EDITORIAL: The industry could suffer for AOL case

No-one should be surprised at the news that the wave of accounting investigations has crashed on media owner shores and that AOL Time Warner is being scrutinised for its own accounting practices. What seems to be becoming a US virus is perhaps easily caught by media companies struggling against the advertising downturn to make a brave show for investors. And, of all of them, AOL Time Warner is the media owner under the most pressure.

Earlier this year it announced the biggest loss ever recorded in US corporate history, with a quarterly net loss of £37.4 billion.

Perhaps it's also not surprising that AOL Time Warner's interesting accounting practices relate to its online business, where revenue has been even tougher to generate than in its traditional and established businesses. In its latest quarterly revenue statement, issued last week, quarterly revenue was up by 10 per cent to $10.58 billion, but commercial revenues in the online division were down 42 per cent.

Now articles in The Washington Post have alleged that AOL employed some unusual methods when it came to booking $270 million of online advertising deals both before and after the Time Warner merger. The Washington Post claims that, in seeking to maintain breakneck growth in online ad revenues, AOL converted legal disputes into ad deals; sold ads on behalf of eBay but booked them as AOL's own revenue; bartered ads for computer equipment with Sun Microsystems; and counted stock rights as commercial revenue in a deal with a company called PurchasePro.com.

AOL has said that the ad deals and the way they are accounted for are within accepted rules and many other media owners will be keen to agree. Indeed, the health of the wider industry hangs on the outcome of the investigation. If AOL Time Warner is found to be fudging any of its advertising revenues, that would drive further lack of confidence in an industry already reeling from a series of events undermining its credibility - from the Omnicom accounting investigation through to the fuss made in the UK by the ITVA over agencies accreditation and even, in the media sector, the sort of management mistakes which led to the collapse of ITV Digital.

In such a climate media and agency stocks have taken a real hit. If AOL Time Warner is found culpable the entire sector could be brought to its knees.

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