AOL pays $3.5m penalty over accounting errors

The internet giant agreed the penalty with the US Securities and Exchange Commission in relation to accounting for $385m of advertising costs.

AOL has agreed the penalty and has also consented to administrative order prohibiting it from violating certain federal securities laws in the future.

According to the Commission,instead of profits for six out of eight between 1995 and 1996, AOL should actually have reported losses.But AOL has neither admitted nor denied the charges brought against it.

However, this is the first time the Commission has brought enforcement action against a public company for improper capitalisation of advertising costs associated with winning new customers.

SEC director of enforcement, Richard H Walker, said: 'This action reflects the commission's close scrutiny of accounting practices in the technology industry to make certain that the financial disclosure of companies in this area reflect present reality, not hopes about the future.'

During 1995 to 1996 the SEC found that AOL capitalised most of the costs of acquiring new subscribers - including the cost of sending computer disks to potential customers - and reported them as an asset on its balance sheet.

If the costs had been listed as expenses AOL would have had to report losses instead of profits during the key period.

In the USA a company cannot capitalize 'direct response advertising costs' unless it can demonstrate' from its past experience, that future net revenues from clients will exceed the capitalized cost.