AOL is to pay $3.5 million to settle federal charges against it regarding allegations of serious errors in its accounts.

The Securities and Exchange Commission (SEC) claimed the ISP had improperly accounted for certain advertising costs in the mid-90s, and put them down as assets.

AOL decided to play it safe. It neither admitted nor denied the charges, but agreed to pay up. It also claimed to have abandoned the accounting practice around four years ago.

The SEC's move, which resulted in the biggest monetary scolding ever for a settlement that didn't involve fraud charges, was meant to keep the Web community on its toes. It said AOL should never have used the accounting method "because the volatile and unstable nature of the Internet marketplace precluded reliable forecasts of future revenues".

It added: "The broader point is to teach the message that we're paying very careful attention to what's going on in the accounting practices in the Internet business."

But the incident shouldn't relegate AOL to the ISP scrapheap. Its president Bob Pittman said the group, set to merge with Time Warner, expected combined sales of $40 billion in 2001. ®