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America Online


agreed Monday to pay $3.5 million to settle charges of accounting violations brought by the

Securities and Exchange Commission


In agreeing to pay the civil penalty, the world's largest provider of online services neither admitted nor denied charges that it violated financial reporting standards when accounting for advertising costs, which totaled as much as $385 million by Sept. 30, 1996. AOL wrote off those costs in a one-time charge taken in the first quarter of fiscal 1997.

AOL will restate its historical results from 1995 to 1997. The Dulles, Va.-based company also consented to an administrative order that prohibits it from violating certain federal securities laws in the future. Should AOL violate these laws in the future, it would suffer increased civil penalties, according to Richard Sauer, a spokesman for the SEC.

The SEC found that in fiscal years 1995 and 1996 AOL violated two provisions of federal securities laws -- the reporting provision and the books and record provision -- by improperly accounting for advertising costs used to solicit new customers. In that time, AOL accounted for the costs of acquiring new subscribers, including the costs of sending computer disks to potential customers, by reporting those costs as an asset on its balance sheet, instead of expensing them as incurred, according to the SEC.

During those two years, AOL reported profits for six of eight quarters, rather than the losses it would have reported had the costs been accounted for properly.

According to the SEC's accounting rules, AOL did not demonstrate that future net revenue from customers obtained through advertising would exceed the amount of capitalized costs, a requirement when capitalizing "direct response advertising costs." The SEC determined that "AOL could not meet this requirement because the volatile and unstable nature of the Internet marketplace precluded reliable forecasts of future revenues."

In a statement, AOL said it discontinued the accounting practices in dispute in October 1996 after adopting an unlimited-use pricing plan. Though AOL will restate its results from 1995 to 1997, the settlement has no effect on results reported since fiscal 1997.

In Monday afternoon trading, shares of AOL were up 2 3/4, or 5%, to 58 1/8. (AOL closed up 2 7/8, or 5%, at 58 1/4.)