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AOL: Under scrutiny, under fire

On the same day Adelphia's Rigases were arrested and charged with business fraud last week, AOL Time Warner acknowledged that the Securities and Exchange Commission had begun a "fact-finding inquiry" into the company's accounting practices. The company's accountant is Ernst & Young.

CEO Richard Parsons confirmed the SEC inquiry in a teleconference with investors and analysts after the markets closed last Wednesday. On Thursday, the company's stock was hammered by Wall Street, falling as low as $8.70, or more than 80% off its 52-week high of $47.25. By midday trading Friday, it had recovered to $10.55 but was still down more than 10% for the week.

Word of the investigation followed a series of Washington Post
stories highlighting the way AOL accounted for some advertising sales in 2000-01. It's the second investigation into AOL accounting practices in five years. The SEC investigated AOL's accounting practices in 1997 (prior to the merger with Time Warner), and AOL signed a cease-and-desist order vowing not to violate SEC rules.

Several analysts downgraded their ratings on AOL Time Warner because of the investigation. Merrill Lynch's Jessica Reif Cohen also reduced her estimates for 2002 pretax earnings: "We are concerned with the uncertainty an investigation such as this creates."

Parsons said the company will "cooperate fully" with the inquiry. "I am quite confident that we have the right processes, controls ... to assure you the highest standards of integrity of financial accounting and reporting."

He also said that he had ordered Ernst & Young to "re-review" all the transactions raised in the Post
stories and that the auditor said they had been accounted for and disclosed in ways that were "appropriate."