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AOL: Justice Scrutinizing Accounting

Aug 1, 2002 | USA Today

Jittery investors sent AOL Time Warner shares down more than 7% to $11.50 Wednesday after the company confirmed a USA TODAY report that the Justice Department is investigating accounting practices at America Online.

''It's open-ended. Nobody knows what the Justice Department is doing,'' says Bear Stearns' Raymond Katz. ''And Wall Street hates uncertainty.''

Justice investigators in Virginia will work with the Securities and Exchange Commission, which launched its inquiry last week. Their interest appears to have been piqued by a Washington Post series describing aggressive efforts to boost AOL's revenue numbers.

AOL tried to reassure the market, even as the company was narrowing its search for a new leader for the troubled online unit and as CEO Richard Parsons was in Boston at a previously scheduled meeting with mutual fund managers.

''In the current environment, when anyone raises a question about accounting, it's not surprising that the relevant government agencies will want to look into the facts,'' AOL said in a prepared statement. ''We are cooperating 100% with the SEC, and we will cooperate with the Department of Justice as well.''

But several analysts say they fear the investigation could broaden as officials subpoena and begin to pore over AOL records.

''You don't know how bad it can be,'' says Merrill Lynch's Jessica Reif Cohen. And Blaylock & Partners' John Tinker says practices ''that were high-fived a few years ago mean orange-suit time now.''

What's more, questions could linger even if investigators find no serious problems.

''They won't just walk away and give them a clean bill of health,'' says Christopher Bebel of Shepherd Smith & Bebel.

Meanwhile, AOL is in the home stretch to find a chief for the online unit. The top candidate is Jon Miller, say people close to the situation. Until June, Miller, 45, was a top executive at Barry Diller's USA Interactive, whose holdings include travel agency Expedia, Home Shopping Network and Ticketmaster.

The deal could fall through, and AOL is still talking to other candidates, which have included Mike Klingensmith, who heads Sports Illustrated, and Disney theme park chief Paul Pressler.

A decision could be made within two weeks. AOL officials would not comment.

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