Got accounting discrepancies? No problem.

Or, that's what auditors from Ernst & Young seem to have told HealthSouth officers after learning last June about apparent discrepancies in the company's financials. This, according to reported testimony in federal court on Wednesday.

E&Y auditor James Lamphron testified that former HealthSouth asset manager Michael Vines sent an e-mail to the auditor, complaining about the company's "misallocation between asset and expense accounts." According to a Reuter's report of the testimony, Lamphron also stated that he informed former finance chief William Owens — who has since agreed to plea guilty to fraud charges — and George Strong, head of the HealthSouth board's audit committee, about Vines' complaint.

E&Y's investigation of the matter beyond that communication, however, is not clear. U.S. District Judge Inge Johnson asked Lamphron: "Did you check any invoices against any checks?" Reportedly, Lamphron responded: "I don't know that we did that."

Still, Lamphron defended his audit team's actions in his testimony: "We reached a point where we were satisfied with the explanation the company provided to us," he said. "The situation that Mr. Vines described was in fact happening, but our procedures determined there was no problem with what they did and that's still our conclusion."

Judge Johnson is considering whether to maintain a temporary freeze on the assets of fired HealthSouth chief executive Richard Scrushy. Scrushy's lead attorney Thomas Sjoblom denies that Scrushy knew anything about the alleged scam. If professional accountants could not catch the problems, he argued in court, his client "could not know this level of detail."

As CFO.com reported yesterday, Barbara Patton, manager of HealthSouth's accounts payable department, also testified that she has doubts that Scrushy knew what was apparently going on in the HealthSouth finance department.

According to charges filed by the Department of Justice, HealthSouth fraudulently overstated earnings by $2.5 billion.

PCAOB Calls for Foreign, Domestic Accounting Firm Registration
Late Wednesday, the Public Company Accounting Oversight Board approved a new system to register accounting firms in and outside the U.S.

The registration rules for cross-border accountancies is not winning the board any new friends in Europe, however. Foreign accountants, which lobbied for an exemption to the registration, were instead provided with an additional six months to register.

Under the system, U.S. accounting firms must be registered online with the oversight body by Oct. 26 ,while non-U.S. firms have until April 2004.

Specifically, overseas firms will be required to register if they audit companies listed on American stock exchanges. Foreign firms will be exempt from supplying information if doing so conflicts with their own country's law, especially those intended to protect privacy.

The board's decision was not exactly cheered by officials at the European Union. Frits Bolkestein, the E.U.'s internal market commissioner, reportedly called for a moratorium on the registration of E.U. audit firms in its 15 member states until a transatlantic resolution can be reached. "Rigorous home-country control over audit firms is a far more effective way to protect investors," he was reported as saying an article on CBS MarketWatch.com.

Bolkestein also believes the rule could have a negative impact on U.S. auditors doing business abroad. "Registration of E.U. audit firms is unnecessary, burdensome and disproportionate," Bolkestein added. "The PCAOB's approach may lead to mounting pressure to require U.S. audit firms to register in the E.U."

The PCAOB's ruling would reportedly impact some 280 E.U. companies with a stock listing in the U.S., as well as multinational U.S. subsidiaries operating within the E.U. Under its requirements, auditors overseas would need to register in order to continue to prepare the financial statements of U.S. publicly listed companies.

The SEC still must approve the board's rule. No decisions have been made yet on whether to inspect accounting firms outside the U.S., subjecting them to its oversight.

Inspections of Big Four accounting firms are slated for the summer and fall, according to statements made by Charles Niemeier, the PCAOB's acting chairman. Board member Daniel Goelzer told Dow Jones Business News that U.S. regulators would like to develop cooperative inspection and disciplinary programs with counterparts outside the U.S.

In a separate action, the board approved a $70 million annual budget for 2003, which does not yet include fees for registering accounting firms, according to Dow Jones. Revenue for the nonprofit board will come chiefly from fees on public companies, which are projected to bring in $68 million this year.

The mid-six figure salaries for PCAOB's four board members have drawn criticism on Capitol Hill. But at this point, it's not likely that those salaries will be adjusted.

Last week, the Securities and Exchange Commission selected William J. McDonough to head the new agency. McDonough, currently the chairman of the New York Federal Reserve, is expected to take the reins from Niemeier next month.

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