Report: WorldCom Deal At Heart of AOL Inquiry

Advertising-for-bandwidth deals between AOL Time Warner and WorldCom comprised at least a part of the revenue now under accounting scrutiny at the New York-based media giant, according to a report in the Washington Post.

Last week, AOL said in Securities and Exchange Commission filings that it discovered that it may have improperly accounted for as much as $49 million in advertising and commerce revenue booked by its America Online unit. The accounting problems, which AOL said it uncovered as it was preparing to have its executives certify its past results, involved three separate marketing deals over six quarters, beginning in March, 2000.

At the time of the filing, AOL did not disclose the advertisers involved, and said it was investigating the matter. The SEC, as well as the Justice Department, are also undertaking inquiries into the conglomerate’s accounting practices.

The Post‘s sources indicated that the deal centered on AOL’s purchase of Internet capacity from Fairfax, Va.-based UUNet, a unit of WorldCom. In exchange, WorldCom agreed to a multi-year advertising deal on America Online.

But the problem lies in whether the deal was a “round-trip” or “back-to-back” transaction, phrases typically used to describe a series of illicit sales and purchasing deals between two companies which allows each to book sales revenue. In such agreements, one company sells to another while buying goods or services at the same price. While revenue from the transaction can be written down by each partner, there is no net gain for either.

The Post said sources had indicated that one employee’s concern over the arrangement spurred the company’s internal investigation, and contributed to the departure of AOL Time Warner executive David Colburn, which the paper reported in July.

The paper also said AOL declined to confirm whether WorldCom was a subject of AOL’s internal investigation.

In its SEC filing, the company said revenues recorded over the past six quarters in connection with the transactions in question were $12.7 million, $5.3 million, $5.3 million, $5.3 million, $11.8 million and $8.5 million, respectively.

“The company is continuing its review of these and other advertising transactions at the AOL division,” it said in the filing. “When the company has completed this review, it will determine whether its accounting for these transactions was inappropriate and, if so, what action, if any, is appropriate with respect to its reported financial results.”

WorldCom, of course, is already facing SEC charges of defrauding investors after disclosing that improper accounting would require it to restate more than $7 billion in earnings over past years.