Justice probes AOL Time Warner finances

Seth Sutel

Wednesday, July 31, 2002 | 9:43 a.m.

NEW YORK -- The Justice Department is investigating accounting practices at AOL Time Warner Inc., the company confirmed today. The media giant already is being investigated by the Securities and Exchange Commission.

The company did not specify which practices were being looked at, but the SEC probe is focusing on several transactions that led to higher revenues at the AOL side of the company. Those transactions were originally reported in The Washington Post.

The company released a short statement saying it was cooperating with the Justice Department as well as with the SEC, and it stood by its accounting practices, which have been upheld by its auditor Ernst & Young.

"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 the statement.

Company spokeswoman Tricia Primrose declined to elaborate.

The probe from the Justice Department comes at an especially difficult time for AOL Time Warner. The world's largest media company is in the midst of management turmoil and earlier this month ousted its No. 2 executive, former America Online chief Robert Pittman.

Pittman was in charge of America Online as it grew into the nation's largest Internet company, and it is that period that investigators are focusing on. The series of articles in The Washington Post described what the newspaper called "unconventional" ways of increasing revenues at America Online.

The practices included selling ads to a British entertainment company in lieu of taking a cash settlement in a legal dispute and booking sales from ads that were sold on behalf of eBay. The transactions occurred between July 2000 and March 2002.

In another case involving Las Vegas technology company PurchasePro, the Post suggested AOL inflated its revenue with a complicated deal in which it gave the Las Vegas company $9.5 million in cash for $30 million in stock warrants and then booked the difference as revenue. PurchasePro also bought ad space and paid commissions to America Online for selling PurchasePro software, the Post reported.

The company has repeatedly stood by the transactions, and analysts say it's still unclear whether the accounting was improper. Nonetheless, concerns that the company could come under fire from regulators has caused an even further erosion in AOL Time Warner's already battered stock price.

The company's stock has tumbled about 65 percent this year as concerns about the waning fortunes of its key America Online division. The company also fell out of favor with investors for other reasons, including continued turnover in the executive suite and a perception that management was not forthcoming with negative information.

AOL Time Warner's shares fell further today, declining 70 cents to $11.70 on the New York Stock Exchange.

Justice Department officials declined to comment on the company's statement and refused to discuss whether an investigation had been opened. The probe was first reported today by USA Today.

While the transactions in question at AOL involve just $270 million, a relatively small amount for a company that booked $38 billion revenues last year, the fact the questions are being raised in a climate of deep distrust for corporate accounting practices has caused alarm among investors and analysts.

MCI owner WorldCom, Global Crossing and Enron collapsed amid corporate accounting scandals. And last week, members of the founding family of Adelphia Communications were arrested and accused of looting the company's coffers.