AOL to Pay $3.5 Million to Settle SEC Suit on Expenses

America Online Inc. has agreed to pay a $3.5-million fine to settle federal allegations it violated financial reporting rules by counting advertising costs as assets, the Securities and Exchange Commission said Monday.

The advertising costs in question included AOL’s well-known practice of flooding the mail with computer disks and a special offer to solicit new customers.

The expenses totaled about $385 million by Sept. 30, 1996. The SEC said AOL should have reported those costs as expenses rather than assets on its balance sheets.

If not for the improper accounting, the world’s biggest Internet services company would have shown a net loss rather than profit for six of eight quarters in its fiscal years beginning Oct. 1, 1994, and Oct. 1, 1995, the SEC said.

AOL said that it will restate its financial results from 1995 to 1997 to reflect the change. The company noted that it had stopped engaging in the accounting practices in question more than 3 1/2 years ago.

Accounting rules do not allow a company to count direct-response advertising costs as assets unless it can show that future revenues resulting from the advertising will exceed its costs, the SEC said.

The SEC said AOL, whose customer base was growing, did not have sufficient evidence to assume that its ad costs would be adequately recovered by new business.

AOL neither admitted to nor denied the allegations in settling the case, a civil lawsuit filed by the SEC in federal court in Washington. The SEC said it was the first time it had taken an enforcement action against a publicly owned company for improperly reporting on advertising costs from soliciting new customers.