Company: AOL Inc.

Industry:

AOL Inc. is a leading multinational mass media corporation headquartered in New York City, which is committed to continuously developing, growing, and investing in brands and web sites.

Auditor:

Ernst & Young

GAAP/Audit Issue: July 2002 – AOL Time Warner – Recognition of Revenue from Barter Deals |

As AOL dominated the internet scene between the mid-1990s to 1999, the internet advertising became a hit and AOL’s stock price rose extremely. However, in the year 2000, the market trading went down due to numerous accounting scandals which impacted the companies that were into internet advertising contracts with AOL TW, this brought a loss of advertising revenues. To sustain the strength of AOL TW’s stock prices, AOL’s management resorted to accounting manipulations by recognizing off-book revenues, such as:

(a) Recording of pre-booked advertising contracts were made twice, even though they were already recognized as pre-booked revenues; (b) Assigning overvalued amounts to advertising contracts as ways to inflate revenues; and, (c) Dollar values of advertising deals entered into as barter trades with other companies were recognized as legitimate sales.

The barter trades were actually entered into for the purpose of making AOL’s advertising offers look lucrative by faking trade deals. Customers were given free advertisements just to make it appear that they closed advertising contract deals with AOL Time Warner. The dollar values of the barter deals amounted to as much as $30 million. This of course reflected large revenues and boosted stock prices.

The SEC finally got wind of these shady advertising revenues and accounting manipulations, and the ensuing fraud investigations subsequently caused AOL Time Warner’s stock prices to drop to $8.70 per share or as much as 85% in reduction of its value on the