and now




The market thinks not. Despite a

Washington Post

article Thursday that claims AOL used "unconventional transactions" to boost revenue over the past two years or so, the media giant's stock hasn't cratered. Thursday afternoon, it was down only 36 cents, or 2.75%, to $12.75.

But don't assume that's because the piece is poor and its findings insignificant. In fact, the


article is one of the best-sourced and well-researched reports to emerge from the recent string of corporate scandals. And though the apparent revenue gains from the allegedly aggressive accounting maneuvers are numerically small, they tell a larger tale and will almost certainly spark a

Securities and Exchange Commission

investigation of the company, which could inhibit any capital-raising attempts or restructurings it may want to do to shore up its balance sheet.

To Earthward

In other words, Thursday's trading does not mark a bottom for AOL's battered stock. Separately Thursday,

The Wall Street Journal

reported that Robert Pittman, the company's chief operating officer and an executive heavily featured in the


accounting story, was expected to resign from the company imminently.

AOL didn't return a call seeking comment. In a statement printed by the Post, AOL said the accounting described in the piece was appropriate and approved by its auditors, Ernst & Young. The


will print a second story on AOL Friday.

There can be little doubt that the


story's allegations are accurate. It contains damaging insights from two named ex-employees who held senior positions, and cites company documents. Getting whistleblowers to go on the record is always tough, so it can be assumed that they were sure of what they said. The piece doesn't say why Robert O'Connor, one of theon-the-record sources, resigned in March, but it does say he believed AOL's accounting could lead to an SEC inquiry. The other identified insider, James Patti, said he was laid off one week after he complained to management about what he called "questionable deals." AOL declined to comment on theexecutives' departures, according to the




story says that maneuvers were carried out to boost earnings and hit revenue targets at a time when advertising revenue from dot-coms was beginning to slump. In meetings held this year and last year, O'Connor told Pittman he was concerned about the aggressive manner in which revenue was being booked, according to the


. The newspaper focused on deals that allegedly produced $270 million of revenue, a relatively small sum for a company showing annual revenue of $40 billion. However, though sales were buoyant, AOL was under huge pressure to make its numbers.

And the demand for revenue tipped into farce in the third quarter of 2000, when AOL allegedly ran dog-racing ads on its site for a British entertainment company without the firm's knowledge. AOL looks weakest in the allegation that it booked too much revenue from a deal with


(EBAY) - Get Report


AOL was acting as ad-rep and finding firms to advertise on eBay's site, a service for which it took a commission. But the article claims AOL was booking the payments for the ads as revenue, even though eBay was to receive the bulk of them. Apparently, there would be little dispute overthe eBay revenue if AOL could show that it had borne the full risk of advertisers failing to pay. However, AOL said it wasn't "contractually obligated in this way," the



The AOL bulls will find it very hard to deny the details of thisarticle, due to its thoroughness. But they will argue that $270 million is peanuts and say that Pittman's likely departure is a sign that the company is cleaning house and allowing tried and trusted Time Warner execs to take over. Not so fast. More ugly revelations could appear. Remember that this is the


time AOL's accounting has been seriously criticized. The first controversy was over the method it used to book certain marketing expenses. It will be no surprise, then, if we get a third wave of nasty news.

But how would it get out, the real cynics will ask? Well, the


article is likely to prompt the SEC investigation that O'Connor had once feared. When big-name newspapers come out with stories like this, the feds aren't far behind. And these days, that also means the Justice Department. This time, the law enforcement agencies know exactly whom to contact and will find at least two willing witnesses in O'Connor and Patti. And any probe is likely to go well beyond the deals highlighted bythe


, because this is a company that has faced legerdemain allegations before.

Just look at the wide sweep of the WorldCom inquiry, which was started well before the company revealed it had buried nearly $4 billion of expenses. And if Pittman is out, he has no loyalty to AOL and could conceivably decide to work with any probe aimed at uncovering other skeletons.

An SEC inquiry could undermine any efforts AOL's CEO Richard Parsons is taking to avoid paying billions of dollars to buy back a stake in various Time Warner assets that is currently held by


(T) - Get Report

cable unit, which is in the process of being sold to




AT&T's stake is worth about $9 billion to $10 billion. Using debt to finance such a sum would had a considerable burden to AOL's balance sheet and would take its debt up to $38 billion from the current $28 billion, a jump that would almost certainly lead to a downgrade of AOL's credit rating and exhaust much of the company's available bank lines.

Some analysts have mentioned the possibility that AOL could wiggle out of this bind by spinning off its Time Warner cable assets, shedding debt at the same time. But floating anything on the market would be troublesome with a federal investigation underway.

That $270 million may end up costing AOL a lot more.