From the archives: Lessons learned after a multibillion-dollar fraud

Aaron Beam became a millionaire in the 1980s as a corporate CFO, but his story is a cautionary tale. In this episode of the podcast, Beam discusses his tenure at HealthSouth, the fraud that occurred, and the advice he has for students and leaders to avoid repeating his mistakes.

What you’ll learn from this episode:

• Why Aaron Beam had high hopes for HealthSouth’s future.
• The concerns he has about Wall Street.
• The luxury items Beam bought with his wealth.
• Why education is important in preventing fraud.
• Beam’s advice for CFOs and other finance leaders.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript:                                                            

Neil Amato: Hello and welcome to the Journal of Accountancy podcast. This is Neil Amato with the JofA. It’s summer 2022, and the podcast is on a hiatus, at least in terms of new episodes, which will be less frequent in the summer months. So, we’re airing some previous episodes that we believe remain relevant for you, the listener. This episode is a conversation from 2018 with Aaron Beam, who was the first CFO at the company HealthSouth.

Amato: Aaron Beam was living a pretty good life in the 1980s in Birmingham, Alabama. He was the CFO of a company called HealthSouth, which opened a number of health care centers that offered rehabilitation and diagnostic services. The company was profitable and growing, and Beam helped take the company public in 1986, along with CEO Richard Scrushy. For years, HealthSouth was a Wall Street darling, expanding to all 50 states and making Beam a millionaire.

But Beam’s story is one of caution, not of celebration. Beam served three months in prison after agreeing to plead guilty to fraud. The company’s CEO, Richard Scrushy, was found not guilty in a criminal trial, but an Alabama judge later ruled that Scrushy was liable for the fraud at HealthSouth and ordered him to pay the company nearly $2.9 billion. Scrushy didn’t serve jail time for the fraud, but he was later found guilty and sent to prison in an unrelated bribery case. Here’s the episode with Aaron Beam.

Aaron, thanks for joining me today.

Beam: Good to be here.

Amato: In your words, you knew you were on the ground floor of something exciting. What was exciting then about HealthSouth?

Beam: I think the most exciting thing about HealthSouth in the beginning is that we recognized there was a true market for our product that wasn’t being filled. When we opened our first outpatient center, amazingly, never having operated one, patients showed up. Our center was profitable very early on, and we were venture-capital-backed. I knew we had the potential to go a long way with our company.

Amato: In the early years, there were signs of growth, but not necessarily much to show for it when it was private?

Beam: True. But in the beginning, we weren’t a public company. We weren’t making announcements about our growth, but we were doing very well from Day One.

Amato: What had to happen for HealthSouth to go public in the minds of investment bankers and others?

Beam: They wanted to be sure to go public that we had a good model that would create profits well into the future. The big hurdle to cover was to make our first profit companywide, and that happened about a little over two years after starting the company.

The investment bankers had told us that you need to have a profitable company and you need to be able to tell us and predict that you can maintain those profits. They said, “If you can do those things, we’ll take the risks and take your company public.”

Amato: What was the next step to get the company to position itself to go public?

Beam: To go public, we needed to have at least one profitable quarter, and that was important. I think it was risky. It was a new concept, a new business. There was no company out there attempting to go public or public that did exactly what we did.

Investors have trouble relating to a concept they haven’t seen before. They constantly asked us, are you like a doc in the box? Are you a hospital? What are you? We had almost a conceptual problem of explaining, and all the explaining in the world wouldn’t do it, you had to show a bottom-line profit.

Amato: In speeches, you’ve said you’re not a confrontational person and maybe that was one of the reasons that you let things go on. But what were some of the other reasons, some of those material possession reasons?

Beam: Well, I was very proud that I started a company and we went on the floor of the New York Stock Exchange and started trading. That’s a big deal. That’s like the pro football player. The college kid signing his contract to play pro ball. There are only about 1,500 New York Stock Exchange companies.

It was a lot of pride and a lot of excitement being in that position. It goes to your head. You own a lot of the stock. Every day, you can see your net worth increase maybe by $50,000, $100,000, $200,000. You can become obsessed with getting that stock price up, not just to please Wall Street, but to fatten your own personal wealth.

Amato: What were some of the things that HealthSouth did under your watch that helped keep that momentum going, whether it was false or not?

