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AOL cleans up its accounting act

The online giant decides to take its auditing into its own hands, a move that analysts say couldn't come at a better time.

America Online, which has a history of controversial accounting practices, will now have an internal auditing department, a move that analysts say couldn't come at a better time.

The online giant announced yesterday that it had promoted two executives to beef up its accounting departing. Jim MacGuidwin was named vice president, controller, and chief accounting and budget officer; Tom Pierno was appointed to the role of vice president of internal audits. Both positions will report to J. Michael Kelly, who was tapped to be AOL's chief financial officer in June.

The move comes during a week of considerable financial activity for the company. On Monday, AOL completed the reporting of its earnings results for the fourth quarter of 1998 after it withheld disclosure of its net income when it originally reported its quarterly earnings on August 4. The delay was the result of two-month-long negotiations between AOL and the SEC regarding charges related to its acquisitions of Mirabilis and NetChannel.

Earlier this week, SEC chairman Arthur Levitt said in an address that too many companies are taking disingenuous short cuts in reporting their earnings results. Levitt expressed concern over, among other things, the practice implemented by many high-tech companies of writing off the "in-process research and development costs" of companies they acquire. This practice was at the heart of the negotiations between AOL and federal regulators.

Though the appointments came shortly after the SEC critique, AOL and analysts said the events were unrelated. Ernst & Young will remain AOL's external auditors despite the formation of the internal department under Kelly.

"It brings together the planning and accounting functions under one director," said AOL spokeswoman Kathy McKiernan.

AOL had wanted to write off a significant portion of the charges of more than $300 million it incurred as a result of its purchase of Mirabilis and NetChannel, but ended up writing off only 22 percent to placate the SEC.

The appointment and creation of an internal auditing body at AOL may signal a new focus on financial accountability at the company, even though it appears to come only after AOL came under fire in the past.

"AOL's striving mightily in trying to shed itself of some of the images it's picked up in the past, and trying to portray itself as a squeaky-clean paragon of rectitude," said David Simons, managing director at Digital Video Investments in New York.

Questionable practices are hardly unique to AOL, however, and many analysts welcomed the company's effort to take the lead in improving corporate accountability through its recent appointments.

"The company is trying to be more responsible and responsive of their accounting practices," said Abhishek Gami, an analyst at William Blair & Company. "Any mature company has to have those positions."