By David A. Vise Washington Post Staff Writer
Wednesday, July 28, 2004; 1:48 PM
An on-going federal probe into America Online's financial practices has uncovered potential problems related to the AOL Europe division, prompting Time Warner Inc. to launch a fresh review of its accounting for the unit that could lead to a restatement of earnings, AOL's parent, Time Warner Inc., reported today.
Time Warner said new information it has learned has prompted it to launch an internal inquiry into the way it accounted for AOL Europe prior to January 2002. The revelations come amid on-going federal probes into AOL's reporting of subscriber numbers and financial results before and after its merger with Time Warner.
"The company has recently begun a review of the accounting related to the consolidation of, and equity accounting for, its interest in AOL Europe," Time Warner disclosed today. "It is possible that further restatement of the company's financial statements may be necessary."
The new problems at AOL were revealed even as a federal probe of Time Warner and America Online appears to be dragging on, rather than being wrapped up swiftly, as the company at one time had hoped. In part, that is because Time Warner remains at odds with the SEC over a variety of issues, most notably its accounting for $400 million paid by German media giant Bertelsmann AG to AOL that was booked as ad revenue. The Securities and Exchange Commission is holding fast to its position that a portion of the Bertelsmann payment ought to have been reflected as a reduction of the purchase price AOL paid for Bertelsmann's ownership stake in AOL Europe.
Time Warner spokesman Ed Adler declined to comment on the matter.
The newly launched inquiry into AOL Europe is unrelated to the Bertelsmann deal. AOL Europe accounts for only a small portion of America Online's revenue and profit.
As long as the Bertelsmann dispute continues, Time Warner said it is unlikely that the SEC would approve any new stock issues, including a partial spin-off of its Time Warner Cable division.
On the bright side, AOL reported that ad sales surged 23 percent in the second quarter, the first year-over-year ad revenue increase in almost three years. That jump pleased Wall Street analysts, who had been waiting to see whether America Online's ad revenue would begin to benefit more from the increase in overall spending on Internet advertising.
The $42 million increase in AOL ad sales was driven by higher revenue from its partnership with Google Inc., the nation's leading search engine. About 75 percent of the increase, or $31 million of the higher ad revenue, came from ad sales linked to search.
AOL recently announced the $435 million acquisition of Advertising.com. The deal is designed to help the Dulles-based online service, which remains the biggest Internet access provider in the nation, garner an even larger chunk of online advertising dollars.