corp. said Monday he didn't find a paper trail linking the scheme to fired CEO Richard Scrushy, who is on trial in the fraud.

While the testimony by Harvey Kelly could help the defense, Kelly also said he wasn't really trying to find out who was behind the conspiracy while working with a team that sifted through HealthSouth books filled with bogus entries.

"Our job was to help the company get the right numbers and figure out how big the fraud was," Kelly said.

Kelly also said it wasn't unusual for people involved in a fraud to keep their name off documents linked to the crime.

Paving the way

As Kelly ended two days on the stand, prosecutors began laying the groundwork for what could be their most important witness: former HealthSouth chief financial officer Bill Owens, who secretly recorded talks with Scrushy before an FBI raid of corporate headquarters in 2003.

Prosecutors contend the recordings prove Scrushy's guilt; the defense claims they exonerate him, despite fighting to keep them out of court before the trial began.

FBI agent Homer B. Coleman testified Monday that agents recorded conversations between Owens and Scrushy over two days. The agent's testimony set the stage for Owens to begin testifying and possibly playing the digital recordings as early as Tuesday, assuming the defense doesn't mount another attempt to keep them from jurors.

Kelly, now with AlixPartners, worked for PricewaterhouseCoopers when the firm was hired to investigate the fraud at HealthSouth and redo the company's financial statements, a contract he said was worth $91 million.

After initial cross examination that left one juror dozing, defense lawyer Art Leach asked Kelly whether he had seen any e-mails, faxes or memos linking Scrushy to the fraud.

"Nothing that had his name on it," testified Kelly, who said he previously investigated fraud at companies including WorldCom Inc. and Adelphia Communications Corp. Clients are charged $700 an hour for his work, Kelly said.

Any corporate CEO must rely on people lower in the company to do the accounting work, he testified. He said he saw no single record accounting for the scheme on a year-to-year basis, although a record kept by one of the 15 people who pleaded guilty in the fraud covered much of it.

Lack of questioning

Explaining in part how the fraud went on for seven years, Kelly said division presidents who noticed odd changes in financial statements didn't ask enough questions to find out what was really happening.

Instead, they accepted explanations that the changes were due to Medicare reimbursements; money being sent back to operating divisions from the corporate office; or were the result of volume purchasing agreements.

"The explanations they received did not comport with reality" or weren't enough to explain large changes in revenues, Kelly testified.

The defense contends subordinates in HealthSouth's corporate accounting offices lied to Scrushy for years, leaving him unaware of what Kelly previously said was a $2.7 billion overstatement of earnings over seven years.

Scrushy is accused of conspiracy, fraud, money laundering, obstruction of justice, perjury and false corporate reporting in the first test of the Sarbanes-Oxley Act, passed in 2002 in response to a wave of corporate frauds.

Scrushy, 52, could receive what amounts to a life sentence if convicted. Prosecutors also are seeking $278 million in assets.




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