AOL pays $3.5m SEC penalty

Internet giant AOL has agreed to pay a $3.5m civil penalty after a US watchdog brought civil and administrative charges against the company for financial reporting violations.

The company has agreed the penalty with the US Securities and Exchange Commission (SEC) in relation to accounting for $385m of advertising costs, and has also consented to an administrative order prohibiting it from violating certain federal securities laws in the future.

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

The penalty represents the first time the Commission has brought enforcement action against a public company for improper capitalisation of advertising costs associated with winning new customers.

Richard H Walker, SEC director of enforcement, 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.”

The SEC found that between 1995 and 1996 AOL capitalised most of the costs of acquiring new subscribers – including the expense 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 been able to report profits during the key period.

In the US, a public company cannot capitalise direct response advertising costs unless it can demonstrate from its past experience that future net revenues from clients will exceed the capitalised costs.

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