AOL shares hit by SEC concerns
Published: 26 Jul 2002 10:31 BST
AOL Time Warner shares fell sharply on Thursday as worries of a Securities and Exchange Commission inquiry overshadowed the company's second-quarter profit.
In a bevy of research notes, Wall Street analysts worried about the outcome of the SEC probe and panned the sluggish performance of the corporation's America Online unit. Goldman Sachs removed AOL Time Warner shares from its "recommended list," and other brokerages downgraded the stock.
AOL Time Warner shares closed down were down $1.76, or 18 percent, to $9.64.
Immediately following its earnings announcement on Wednesday, AOL Time Warner said that the SEC would be looking into its accounting practices in reaction to a critical newspaper report last week.
"After the (Washington Post) articles came out, the SEC informed us they are conducting a fact-finding inquiry," chief executive Richard Parsons said, referring to a report in the newspaper that the AOL division boosted its online advertising earnings through questionable deals amid mounting indications that the company would suffer a collapse in ad revenue.
AOL Time Warner said its auditor, Ernst & Young, re-reviewed all the transactions in the Washington Post article and confirmed in writing that all transactions and disclosures questioned in the article were in accordance with accounting standards.
Analysts said the SEC inquiry could take several turns:
- The SEC could quickly review AOL's accounting and conclude the company's accounting treatment was appropriate.
- It could expand the inquiry to other AOL Time Warner divisions.
- Or the SEC could force the company to restate its historical results.
"In the current environment where rules can shift and political pressures run high, there may be other outcomes of the SEC's probe that could be impossible to anticipate," Salomon Smith Barney analyst Lanny Baker said in a research note. Baker downgraded AOL shares to "neutral" from "buy."
Some analysts held out hopes that the SEC probe could give AOL Time Warner a clean bill of accounting health but noted that an investigation could take awhile. "One source we spoke to suggested that inquiries can take between three to six months," Bear Stearns analyst Lee Katz said.
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