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1. The role of Joseph Ripp in the accounting fraud at AOL is one of whether a CFO who seemingly goes along with an accounting

1. The role of Joseph Ripp in the accounting fraud at AOL is one of whether a CFO who seemingly goes along with an accounting fraud and then is responsible for uncovering it should be viewed as a hero or villain. How should we view Joseph Ripp in this case: a participant in the fraud or an innocent bystander? A hero or a villain? Explain.

2. Two of the officers—J. Michael Kelly, the former CFO of AOL, and Mark Wovsaniker, former head of accounting policy—consented to the charges of the SEC that they misled the external auditors about the fraudulent transactions. What were the ethical responsibilities of Kelly and Wovsaniker in this matter in general, and specifically with respect to their relationship with the external auditors? Did they violate those standards?

3. Do you think the decision to reverse the charges against Wovsaniker because he did not have ultimate authority over the misleading financial statements was the "right" decision from an ethical perspective? Include in your discussion how that decision accords with the rules of conduct in the AICPA Code.

How does one go from whistleblower to being charged by the SEC for participating in a scheme from mid-2000 to mid-2002 to overstate online revenue through round-trip transactions over two years while being the CPO of the America Online (AOL) Division of Time Warner? Just ask Joseph A. Ripp. Ripp consented to a final judgment with the SEC on May 19. 3308. permanently preventing him from future violations of the Securities Exchange Act of 1934 Section 13(hX2XA) and ordering him to pay disgorgement of S130000 and pay a civil penalty of $20.000.

The Warning Letter from Ripp

Our story starts on May 14. 3301. when Joseph A. Ripp. the newly appointed CFO of AOL, faxed a letter to the Las Vegas offices of Arthur Andersen informing it that an AOL business partner, and Andersen client. had forged a signature on a contract and booked several million dollars of sham revenue. That letter set off a chain of events that culminated in the accounting scandal that followed Time Warner's merger with AOL, including huge fines and criminal convictions. Ripp was called one of the "white hats" in the whole affair by the Justice Department.

But on May 19. 2008. the SEC, after nearly six years of investigating accounting at AOL, filed a civil lawsuit against former executives alleging financial fraud. Seven were AOL executives before the merger. the eighth was Ripp. The SEC had charged Ripp with being a participant in the fraud and making public statements to investors that were part of the release of the fraudulent financial statements. To say his former colleagues at Time Warner were shaded is an understatement. Gerald Levin, the former CEO of Time Warner, said of Ripp, This is precisely the type of guy you'd want to manage your financial group."

In addition to Ripp, two CPAs were charged with misleading the external auditor (Andersen) about the fraudulent transactions: J. Michael Kelly was the CFO of AOL and Mart Wovsaniker, former head of accounting policy.

In another twist to the story, on September 23. 2011. a Nay York federal judge stripped claims from the SEC lawsuit against two AOL Time Warner executives on engineering the online scheme, citing a recent U.S. Supreme Court decision, because two parties to the lawsuit—Wovsaniker and Steven Rindner, former CEO in the company's business affairs unit—did not have ultimate authority over the misleading financial statements.

Beginning in mid-2000, stock prices of Internet-related businesses declined precipitously as. among other things. sales of online advertising declined and the rate of growth of new online subscriptions started to flatten. Beginning at this time. and extending through 2002. AOL employed fraudulent round-trip transactions that boosted its online advertising revenue to mask the fact that it also experienced a business slow-down. The round-trip transactions enabled AOL to effectively fund its own online advertising revenue by giving the counterparties the means to pay for advertising that they would not otherwise have purchased. To conceal the true nature of the transactions. AOL typically structured and documented round-trips as if they were two or more separate. bona fide transactions. conducted at arm's length and reflecting each party's independent business purpose. AOL delivered mostly untargeted. less desirable, remnant online advertising to the round-trip advertisers, and the round-trip advertisers often had little or no ability to control the quantity. quality, and sometimes even the content of the online advertising they received. Because the round-trip customers effectively were paying for the online advertising with AOL's funds, the customers seldom, if ever. complained.

Several of the counterparties to the round-trip transactions were publicly traded companies. Three of these counterparties—Homestore. Inc_ PurchasePro.com. Inc.. and a California software company—improperly recognized revenue on the round-trip transactions and reported materially misstated financial investors. As a consequence, the company aided and abetted the frauds of three public company. The company also artificially inflated the number of AOL subscribers in the second, third, and 2001 so it could report to the investment community that it had met its new subscriber targets, the market used to evaluate AOL (both before and after its merger with Time Warner). Special counted members from "bulk subscription sales" to corporate customers (for distribution to that the company knew that the memberships had not, and mostly would not, be activated. In at least company entered into round-trip arrangements to fund the corporate customers' purchases on. Additionally, in last-minute efforts to meet the quarterly targets, the company on at least for nonconforming bulk subscription membership kits to the customers prior to quarter-end will that it would turn around and replace them at a later date with conforming kits, but it none subscribers from these sales as of the quarter-end.

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