AOL Under The Microscope

Media giant AOL Time Warner Inc. disclosed Wednesday that the Securities and Exchange Commission was looking into the company's accounting of a series of transactions that may have improperly inflated revenues.

Richard Parsons, the company's chief executive, said in a conference call with investors that the SEC was conducting a "fact-finding" inquiry into several transactions that were reported last week in The Washington Post.

In the articles, the Post said AOL made an unusual deal to allow a British entertainment company to buy advertising instead of paying an arbitration award in a legal dispute, improperly shifted revenue from one division to another, sold ads on behalf of eBay and booked them as its own revenue.

Parsons did not elaborate on the transactions, but said the company was cooperating with the SEC. He also repeated AOL Time Warner's earlier assertion that its auditors, Ernst & Young, had signed off on all of the transactions and that they all conformed with generally accepted accounting procedures. He also repeated pledges to restore investors' trust in the company.

SEC spokesman John Heine declined to comment.

The SEC probe comes amid accounting scandals at Enron Corp., WorldCom Inc., Xerox Corp. and Adelphia Communications Corp., among others.

AOL's shares fell 95 cents, or 8.3 percent, to $10.45 in after-hours trading.

Parsons made the disclosure during a conference call to discuss the company's second quarter earnings, released after the close of regular trading on the New York Stock Exchange. Despite a massive rally on the market, AOL Time Warner's shares lost ground, slipping 15 cents to $11.40 in regular trading on very heavy volume of 52 million shares.

AOL Time Warner's shares have been pounded since the beginning of the year on persistent concerns about the lagging fortunes at America Online, management's credibility with investors, accounting concerns and turnover in the executive suite.

AOL Time Warner reported net earnings of $394 million or 9 cents a share, versus a net loss of $734 million or 17 cents a share in the comparable period a year ago.

The year-ago figures include amortization of goodwill, which is no longer done under new accounting standards that the company adopted at the beginning of this year.

Without the amortization and one-time charges, and adjusting for acquisitions, earnings in the year-ago period were $592 million, meaning that the current earnings marked a decline of 33 percent from a year ago.

The main culprit for the decline was a poor performance at the company's lagging AOL division, where revenues fell 3 percent and cash flow fell 27 percent as online advertising continued to decline.

The company is still looking for a new CEO for the struggling division following the departure last week of Robert Pittman, the chief operating officer and former AOL chief who had been dispatched in April to shake things up.

Parsons said turning around the AOL division was his top priority and that he expected a new chief for the division to be named shortly.

Revenues were $10.58 billion compared with $9.3 billion reported in the same period a year ago. Adjusting for the acquisition of IPC Group, a major British magazine publisher, and other acquisitions, the year-ago revenues were $9.61 billion, meaning that revenues in the current quarter grew 10 percent.

Last week the company reshuffled its top management ranks, replacing operating chief Pittman, a former chief of America Online, with two veteran media executives from the Time Warner side of the company. The shake-up, which had been rumored for some time, was announced the same day The Washington Post story about the accounting questions was published.

Don Logan, the head of magazine giant Time Inc., will lead a "media and communications" division that will include AOL, Time Inc. and Time Warner Cable, the nation's No. 2 cable TV operator. Jeff Bewkes, the chairman of HBO, will lead an "entertainment and networks" group, with the Warner Bros. movie studio, Warner Music, HBO, The WB and the Turner Networks cable channels such as CNN.

In the first quarter of 2002, AOL Time Warner reported the largest quarterly loss for a company in the history of U.S. business as the company took a massive $54.24 billion write-off because of a sharp decline in its stock price.

For the first six months of the year, AOL Time Warner had a net loss of $53.85 billion, including which includes the write-down it announced in the first quarter, versus a loss of $2.1 billion in the comparable period a year ago.

Excluding the write-down and other one-time factors and also adjusting for acquisitions, six-month earnings were $393 million versus $571 million in the same period a year ago.

First-half revenues were $20.34 billion versus $19.04 billion. and AOL have a news content and business partnership.