SEC Eyes AOL Time Warner AccountingJul 25, 2002 | AP
Federal regulators are looking into how AOL Time Warner accounted for several transactions that were reported just as the media giant shook up its top management ranks last week.
Chief executive Richard Parsons, speaking on a conference call with investors Wednesday, disclosed that the Securities and Exchange Commission had opened a "fact-finding" inquiry into the transactions, which were reported by The Washington Post.
According to the Post, AOL let a British entertainment company buy advertising instead of paying an arbitration award in a legal dispute, shifted revenue among two divisions and sold ads on behalf of eBay while booking the sales as its own revenue.
Parsons said the company was cooperating fully with the investigation. He also repeated AOL Time Warner's earlier assertion that its auditors, Ernst & Young, had signed off on all the transactions. Parsons pledged to restore investors' trust in the company and to make it more transparent.
SEC spokesman John Heine declined to comment.
AOL's stock fell sharply in heavy trading Thursday morning after several analysts downgraded the company's shares, some of them expressing concerns that the SEC probe could weigh down the stock.
The company's shares were off $1.41 or 12 percent at $9.99 in extremely heavy trading Thursday morning on the New York Stock Exchange. The stock is down more than 65 percent for the year.
AOL Time Warner has fallen out of favor with investors, in part because of lagging results at its America Online divisions and a perception that the company has not been forthcoming with negative information.
The company failed to meet growth targets, surprised investors with poor results at its European division and was criticized for the way it accounted for a transaction involving a joint venture with Sun Microsystems.
The SEC probe follows accounting scandals at Enron Corp., WorldCom and Adelphia Communications Corp., among others. Concern over corporate wrongdoing has shaken investors' confidence and led to calls for better regulation of accounting procedures.
"In the current environment, any such allegations will necessarily and appropriately draw inquiry from the appropriate regulatory authorities even where, as here, they are without merit," Parsons said.
"I am personally committed to doing all we reasonably can to promote clarity and transparency for investors," he said.
Tom Wolzien, a media analyst for Sanford C. Bernstein & Co., said it's unclear whether the company did anything wrong in the way it accounted for the transactions. He said the company is already disclosing more information now, under pressure, than it was before.
"Nobody should be happy about (the SEC probe), but if there are questions they should be cleared up. This is a time when we need confidence," Wolzien said. "I think that what they did today in terms of providing information would have been very helpful to investors had they also been doing it a year ago."
The company reshuffled its top management last week, replacing chief operating officer Bob Pittman, a former head of America Online, with two veteran executives from the Time Warner side of the company.
In an earnings report released Wednesday, AOL Time Warner said it posted net profits of $394 million, or 9 cents a share, in the second quarter, versus a net loss of $734 million, or 17 cents a share, in the comparable period a year ago.
Revenues were $10.58 billion, compared with $9.3 billion reported in the same period a year ago. Adjusting for the acquisition of IPC Group, a major British magazine publisher, and other purchases, the year-ago revenues were $9.61 billion, meaning that revenues in the current quarter grew 10 percent.
In the first quarter of 2002, AOL Time Warner reported the largest quarterly loss for a company in the history of U.S. business as the company took a massive $54.24 billion write-off because of a sharp decline in its stock price.