U.S. Probes AOL Accounting Practices

AOL Time Warner’s positive earnings report this week was tempered by news that the U.S. Securities & Exchange Commission is looking into the way the company’s online division has handled its accounting.

In what is becoming an all-too-familiar occurrence, the SEC has opened an inquiry into “how AOL booked some of its earnings,” Yankee Group analyst Mike Goodman told the E-Commerce Times.

The company has had its share of problems in 2002, with poor financials in the first quarter and shake-ups among top management, including the departure of chief operating officer Robert Pittman last week.

Goodman noted that Pittman’s departure was not directly related to the accounting practices under scrutiny, but rather was a result of AOL’s flagging earnings.

Titan Shrugged

The company shrugged off the SEC inquiry. “We are comfortable with the accounting practices and policies in place at our company. Our accounting is appropriate for the businesses in which we operate,” AOL Time Warner chief financial officer Wayne Pace said during a conference call with analysts, after company chairman Richard Parsons confirmed an investigation is under way.

Goodman said there is currently not much to worry about because the SEC probe is an inquiry, not a formal investigation. “If it turns into an investigation, though, it could throw a wrench” into AOL’s future plans, he warned, noting that AOL reported its accounting practices to the SEC in an effort “to head it off.”

The news came on the heels of AOL’s improved financial picture. After posting one of the largest quarterly losses in the history of corporate America during the first quarter of 2002, AOL Time Warner reported US$384 million in net profit and a 10 percent increase in revenue to $10.6 billion for the second quarter.

Vigilance Rising

The SEC has ramped up its investigative activity in the past few months as the U.S. economy has been rocked by one accounting scandal after another, prompting large companies like Enron and WorldCom to file for bankruptcy and spawning numerous investigations by Congress and the federal courts.

Increased vigilance led to the arrest this week of Adelphia founder and former CEO John Rigas, and his sons, former CFO Timothy Rigas and former executive vice president of operations Michael Rigas.

Widespread accounting woes and stories of executives walking off with millions and leaving their companies — and investors — in shambles also have prompted Congress to create a corporate reform act that would increase the penalties for fraud.

However, Goodman noted, the action is too little too late. “Talk about closing the gate after the horses have already left the barn,” he said.

SEC Under Fire

The SEC has asked the White House for more money to bolster its personnel so it can better grapple with the disclosures of accounting irregularities that are becoming commonplace.

The commission has drawn criticism for being too lax in the past, and some have speculated that SEC Chairman Harvey L. Pitt should step down.

But in a statement issued earlier in July, Pitt thanked President Bush for his “unqualified support” of the SEC’s budgetary requests and noted: “We already have undertaken an unprecedented number of significant and broad-ranging initiatives to correct long-festering flaws in the current system. We are committed to forceful, aggressive, creative and prudent efforts to revitalize and improve our system. We are proud to let our actions speak for us.”

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