Another Witness Links Scrushy to HealthSouth Fraud

Another former HealthSouth Corp. chief (search) financial officer testified on Wednesday that ousted Chief Executive Richard Scrushy (search) knew about the accounting fraud at his company and told him all companies fudge their numbers.

Malcolm "Tad" McVay became the fourth former HealthSouth CFO to take the stand for the government at Scrushy's criminal fraud trial and tell the court that his boss was aware of the massive accounting fraud at the health-care company.

A gaunt McVay, who has been treated for anorexia, told the U.S. District Court in Birmingham that he was assured by William Owens, another former CFO and Scrushy confidant, ammitted to reducing the fraud and getting false assets off the HealthSouth books.

The government has made Scrushy's knowledge of the fraud a foundation of its case against him. They accuse Scrushy of directing a scheme to inflate HealthSouth's earnings and assets by some $2.7 billion from 1996 to 2002. Scrushy has said the fraud was orchestrated and carried out by underlings without his knowledge.

McVay, who had also been treasurer at HealthSouth, was not one of the original conspirators. But he testified that in 2002 he began to realize something suspicious was going on when he noticed a wide disparity between cash on the balance sheet and actual available cash.

"It just sort of clicked. It had to be a fraud to explain this disparity," McVay recalled.

He told the court that he took the information to assistant controller Emery Harris, who confirmed his suspicions.

"He explained the earnings in all prior quarters had been artificially inflated," McVay said of Harris.

McVay, Owens and Harris are among 15 former HealthSouth executives who pleaded guilty to fraud charges and agreed to cooperate in the government's case against Scrushy.

McVay told the court of a secret meeting in 2002 at his home with Owens and legal counsel Bill Horton in which removing Scrushy as company chairman was discussed.

But Owens told Scrushy of the meeting and McVay said he got an e-mail from Scrushy accusing him of insubordination.

McVay told the court he thought he was going to be fired, and in September of 2002 he said he threatened not to sign fraudulent financial reports to be filed with the government.

"I was not going to sign the financial statement, and if I did not sign it, it was going to shine a bright light on it, a negative light," the ex-CFO said.

He said at a meeting with Scrushy to discuss the situation, "Mr. Scrushy assured me that he and Mr Owens were committed to correcting the inflation of the cash. He told me all companies fudge their numbers."

The damaging testimony came one day after former WorldCom Chief Executive Bernard Ebbers (search) was found guilty of fraud and conspiracy for orchestrating an $11 billion accounting scandal. His defense team used a similar tactic to that of Scrushy's, claiming that Ebbers had no specific knowledge of the fraud, that he was too high up to deal in accounting details.

Outside the Birmingham courthouse, Scrushy insisted to reporters that the Ebbers case was "completely different."