Beam: Investment analysts are very in tune to what is your same-store growth. Is your company growing because the volume of business you’re doing is coming from your existing units? If it’s coming entirely from new units, that is not as positive as your same-store growth.

When we’d opened a second center in a city, let’s say we went to Houston and we opened our first center, when we opened our second center, we counted that as a same store on the theory that, well, we’re in a market, it’s all one business really. Without totally lying about it, we were deceiving the Street a little bit on what our same-store growth was. That’s the thing we did. There’s a saying on Wall Street, you put lipstick on the pig.

If you have some flaw in your company or something that bothers you, you don’t talk about it. If somebody brings it up, you say it’s not a problem. Again, putting lipstick on the pig.

While I was trying to create this great image of the company, you’re constantly selling when you’re a public company. When you’re the CFO and the CEO, you’re constantly interacting with the public and you’re always trying to paint your company in the best light you can.

It’s not, like I say, just to do it for the stockholders, but you do it for yourself, too. As I got more and more wealthy, had more stock options that I can sell and cash in, I bought cars, I bought other homes, I bought expensive clothes, all of those things. You get caught up in it.

It’s funny, I think most people think, if someday I had a million dollars, I’d be set, that’d be it. I wouldn’t need anything else anymore. But it doesn’t work like that. Human nature is such, once you become really wealthy, you go from a $200,000 house to a half a million-dollar house.

Then you think, hey, it’d be nice to have a beach house and you’d get a beach house and you want a second car. You want a sporty car and a pickup truck. You start just enjoying those material things, and you become wrapped up in materialism. It can happen to you very easily.

Amato: This goes on with you as the CFO of HealthSouth for how long?

Beam: I was there for 13 years. I left in 1997 after starting the company in ’84. We went public in ’86. Two years after starting the company, I was really beginning to feel my oats that I was a wealthy man.

Amato: It was a public company for how many years with you as CFO?

Beam: Eleven.

Amato: Eleven years. You’ve made your money, you’ve bought your houses, you’ve got your condo in the French Quarter, how many thousands of dollars in Hermès ties?

Beam: Well, let me just list some of my personal possessions. I had a very large house in Birmingham. I had a condo in the French Quarter, which I owned. I had three beach houses in Florida. At one time, I owned about six different cars — Mercedes, Porsche, those kinds of things. I fell in love with the Hermès silk ties that all the investment bankers wore, and I bought over $30,000 worth of them. Now it was over a 13-year period, but, still, that’s a lot of neckties.

Amato: You made your money, you had your things, and then one day you just decided it was time to get out?

Beam: Well, we actually began in 1996 in particular and we weren’t achieving our Wall Street expectations. We weren’t in financial trouble. We weren’t losing money, but we weren’t making the numbers that we’d promised Wall Street. That’s when the fraud began and, within nine months of fraud beginning, I was depressed. I felt trapped. I had lied to everybody about our earnings, and that’s when I made the decision to leave the company.

Amato: You decide to leave and you move south to Mobile. What goes on in that time before you hear, I guess, from Richard Scrushy again?

Beam: Well, I actually got a phone call from Richard after I’d been gone for one year, and he wanted me to have lunch with him in Birmingham. I drove up to Birmingham, about 220 miles. He made a pitch for me to come back to the company. He said, look, Aaron, we’re making our numbers fine. Now, you don’t need to worry about that. I want you back on the team. I told him, no. Then that was in ’98, ’99 came, 2000, 2001, 2002.

But in 2003, I heard on the evening news, “Massive accounting fraud at HealthSouth.”

Amato: I’m going to fast-forward through some of the legal proceedings. But basically what happened is you agreed to plead guilty and you served a short prison term.

Beam: Right.

Amato: You’re a convicted felon, is that correct?

Beam: Yes. That’s just a label you never can get away from. It’s just like if you’re a football coach, they still call you coach years after you’re retired or former president. I’m a felon.

Amato: How has that held you back?

Beam: Initially, it was very disturbing because I could not get a job. I had to pay restitution, and I needed a job and nobody would hire me. I even got a job working at a golf course, mowing their greens, and somebody at their corporate office found out that I was a felon. They politely told me they did not think they could continue employing me because of my criminal past, so it’s a very sad thing. Once you get that on your record it doesn’t go away, and with social media and everything we have today, nobody can keep any secrets. It’s all out there.

