Wednesday, December 15, 2004
An article in the New York Times (Dec. 15) states that Time Warner is preparing to announce a settlement in a long-running SEC and Department of Justice investigation into accounting issues at its American Online unit (AOL), including a $400 million transaction between AOL and Bertelsmann in 2000. The accounting issues involve (always exciting) revenue recognition in what appear to have been round-trip transactions, something that has troubled the energy and food distribution industries, among others. According to the article:
Time Warner is expected to announce a settlement with the Justice Department in its investigation of advertising deals between America Online and smaller Internet companies that may have allowed America Online to exaggerate its growth, an official close to the case said yesterday. The announcement could come as early as today.
The company may also announce a tentative agreement with the enforcement division of the Securities and Exchange Commission, which is conducting a separate investigation into accounting irregularities at America Online, the official said. Time Warner is expected to pay $500 million to $600 million to settle all civil and criminal accusations with the two agencies.
The fine will be divided between the DOJ ($200 million) and the SEC ($300+ million). The SEC investigation has had a particularly negative effect on the company because it called into question the reliability of its financial statements, making it impossible for Time Warner to issue debt and equity securities--a must for any company hoping to engage in acquisitions, for which Time Warner is famous. Indeed, it likely still rues the day it decided to accept the AOL offer in 1999, even having dropped that moniker from its name a couple years ago. (ph)
From the Time Warner press release, here are the undertakings by the company for the DOJ and SEC settlements:
DOJ Settlement (criminal complaint, dismissed after two years if the company complies with the following):
- Accept responsibility for the conduct of certain AOL employees with respect to the PurchasePro transactions;
- Pay a penalty of $60 million and establish a $150 million fund, which the Company may use to settle any related shareholder or securities litigation;
- Cooperate fully with the DOJ or any other federal criminal law enforcement agency regarding the transactions covered by the settlement; and
- Retain and cooperate with an independent monitor, who will review the effectiveness of AOL’s internal controls, including those related to the accounting for advertising and related transactions.
SEC Settlement (no admission or denial of liability):
- Pay a $300 million penalty, which the SEC staff will request be used for a Fair Fund, as authorized under the Sarbanes-Oxley Act;
- Adjust its accounting for the $400 million in advertising revenues recognized primarily in 2001 and 2002 in transactions with Bertelsmann, A.G. and for transactions with two other AOL customers that resulted in approximately $30 million of advertising revenue recognized in 2001;
- Adjust its accounting for the Company’s investment in and consolidation of AOL Europe, consistent with the Company’s announcement in November 2004; and
- Agree to the appointment of an independent examiner, who – within 180 days after starting work – will review the Company’s historical accounting for a limited number of transactions entered into between 1999 and 2002, principally involving online advertising revenue. Depending on the examiner’s conclusions, a further restatement might be necessary.