AOL Time Warner executives had hoped to spend this morning talking about first-quarter earnings, which are expected to be encouraging.
But they might find themselves on the defensive following reports Tuesday that the Securities and Exchange Commission is looking into previously undisclosed potential accounting irregularities.
The SEC is examining a $100 million, four-year deal AOL cut in 1999 with Monster.com, a Web site for job hunters, The Washington Post reports. AOL apparently recorded ad sales from a non-cash deal with Monster to simply promote each other on their sites, the newspaper says. Investigators also are reportedly looking at a 1999 deal with medical Web site DrKoop.com. AOL took $9.6 million of DrKoop stock as compensation for an ad agreement that fell apart, then booked that amount as an ad sale, anyway.
Also under scrutiny is a $25 million ad deal with Vivendi Universal from 2001, The New York Times says. It’s unclear whether this was an outright ad sale, or a rebate from a $725 million stock payment for Vivendi’s 55% of AOL France.
AOL declined to comment. But it says it’s continuing to cooperate with the SEC.
While the amounts in question are relatively tiny, the revelations suggest that the company isn’t yet in the clear as investigators explore whether America Online misled investors in the key period just before and after its 2001 acquisition of Time Warner.
And that worries some Wall Streeters. ”It’s very difficult sitting in my seat to get a handle on how widespread the revisions are,” CIBC World Markets’ Michael Gallant says. ”What I’m focused on, and what a lot of investors are focused on, is what civil lawsuits might amount to. That’s impossible to handicap.”
He added that it ”would not be a shock to anybody” if additional problems are uncovered.
The SEC has already found several cases where AOL might have made its business prospects look unrealistically bright. For instance, they’re challenging AOL’s report that it made $400 million in ad sales from the deal in which it paid Bertelsmann $6.7 billion for its interest in AOL Europe.
And last year, AOL cut $190 million from its revenue in a restatement of its financial reports over the course of a year and a half.
Investors took the new accounting questions in stride Tuesday, sending AOL stock up nearly 3.2% to $13.31. Many were pleased to see Viacom agree to pay $1.23 billion for AOL’s 50% stake in Comedy Central. Viacom’s upbeat ad sales from the first quarter also seemed to bode well for AOL.
Also on Tuesday, AOL agreed to pay nearly $15.9 million to resolve a complicated dispute with WorldCom, which has sought bankruptcy protection.
A filing at U.S. Bankruptcy Court in New York said that AOL owed WorldCom about $28.9 million for network services. But the telecom company owed AOL about $13 million for advertising.