Aug 1, 2002 4 min read

By Seth Sutel AP Business Writer

NEW YORK (AP) – In the latest round of bad news for the world’s largest media company, the Justice Department is looking into accounting practices at AOL Time Warner Inc., which is already under investigation by federal securities regulators.

AOL Time Warner released a brief statement Wednesday defending its accounting and saying it was cooperating with the probe. The company didn’t say what kind of probe the Justice Department was conducting, and department officials declined to make any comment or say whether an investigation had been opened.

The inquiry comes amid a backdrop of deepening mistrust of corporate accounting as scandal after scandal has shaken investors’ confidence. President Bush, whose own actions as a corporate executive have been questioned, signed a bill cracking down on corporate fraud into law Tuesday but was immediately criticized for interpreting the law in a way that appeared to weaken it.

The involvement of the Justice Department in the AOL Time Warner probe raises the possibility that the investigation could move beyond a civil securities case and into a criminal proceeding, which would be far more serious for company. The investigation was first reported by USA Today.

“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 in the statement. Spokeswoman Tricia Primrose declined to elaborate.

Even if AOL Time Warner isn’t charged, the mere fact that its accounting is being scrutinized is hurting its already battered stock. AOL Time Warner’s shares fell sharply last week after it disclosed that the Securities and Exchange Commission was investigating how it accounted for several transactions at its America Online unit.

AOL Time Warner’s shares tumbled $1.13, or 9 percent, to $11.27 in heavy trading on the New York Stock Exchange Wednesday. The shares were already down sharply this year on concerns about the waning fortunes of its key America Online division and investors’ distrust of management.

The accounting probes come at an especially difficult time for AOL Time Warner. The company, created in a blockbuster merger announced in early 2000, ousted its No. 2 executive Robert Pittman earlier this month and badly needs to restore its reputation with investors.

Pittman, chief of America Online before the merger, announced his resignation on the same day that The Washington Post began publishing a series of articles detailing 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.

AOL has been in trouble for aggressive accounting in the past. In May 2000 the company agreed to pay a $3.5 million fine to settle SEC charges that it improperly accounted for costs to mail computer discs to potential customers.

While the transactions in question at AOL involve just $270 million, a relatively small amount for a company that booked $38 billion in revenues last year, the fact that the questions are being raised in a climate of deep skepticism of 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.

The Justice Department conducts both criminal and civil investigations, depending on what type of wrongdoing department officials suspect. Either type of investigation can evolve into criminal charges.

Robert Mintz, a former federal prosecutor, said it was normal for the Justice Department to join the SEC in the early stages of an investigation to determine whether the case should proceed as a criminal matter.

“If there’s any possibility of criminal wrongdoing, the government wouldn’t hesitate to turn it over to the U.S. Attorney’s office,” said Mintz, who now works as a white collar defense attorney in Newark, N.J. “I think within a couple weeks we’ll know.”