Time Warner faces SEC action over accounting practices

Link: SEC to probe accounts at AOL Time Warner

Reports in The Washington Post quoted sources close to the case as saying that the move was expected by early summer, two years after investigations began.

Concerns focus on the 2001 merger between Time Warner and AOL. The SEC has been investigating the possibility that investors were misled by the false inflation of advertising revenue.

The most serious question mark hangs over the transaction that saw AOL Time Warner buy a 49% stake in AOL’s European operations from the German company Bertelsmann.

There is a disagreement between the two sides of the deal over whether a $400m discount in the purchase price was agreed by Bertelsmann in exchange for advertising on AOL between 2001 and 2002. In the period, AOL booked $400m in advertising revenue from the German company.

But Bertelsmann has told the SEC that the discount was part of a deal struck for the purchase to be made in cash instead of stock, rather than as part of an advertising deal. The SEC is reported to favour this account over Time Warner’s.

If the formal allegation – known as a Wells notice – goes ahead, the company will have an opportunity to put its case. However, the likely outcome would be either a settlement or sanctions against it.

Ernst & Young , as external auditor, could also face embarrassment for approving AOL Time Warner’s decision to book the $400m as advertising revenue.