• Prepare a adjusted income statement for AOL, after taking out unusual items, purchased R&D, and adjusting the accruals for customer acquisition costs and product development costs. Ignore taxes
• Is there any evidence that AOL benefited from operating leverage? (use the adjusted numbers to determine whether AOL benefitted from operating leverage)
• Compare the inferences that you make from the original and adjusted statements
• If you were the partner in charge of the AOL audit and AOL pitched to you its request to capitalize the subscriber acquisition costs, how do you think you would have responded? What reasons would you have provided to say yes? To say no? How would your response have changed if AOL threatened to switch auditors for next year unless you agreed to proposal?
• In years 8 and beyond (until the merger with Time Warner), AOL was highly profitable on a conventional accounting basis. What does the AOL story tell you about the difficulty that accounting has with businesses that are driven by the internal development of intangible assets?
• Read the SEC charge in this link https://www.sec.gov/litigation/litreleases/lr-19147
• Look at the AOL TW financials for 2003 and 2002.What were the Dollar amounts of revenue generated by AOL in 2003 and in 2002from selling advertising to the outside world (i.e., not to AOL Time Warner affiliates).
• What does your answer to the prior question tell you about the strength and legitimacy of AOL's advertising business?