AOL Time Warner is expecting the US Securities and Exchange Commission to widen its investigation into past accounting practices at the media group’s AOL unit.
The company’s share price fell steeply in New York on Thursday afternoon as markets digested the potential effect of the probe.
The regulator’s fact-finding inquiry was prompted by a series of articles last week in the Washington Post. However, a person familiar with the investigation hinted that the company was prepared for the inquiry to go beyond the initial allegation, which centred on how AOL accounted for a handful of online advertising transactions in 2000 and 2001.
“I expect they will look more broadly,” said one person involved in the inquiry. “The focus will probably be on AOL but not limited to it.”
Dick Parsons, AOL Time Warner chief executive, said on Tuesday the company was cooperating with the inquiry and that the accounting issues raised by the articles were “without merit “. But he admitted the group had to go further than merely complying with existing disclosure rules.
Speaking after the group’s announcement of second quarter earnings, he added: “I am aware that we are living through a time when merely complying with GAAP [US accounting rules] may not be enough.” That effort would involve greater transparency “beyond any legal or accounting obligations”, he said.
The company’s already-wounded shares fell $2.05, or 18 per cent, to $9.35 by midday trading on Thursday. The shares are now down 70 per cent this year and nearly 80 per cent since last year’s merger of AOL and Time Warner.
Several Wall Street analysts who had considered AOL shares to be at bargain-basement prices downgraded the stock.
“While we believe that the stock is already discounting worst-case [scenarios], we think the combination of a reduction in estimates and the SEC accounting inquiry will make it difficult for the shares” to rebound soon, said Jessica Reif Cohen, a Merrill Lynch analyst. She cut her rating on AOL shares to “neutral” from “buy.”
The SEC inquiry comes as Mr Parsons, who took control of the world’s largest media group in May, tries to rebuild investor confidence. Many investors and employees of the former Time Warner regret that the company sold itself to AOL.
Mr Parsons has announced a series of management changes in what many interpreted as a sign that the Time Warner old guard was back in charge.