AOL probe centres on PurchasePro deal
The Securities and Exchange Commission is looking into the particulars of dealings between AOL Time Warner Inc and PurchasePro.com Inc, according to reports Friday. The Wall Street Journal quoted sources saying the SEC has contacted Las Vegas-based PurchasePro for documents as part of a wider probe of AOL's accounting practices.
The move, not entirely unexpected, was described as an "expansion" of the investigation, although the definition is debatable. AOL said the SEC is just doing what one would expect when investigating a company's business relationships. Deals with PurchasePro were among those listed in the Washington Post expose that kicked off the probe.
According to the Post's investigation three weeks ago, AOL used unconventional methods to account for some deals when its ad revenue started to slide late 2000. One deal at that time had AOL paying $9.5m cash for $30m in PurchasePro stock warrants, and accounting for the $20.5m difference as ad and e-commerce revenue, the paper said.
AOL CEO Richard Parsons confirmed two weeks ago that the SEC is looking into its books, but the company is happy with what the Post called "unconventional" accounting. The accounts accord to generally accepted accounting principles, and were signed off by auditor Ernst & Young, AOL says.
PurchasePro and AOL got together in early 2000, shortly before the bubble burst. The Vegas company was to provide its business-to-business marketplace software to AOL to create trading arenas on its Netscape, AOL and Compuserve web properties. The companies said they would share ad and transaction revenue, and that AOL would be able to earn performance-based warrants.
The firms broke off their relationship in September 2001, with AOL paying off PurchasePro to the tune of $1.5m, eliminating $20.7m it would have otherwise been paid. The companies ceased their revenue sharing and parted ways, except to say that they would "work together to identify opportunities that will mutually benefit both corporations."
While PurchasePro's own accounts are not believed to be in question in this particular inquiriy, the company does have the dubious honor of being a firm that Arthur Andersen LLP dumped. The two companies had disagreements about accounting that were subsequently resolved.
According to regulatory filings, the foundering accounting company, which signed off Enron Corp's books, resigned as PurchasePro's independent auditor late last year following "a disagreement with prior members of the Company's management regarding proposed recognition of revenue derived from reseller agreements between the Company and certain of its business partners."
The company, which went public when B2B was the buzzword du jour, has had more than its fair share of hassles since the bubble burst. In 2001, it recorded a loss of $272.2m on revenue that fell 40% to $38.8m, lost top level executives and went from about 600 employees to about 125 employees in two rounds of layoffs five months apart.