Federal regulators are investigating the complex relationship between AOL Time Warner Inc.’s America Online division and a small Las Vegas software company called PurchasePro.com Inc . , people familiar with the matter told The Wall Street Journal.
The Securities and Exchange Commission has already questioned AOL executive Myer Berlow about America Online’s business dealings with PurchasePro, a once-hot company that sells business-purchasing software but has fallen on tough times.
A PurchasePro spokesman said the SEC has asked for documents relating to AOL, and the company has complied with the request. Several AOL executives said the focus of the inquiry is PurchasePro, which PurchasePro denies.
AOL Time Warner is coming under increasing scrutiny about its accounting practices but has consistently said its accounting is appropriate. The SEC inquiry of AOL was disclosed July 24 on the heels of Washington Post articles that questioned AOL’s unconventional advertising deals. Wednesday, the company disclosed that the Department of Justice has joined the SEC probe. The criminal part of the inquiry was initiated by prosecutors in New York who issued subpoenas at the end of last week. The jurisdiction then shifted to the U.S . attorney’s office in Alexandria, Va., near America Online’s Dulles, Va., headquarters.
At the heart of the probe by investigators is whether the online division improperly booked revenue from partners such as PurchasePro. America Online booked as advertising revenuethat it received from cashing in PurchasePro stock warrants — something that accountants call a gray area of accounting. Normally, equity sales are booked as one-time investment gains, rather than revenue. But some barter transactions can be counted as revenue.
Former PurchasePro executive Charles “Junior” Johnson said booking the equity sales as advertising revenue seemed strange to him. “They were selling software [for PurchasePro] and they got warrants for selling it,” he said. “I don’t know how those become ad revenues.”
AOL says it disclosed the fact that it occasionally booked equity sales as revenue in its 1999 annual report. “Certain of the transactions with partners also include an equity component for the company,” the annual report says. “The company may receive a warrant to purchase stock or may purchase or acquire a direct interest in the partner. These equity investments are accounted for in accordance with company accounting policies.”
The PurchasePro transaction also highlights an occasional practice at America Online: assuring its partners a cut of future revenue beyond the contractual relationship. Big advertisers such as eBay Inc . and TMP Worldwide Inc.’s Monster.com entered into arrangements where AOL would sell ads on their behalf. Monster, for example, said it expects to receive aboutin advertising revenue from AOL during its four-yearadvertising arrangement.
Messrs. Berlow and Colburn were unavailable for comment.
The arrangement between Purchase Pro and AOL dates to March 2000 . At that time, PurchasePro agreed to paytoward co-developing software with America Online and to spendon AOL marketing that software. The two agreed to share the revenue generated by the software sales.