Amato: Can you vote?

Beam: I did get my right to vote, but there’s two things that you lose, your right to vote and right to own a gun. I’ve never been a gun person, so the fact that I can’t own a gun doesn’t bother me. But you can apply it to your state and get your right back to vote, and I did.

Amato: How did it come about that you became a speaker on the topic of fraud?

Beam: It was really at the encouragement of my wife that I became a public speaker. She felt like it’d be cathartic for me to go back to LSU and talk to the business students there about what had happened. I don’t know how she knew that it’d be good for me, but she did, and I finally got up the courage and call the dean of the business school and gave my first speech at LSU. I thought I’d really messed up because I became very emotional. I cried during my presentation.

It was very difficult for me to tell my story publicly for the first time, but I did and I felt a little better, and in spite of breaking down and crying, they said I did a very good job and I was very believable and that launched my speaking.

Amato: Beyond telling the story, what training should be given to those working in finance as it relates to fraud?

Beam: Universities are trying to prepare students today for the fraud that’s out there in the world. The key thing is for students coming out of college to realize that they will, if they’re in the financial world at some point, they’re going to see or be asked to do unethical things. They need to prepare themselves for that moment. I like to use the analogy of a professional baseball player. He’s a shortstop and there’s two outs, two men on base, and they hit the ball to him.

He didn’t pick the ball up and scratch his head. What should I do? He’s trained; he knows exactly where to go with that ball based on the circumstances. I tell students they need to study Enron, WorldCom, HealthSouth, all of these large corporate frauds and understand the dynamics of how these frauds happen. When that day comes and they’re faced with making the decision to go along with the fraud or participate in a fraud, they will know what to do. Of course, the correct thing to do is don’t do it. There’s no rationalization that really justifies lying to people, particularly when it’s a financial matter.

Amato: You’ve said that you still have grave concerns about what’s happening on Wall Street. What are some of those concerns?

Beam: I still have concerns about what’s going on on Wall Street. There’s a thing called the fraud triangle. You have to have a desire to commit the fraud, you have to have opportunity, and you have to have the ability to rationalize your behavior. The opportunity to commit fraud and make huge money is unbelievable on Wall Street. With the click of a mouse, if you’re in the right position, you can make $5 million on an insider trade — that easy — and probably get away with it.

A few years ago I spoke to an investment firm on Wall Street, a huge firm, multibillion-dollar firm, and I made my presentation, I talked about what happened to me. I talked about the importance of ethics, all the stuff I tried to do. That night at a dinner with one of the fund managers, he said, all that talk about ethics and Richard Scrushy and what happened to you. OK, we understand that, but what we want to know is how to spot fraud in the numbers so we can short the stocks and make money.

That mentality is out there on Wall Street. Any way we can get an edge to make money, be it insider trade, spotting fraud before anybody else does. They don’t want to spot the fraud so they can warn the public, they want to make a profit off of it. And I’m afraid that culture is really ingrained in Wall Street.

Is it getting better? I think so. A lot of kids coming out of college now, they’re not as eager to go to Wall Street as they were in the past. They have seen the things that have happened, the frauds that have taken place. I think it’s getting better, but I still think a lot of things go on in Wall Street that are really, really scary.

Amato: You mentioned universities and what they’re doing. What about accounting organizations, ethics policies, ethics training? How have you seen that maybe change over the years, and what more needs to be done?

Beam: I’ve been speaking now for over eight years, and I’ve seen more and more that every state society of accountants require so many hours in ethical training. Every major company has a corporate compliance officer. At meetings, at conventions, they stress ethics is on their agenda. I think things are getting better in general because there’s been such a huge amount of attention paid to it because of Enron, HealthSouth, the subprime debacle. It’s good for me because it allows me to speak at these conferences and tell my story.

Amato: Any parting words for a CFO or controller or any other finance professional out there who’s confronted with the potential to commit fraud?

Beam: A CFO out there today has to realize, above all else, that his job is to communicate with the public and with the management and with everybody the true financial condition of the company. Because you want to build trust. You want people to invest in your company, buy your product because they trust you and they trust that you’re delivering accurate numbers. Don’t succumb to the pressure of fudging the numbers up or doing something that’s not good accounting. Because in the long run you’re going to lose the trust of the public. You might win in the short run, but in the long run, you’re not going to succeed.