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AOL might have structured ad revenue between 2000 and 2002 to make its long-term profit picture appear rosier than it really was, according to The Washington Post. In an article appearing in Thursday's Post, staff writer Alec Klein wrote that AOL was under pressure to bolster its stock price so as not to jeopardize its takeover of Time Warner, during a period when its investors were concerned about softening advertising revenue.
While AOL reportedly was taking steps to shore up that revenue, Robert Pittman, then the company's president and until now its chief operating officer, assured Wall Street analysts and the media that the company was unaffected by the slowdown in advertising.
The story adds to AOL's woes at a time of declining profits and plunging stock prices. Pittman resigned after market close Thursday.
Vanishing Dot-Coms
According to the Post, AOL officials learned in October 2000 that the company could lose as much as US$140 million in advertising revenue during the next year because so many of its dot-com advertisers were going out of business.
AOL allegedly responded to this threat with a series of unconventional accounting moves: counting penalties for ad contract terminations as advertising revenue; selling ads for cash to its own online service; booking ads it sold on behalf of eBay (Nasdaq: EBAY) as its own ad revenue; and bartering advertising for computer equipment, stock rights and monies owed in court judgments.
In addition, after the merger with Time Warner, AOL allegedly required a cable station whose programming was carried on Time Warner Cable to buy advertisements on AOL as part of its payment to the cable network.
Although these unconventional deals represented just a small fraction of AOL's revenue, they allowed the company to meet analysts' earnings expectations -- when it otherwise would not have -- during three quarters in 2000 and 2001.
Questionable Deals
At least two whistleblowers apparently tried to alert senior management that they found these deals improper. According to the Post story, the vice president of finance of AOL's advertising division resigned in March 2002 after failing to convince Pittman and others that reported advertising revenue was not sustainable. A former senior manager of AOL's business affairs division also said he was laid off because he would not go along with questionable deals.
While AOL has not denied the reported transactions, the company took issue with the Post's characterization of them in a response published by the Post. Pointing out that AOL's external auditor, Ernst & Young, reviewed all of the deals and found them to be in accordance with generally accepted accounting principles, spokesperson John Buckley stated that "AOL has maintained a strict and effective set of internal controls."
At press time, AOL was unavailable for comment.
'Everybody's Doing It'
Some of AOL's accounting practices are not unusual in the high-tech world, according to Giga Information Group vice president and research leader Erin Kinikin.
"Product swaps or other 'in kind' services between closely related companies are facts of life and have been used for years to make up for missing revenue in slow quarters," Kinikin told the E-Commerce Times.
Other reported AOL tactics are less common but still not unknown. For example, according to Kinikin, Priceline.com (Nasdaq: PCLN) and other Internet companies have booked pass-through sales, just as AOL did with eBay's advertising.
However, the era of creative accounting for advertising revenue might be drawing to a close.
"'Everybody's doing it' is only a good excuse if you're
not the one who gets caught," Kinikin noted. "I think you'll see more and
more of these side deals disclosed and out in the open, which is going to
make them less attractive for companies and more visible to investors."
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