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American Morning

Justice Department Launches Preliminary Investigation Into Accounting Practices at AOL-Time Warner

Aired August 01, 2002 - 09:37   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
BILL HEMMER, CNN ANCHOR: We want to turn our attention now to another story right now coming under -- another company rather, coming under Justice Department scrutiny. This one hits rather close to home. The Justice Department has launched a preliminary investigation into the accounting practices at CNN's parent company, AOL Time Warner. The SEC has already announced their own investigation. So we asked the question today, what does this all mean?

From Washington, Kara Swisher, "Wall Street Journal" columnist, and also author of the book "AOL.com."

Kara, good morning. How are you?

KARA SWISHER, "WALL STREET JOURNAL": Good morning. How are you doing?

HEMMER: Good morning. How are you doing?

I'm doing OK, thank you. The SEC is one thing, the Justice Department is something else.

SWISHER: Absolutely. Well, the Justice Department has a lot more powers of subpoena. They can make criminal allegations, they can do -- they have a lot more power. And of course it's what they're looking into. They often work in tandem, the SEC and the Justice Department, so it's sort of one, two punch, and this is its number two punch.

HEMMER: It doesn't mean they broke the law yet.

(CROSSTALK)

SWISHER: No, not all, no. Until they bring charges, that's really -- until they bring charges or the SEC levies fines, there's nothing there yet, but they're looking into things, and that's a problem for AOL-Time Warner.

HEMMER: Here's what I want to know, Kara, given the economic and political climate in Washington, just the width of a question makes eyebrows rise. Could AOL be a victim of this climate?

SWISHER: I don't know if you would say victim, there's clearly some accounting practices that are in question, and of course the atmosphere right now is poisonous, because it's got political pressures, you've got economic pressures, you've got some very serious violations from some companies. And so everybody is being put under scrutiny, and there's been some violations by other companies, and so it's clear that a lot of the system has to be reformed because there was a little too much aggressive accounting done during sort of the dot.com era, and AOL is -- was one of the companies that was doing some of that accounting.

HEMMER: You call it aggressive. I think other people have used the word "unconventional."

SWISHER: Unconventional -- I'm not sure what that means.

HEMMER: I was actually going to ask you to define it here. This is a huge company.

SWISHER: Right.

HEMMER: And just to target it a little bit for us and put into plainspeak, where is the investigation going?

SWISHER: Plainspeak, unconventional. The investigation is looking at the AOL online unit, which two years ago, bought Time Warner really. And now, of course, recently there has been some management upheaval, and now the Time Warner side is in charge of the company.

Unconventional means booking revenues that maybe weren't revenues, turning other revenues -- advertising revenues into something else. The allegations are that they're trying to boost the financial outlook of the company so that it could look better.

HEMMER: Let me ask you a very shallow question here, because I don't know the answer.

If AOL-Time Warner is this mammoth company and you have questions about one division, is the entire company impacted after that?

SWISHER: Well, yes. Because the Justice Department could start looking into other parts of the company. I mean, there's no -- the problem with investigators, is that they might find something, you know, and I think once these investigations start, the real problem has to do with management turmoil. I mean, the managers have to start focusing in on this and not running the business. And obviously in this very difficult economic time, you should be focusing in on the business and how to improve. For example, the online unit has had problems with adverting revenue and subscriptions going down. Well someone should pay attention to that, and instead, they'll be paying attention to the investigators.

HEMMER: We should point out, you were critical of the merger from the very beginning, were you not?

SWISHER: No, actually. I think -- there's a thing I like to say. There's a difference between a bad deal and a bad strategy. I think that Time Warner did need some sort of digital strategy, because the dot.com debacle, these digital technologies are here to stay, and they're going to impact every business of every media company, including Dow Jones, whom I work for. So think you need a digital strategy. I just think it's very clear that the price was bad and the deal was bad, you know, as evidenced by the fact that Time Warner's stock is down in the basement right now. It's at very dangerously low levels actually.

HEMMER: Carol, I just want to shift our focus here for a little bit. I'm less than a minute away here, and our time is running out here. Today's August 1st. There's a deadline in two weeks from now, August 14th, when I think about 1,000 CEOs have to sign off on bottom line for their company's accounting.

As far as I know, there's only about a dozen companies that come out and said, yes, we're going to do it, and we're on board here. Is there going to be a problem meeting this deadline. And if so, what's the impact of that?

SWISHER: That's -- I was reading a story about this, this morning. I think there are 16 CEOs that have signed, and there's 900 and whatever left to sign. I think it will really be interested, and actually interesting if Dick Parson signs, who is the CEO of AOL-Time Warner. Can he sign in good faith if he doesn't really know all the accounting problems that might occur. And I think it will be interesting to see who does and who doesn't. And if you don't do it, what impact that will have on your stock, because you know, just the very fact that you're not signing means your suspect.

HEMMER: And if that's the case, Kara, it's quite possible we could see a lot of turmoil in the couple of weeks ahead, throughout the month of August.

SWISHER: Absolutely. Oh yes, I think everybody is going to be looking at these things with big scrutiny.

HEMMER: We're out of time. Thank you, Kara Swisher in Washington. Thank you much.

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