According to the SEC, the Internet and media giant improperly reported most of the costs of acquiring new subscribers--such as the expense of sending computer disks to potential customers--as an asset.
As a result, the SEC said AOL posted a profit for six of eight quarters in 1995 and 1996 but would have recorded a loss if the company followed recommended accounting practices.
"This action reflects the commission's close scrutiny of accounting practices in the technology industry to make certain that the financial disclosure of companies in this area reflect present reality, not hopes about the future," SEC director of enforcement Richard H. Walker said in a statement.
Without admitting guilt, AOL agreed to pay a $3.5 million fine and to restate earnings for fiscal years 1995, 1996 and 1997. AOL said it discontinued the practice more than three years ago.
The case marked the first time the SEC has brought an enforcement action against a public company for improper capitalization of advertising costs associated with soliciting new customers.
According to a release by the SEC, "the advertising costs improperly capitalized on AOL's balance sheet reached approximately $385 million by Sept. 30, 1996, when AOL wrote them off in their entirety."
Accounting rules prohibit a company from capitalizing "direct response" costs "unless it can demonstrate from its past experience that future net revenues from customers obtained through the advertising will exceed the amount of capitalized costs."
AOL was not able to make that case because its business was changing rapidly, and the response from customers to the ad campaign was unpredictable.