Is it ethical to choose aggressive accounting practices to advance a company’s business? During the 1990s, America Online (AOL), the largest Internet service provider in the United States, was one of the hottest stocks on Wall Street. After its initial stock offering in 1992, AOL’s stock price shot up by several thousand percent.
Accounting is very important to a company like AOL because earnings enable it to sell shares of stock and raise more cash to fund its growth. In its early years, AOL was one of the most aggressive companies in its choice of accounting principles. AOL’s strategy called for building the largest customer base in the industry. Consequently, it spent many millions of dollars each year marketing its services to new customers. Such costs are usually recognized as operating expenses in the year in which they are incurred. However, AOL treated these costs as long-term assets, called “deferred subscriber acquisition costs,” and expensed them over several years, because it said the average customer was going to stay with the company for three years or more. The company also recorded research and development costs as “product development costs” and amortized them over five years. Both of these practices are justifiable theoretically, but they are not common practice. If the standard, more conservative practice had been followed, the company would have had a net loss in every year it has been in business.²³ This result would have greatly limited AOL’s ability to raise money and grow. Form groups to discuss this case. Determine whether your group thinks AOL was justified in adopting the “aggressive” accounting techniques. What was “aggressive” about these techniques? What was management’s rationale for adopting the accounting policies that it did? What could go wrong with such a plan? How would you evaluate the ethics of AOL’s actions? Who benefits from the actions? Who is harmed by these actions? Be prepared to support your conclusions in class.