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AOL Takes SEC Filing Down To Wire

Aug 14, 2002 | The Wall Street Journal

Will they or won’t they? As Wednesday’s 5:30 p.m. EDT deadline approaches for chief executives and chief financial officers to swear to their companies’ accounting accuracy, some companies are taking the decision down to the wire.

AOL TIME Warner Inc. wouldn’t confirm Tuesday night whether CEO Richard Parsons and Wayne Pace, the chief financial officer, planned to certify its financial results with the Securities and Exchange Commission. The executives were meeting with their advisers, said a person familiar with the situation.

Later in the evening, this person said the two executives had decided to certify the results.

AOL is in a delicate situation. Last month, the SEC and the Justice Department initiated investigations of AOL’s accounting practices at its America Online unit. AOL has said its accounting is appropriate, but if the SEC finds irregularities, the executives could be personally exposed to potential perjury charges.

On July 24, Mr. Parsons told investors in a conference call that he intended to sign the SEC certification, but made it clear that he was less than enthusiastic.

“My initial comment is, ‘Whose idea was that?’ ” he said. “But moving beyond that, it is what it is. I’m not going to become the poster child for debating whether it’s a good idea or not. We live in a country of laws and we’ll observe them.” He added: “Wayne and I will both sign off as the new SEC requirements provide. You needn’t worry about that.” Mr. Parsons reiterated his commitment a few days later at a luncheon with a group of investors.

But Tuesday an AOL spokesman declined to comment on whether Messrs. Parsons and Pace would sign the statements. There is no direct penalty for failing to sign the statements, but the market isn’t likely to look kindly on a company that fails to do so.

“I expect all my companies to certify their financials,” says Henry Berghoef, a portfolio manager at Harris Associates, an AOL shareholder. “I can’t imagine an investor manager on the planet who would be happy if any of their companies refused to certify.”

At AOL , a management shake-up recently demoted the prominence of the America Online side of the company, and many of the aggressive accounting practices of the online unit during the dot-com era have come under scrutiny. It is doubtful the current managers, who hail from the Time Warner side, will want to take personal and legal responsibility for the accounting proclivities of their online brethren. And although the company’s share price has been devastated as the merger’s woes have manifested themselves, some investors appear to believe the stock has bottomed, and management is anxious to encourage this optimism. AOL shares closed at $10.80, down 20 cents, in 4 p.m. composite trading Tuesday on the New York Stock Exchange.

“This is an unprecedented situation and in the current climate, fraught with danger,” said Ted Fiflis, law professor at the University of Colorado Law School at Boulder. “If AOL’s got anything wrong, their executives are in a very dangerous situation.”

Experts say AOL executives, like those of other companies, essentially have four options. They can sign the statements Wednesday if they have confidence in them. They can ask for a five-day extension from the SEC to review their options. They could restate past results and certify those results. Or they can submit an alternate document to the SEC and hope that it is accepted.

Some other companies whose accounting practices are being investigated by the SEC, such as WorldCom Inc. and Qwest Communications International Inc., aren’t certifying their results. But those companies are also in the process of restating their results, and their credibility with Wall Street is already at rock bottom: WorldCom stock has been delisted; Qwest shares are trading at about $1 apiece.

A WorldCom spokeswoman said, “Since we are restating, we won’t be in a position to certify until the restatement is completed.” In a news release, Qwest said its executives will be “unable to make the statement specified in the SEC order because of the expected restatement of the company’s financial statements, the ongoing analyses by the company and KPMG of the accounting policies and practices of the company and the ongoing investigation by the SEC, among other reasons.” Qwest has asked for an extension.

Interpublic Group of Cos., an advertising holding company, experienced the impact of the new SEC rules last week when it postponed its second-quarter earnings announcement, spooking investors and knocking down its share price by 24% on Aug. 5. Tuesday, it restated five years of earnings, and was able to say it would meet Wednesday’s deadline for complying with the SEC requirements. The announcement was made after the markets closed.

AOL hasn’t indicated any plans to restate its past results. A restatement could be disclosed when it files its quarterly earnings report, which is due to the SEC Wednesday. But a restatement might send a damaging message.

“Credibility has been a huge issue for this company for investors,” said Katherine Styponias, analyst at Prudential Securities. “They’ve lowered guidance two or three times this year. To the extent they don’t sign those financial statements it would certainly push back any strides they’ve made so far.”

Moreover, a restatement could trigger lawsuits. Although speaking in general and not about AOL , William S. Lerach, a partner at the Milberg Weiss Bershad Hynes & Lerach law firm, a shareholder litigation powerhouse, said he is “watching and waiting” for restatements. “Any substantial restatement will almost certainly result in stockholder litigation,” he says, adding: “There may well be some situations where there are existing litigations ... that take on more significance and size.”

“A restatement is an admission that the financial statements were materially false when originally issued,” he said. “That admission gives any securities case an enormous boost. At that point, just about all the shareholder-plaintiff has to prove is that the improper accounting was done knowingly or recklessly.”


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