updated 1/28/2005 7:30:57 PM ET 2005-01-29T00:30:57

An accountant testifying Friday in the trial of fired HealthSouth chief Richard Scrushy gave jurors the recipe for a huge fraud: Take legitimate numbers from clinics and hospitals, add bogus amounts at headquarters, and blend it all together.

"That's where they cooked the books," said Harvey Kelly, who was part of a team of experts brought in by HealthSouth Corp.'s law firm to unravel the scheme after the fact.

Under questioning by a prosecutor, Kelly said Scrushy passed along the fake numbers during presentations to analysts, in the company's annual report and in reports submitted to the government. But Kelly did not address whether Scrushy knew the numbers were false _ an important point the defense could bring up during cross-examination when the trial resumes Monday.

Using financial statements projected on a screen, Kelly pointed out entries that he said included false revenues and assets.

"If they didn't have that fraud in there, their numbers would have looked a whole lot worse," said Kelly, referring to an annual report that included a photo of Scrushy.

The government claims Scrushy was behind the fraud, enriching himself as the inflated earnings boosted HealthSouth shares. The defense contends the fraud was carried out by underlings who lied and hid the scheme from Scrushy for years.

Time and again, Kelly testified, the rehabilitation clinics, hospitals and other facilities owned by HealthSouth submitted legitimate financial reports to headquarters in Birmingham.

But workers in the corporate office then inflated those numbers and fed them into a computer program that created HealthSouth's consolidated corporate reports, Kelly said, testifying with the help of a computer display and writing charts by hand.

Kelly said about 80 percent of the fake revenue numbers were placed in an account called "contractual adjustments," making it appear the company would collect more from patients than it really anticipated getting.

"They just made up the numbers and happened to put it through to the contractual account," he said.

The fraud didn't end there, Kelly testified.

HealthSouth failed to properly record the sale of technology to a related company called Source Medical, resulting in $29 million in overstatements by late 2001, he said. And workers twice recorded the sale of 1.7 million shares of stock in another company, Caremark, reporting a $16 million gain the second time.

"That was totally false income," said Kelly.

Some fake entries were detected because workers used three-letter codes to indicate bogus numbers, Kelly testified.

Other fraudulent figures were located because information was missing from account records, he said. Examiners found fake assets totaling as much as $2 billion partly because office equipment listed in records lacked numbers from the little metal tags normally used to track inventory, Kelly said.

Scrushy is on trial on charges including conspiracy, fraud, money laundering, obstruction of justice, perjury, and false corporate reporting in the first test of the 2002 Sarbanes-Oxley Act against a CEO.

Scrushy, 52, could get what amounts to a life sentence if convicted. Prosecutors also are seeking $278 million in his personal assets including vintage cars, boats, an airplane, jewels and bronze statues.

The government has given varying estimates on the exact size of the fraud, ranging from $2.64 billion to $2.74 billion.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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