The United States Justice Department has opened an investigation into accounting practices at AOL Time Warner, delivering another blow to the world’s largest media company.
Federal prosecutors in Virginia, where the company’s America Online Internet business is based, are working alongside financial regulators to investigate claims that it inflated revenues during 2000 and 2001. The Justice Department has subpoena powers and the inquiry could lead to criminal charges.
Shares in America Online were another 7% lower at $1,69 in midday trading on Wednesday. A year ago, the shares were trading at $44,50.
Allegations have been levelled at the company, suggesting it used aggressive accounting to prop up its share price during the takeover of Time Warner. The Securities and Exchange Commission (SEC) began scrutinising the company last week following a report in The Washington Post.
A statement from AOL confirmed that the company has been notified of an investigation by the Justice Department but it tried to play down the significance. ”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 statement said. ”As we said last week we are cooperating 100% with the SEC, and we will cooperate with the Justice Department as well.”
It added: ”Most importantly, our accounting is appropriate and in accordance with generally accepted accounting principles and our outside auditors, Ernst & Young, have repeatedly confirmed that.”
The report in The Washington Post highlighted a series of unusual accounting methods employed by America Online. It alleged that, among other things, the company had booked revenue from advertising sold for online auctioneer eBay and renegotiated long-term contracts to recognise revenue more quickly.
The Justice Department and the SEC are under severe pressure to show that they are acting on the corporate scandals that have rattled Wall Street and are now threatening to damage the popularity of the Bush administration. President George W Bush on Tuesday signed a far-reaching corporate reform Bill that introduces tougher penalties for fraudsters.
There was also speculation this week that AOL Time Warner had lined up a replacement for Bob Pittman at the helm of the struggling online business. His replacement is said to be Jonathan Miller, a former senior executive of Barry Diller’s USA Interactive. America Online declined to comment.
Whoever gets the job will have a tough task. America Online had promised to ”super charge” the growth of the old media world of Time Warner when the merger was announced. Instead, the Internet business has become a drag on the group. Online advertising has collapsed and subscriber growth is faltering.
Revenue at the unit fell from $2,33-billion to $2,27-billion. It added just 492 000 subscribers during the quarter, less than half analysts’ expectations, and there is increasing pressure on chairperson Steve Case to quit. — (C) Guardian Newspapers