AOL Time Warner confirmed Wednesday that, along with a Securities and Exchange Commission inquiry revealed last week, the company’s accounting practices are also the subject of a U.S. Department of Justice(DOJ) probe.
The DOJ had no comment, but AOL confirmed speculation that the federal agency is investigating the company’s accounting practices. Reports indicate that the accounting issues are focused on how AOL reported revenue from its online unit. However, analysts say that the DOJ’s inquiries are likely to spread across all divisions of the complex company.
“It’s certainly a step up in intensity,” Yankee Group senior analyst Mike Goodman told NewsFactor, speaking of the DOJ probe. “I think the more people investigating, the more likely something will be found [if it is there].”
AOL responded to DOJ probe rumors with a statement confirming that a preliminary investigation is taking place but defending the company’s accounting practices.
“In the current environment, when anyone raises a question about accounting, it’s not surprising that the relevant government agencies will want to look into the facts,” the company said in a statement. “As we said last week, we are cooperating 100 percent with the SEC and we will cooperate with the Department of Justice as well.”
“Most importantly, as we have consistently said, our accounting is appropriate and in accordance with generally accepted accounting principles (GAAP), and our outside auditors, Ernst & Young, have repeatedly confirmed that,” the statement said.
The Pile-On Effect
Yankee Group’s Goodman, referring to a government desire to be seen as proactive on corporate accounting issues, agreed that it is not surprising that another agency is looking into AOL’s accounting.
“At a bare minimum,” said Goodman, “anybody who’s getting an inquiry is going to get [investigated] from a number of places, whether it’s the SEC, the Federal Trade Commission or the Justice Department.”
Gartner research director Rob Batchelder told NewsFactor that the Justice Department probe was no surprise, but added that it was, as he put it, “a significant turn of events.”
Batchelder said that the Justice Department investigation, whether formal or not, represents more serious issues for AOL than the SEC probe.
“It’s an excruciating experience, because [Justice] has immense resources and legal resources to get what they want,” Batchelder said. “Nobody wants to be on the receiving end of the DOJ. They always find something.”
While AOL is certainly not the only company to push accounting into so-called “gray areas,” according to Batchelder, the additional scrutiny brought on by intense political pressure on the Department of Justice is putting AOL on the defensive, and is giving the giant media company a severe image problem.
Batchelder said that many of the issues surrounding AOL’s accounting, which involve online advertising and other revenue sources, are common among dot-com companies, which have struggled to survive in the current economy.
“There are a lot of skeletons in the dot-com closet,” Batchelder said. “AOL’s only the most visible target. They’re not the only target.”
Batchelder said that other dot-com sector companies could also come under scrutiny, adding, “I think you’re going to find a lot of these companies played fast and loose.”
Backlash and Bloodlust
Batchelder said AOL’s own business approach, often seen as arrogant and confrontational, might come back to hurt it in the “public execution mentality” that has resulted from corporate financial scandals such as Enron and WorldCom.
“There’s a definite bloodlust, and I think it’s justified because people have been abused,” Batchelder said. Yankee Group’s Goodman agreed, adding that both the government and the public are looking to punish companies that have misrepresented their accounting.
“God help the company that is the first to get investigated and the investigators find something, because [that company] will be made an example of,” Goodman said.