Following up with your reading of the article and earlier comments and postings regarding unhealthy accounting practice of HealthSouth Corp. and the auditor, Ernst & Young, E&Y’s audit failure story, please let us continue our discussions a bit further with the following questions:
1. HealthSouth concealed the fraud by keeping the fraudulent transactions below $5,000. What recommendation would you have to Ernst & Young to improve its sampling practices?
2. What are several red flags that E&Y either was or should have been aware of in the audit of HealthSouth?
3. What procedures can auditors perform to detect fraudulent entries made by HealthSouth?
4. HealthSouth has sued Ernst & Young and Ernst & Young is also the target of a federal securities class action suit. What are Ernst & Young’s likely defenses against HealthSouth? Against the class action suit?