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SEC Looks At AOL Time Warner

Jul 25, 2002 | USA Today

The Securities and Exchange Commission has launched a fact-finding inquiry into accounting practices at AOL Time Warner, the word's largest media company, which has such properties as HBO's The Sopranos and People magazine.

Richard Parsons, chief executive of the $38 billion company, promised Wednesday to cooperate with the investigation and to tell investors and regulatory authorities about company business practices.

The investigation comes after accounting scandals at such companies as WorldCom and Adelphia Communications and a management shake-up at AOL Time Warner. No. 2 executive Bob Pittman resigned last week, and two Time Warner executives stepped into more powerful roles.

The investigation started after The Washington Post reported that the company used creative accounting methods to boost its revenue from 2000 to this year. Among practices reported by the newspaper: selling ads for online auctioneer eBay and booking them as AOL revenue, bartering ads for computer equipment with Sun Microsystems and shifting revenue between divisions.

Parsons challenged the accuracy of the stories and said the company's outside auditor, Ernst & Young, has checked and rechecked the transactions and declared them OK. He also alerted the SEC about the pending articles before they were published. ''It's important to be proactive,'' he told Wall Street analysts and reporters during a conference call Wednesday.

SEC officials could not be reached for comment on the investigation.

Analyst Denise Garcia of GartnerG2 says the probe is ''no surprise'' given that online companies such as America Online put together tricky ad deals. ''Many of these deals are not straightforward cash deals,'' Garcia says. ''Given the volatile marketplace and the current climate, the fact that the SEC is investigating many large companies is not a surprise.''

Christopher Dixon, media analyst at UBS Warburg, says, ''Anything that smacks of uncertainty is going to come under perusal. What's more important is that Ernst & Young signed off and that management is going to make every effort they can to be transparent.''

AOL Time Warner's stock dropped 75 cents to $10.65 in after-hours trading.

The SEC investigation overshadowed some promising second-quarter results by the company, which has seen its stock plummet almost 65% this year.

The company said earnings before interest, taxes, depreciation and amortization grew 2% to $2.5 billion from the same period the year before. Revenue rose 10% to $10.6 billion.

The AOL unit continued to be a black hole, however, with earnings falling 27% and revenue dropping 3%.

The lagging AOL results continue to drive speculation that the company will be broken into two or three pieces. But Garcia says such a strategy would be foolish. ''It's way too early. They are just now realizing the synergies from merging these two companies."


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