Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 4-9 AOL-Time Warner
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 CFO 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, 2008, permanently
preventing him from future violations of the Securities Exchange Act of 1934 Section
13(b)(2)(A) and ordering him to pay disgorgement of $130,000 and pay a civil penalty of
$20,000.
The Warning Letter from Ripp
Our story starts on May 14, 2001, when 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.
Fraudulent Round-Trip Transactions to Inflate Online Advertising Revenue
The following is taken from the SEC’s ruling in the case against the former AOL-Time Warner
officials.
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
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Questions
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.
One of the tests of ethical behavior is to admit one’s mistakes, take responsibility for
one’s actions, and promise never to do it again. Ethical behavior is also a by-product of
intent. It appears that Ripp wanted to do the right thing by faxing the letter to Andersen
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Doing the right thing in business is not an easy task when the culture of the company
fosters unethical behavior. Ripp may have had a high level of ethics but AOL’s low
ethics were a countervailing force that created ethical dissonance. It may have taken him
time to realize the ethical dilemma and muster up the courage to go public.
Instructors may want to share additional facts about the case once students answer this
question. The following is drawn from a story in the NY Times:
http://www.nytimes.com/2008/06/09/business/media/09aol.html?pagewanted=all&_r=0.
According to several people involved with AOL at the time, and documents from a
criminal fraud case against PurchasePro, Ripp played a crucial role in uncovering
fraudulent transactions between AOL and two business partners: PurchasePro and
Homestore, an online real estate company. Those companies were central to Time
Warner’s settlement with the S.E.C. in 2005.
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?
As CPAs both Kelly and Wonsaniker had an ethical obligation to be honest with the
external auditors and work with them in producing accurate and reliable financial
Exhibit 3.6
Initial Detection of Occupational Frauds from the ACFE 2014 Global Survey: Report to the
Nations on Occupational Fraud and Abuse
Detection Method
Percentage Reported
Median Loss
Tip
42.2%
$149,000
Management Review
16.0%
$125,000
Internal Audit
14.1%
$100,000
By Accident
6.8%
$325,000
Account Reconciliation
6.6%
$75,000
Document Examination
4.2%
$220,000
External Audit
3.0%
$360,000
Surveillance/Monitoring
2.6%
$49,000
Notified by Law Enforcement
2.2%
IT Controls
1.1%
$70,000
Confession
0.8%
$220,000
Other
0.5%
We can see that about 30 percent of all fraud are detected by management review and
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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.
Reversing the charges against Wovsaniker who was the director of Accounting Policy
may have been the right thing to do assuming as director he had nothing to do with the
accounting for sham revenue transactions or inflated subscriber data. Indeed,
Wovsaniker’s lawyers argued vehemently that he engaged in no wrongdoing. The federal
Postscript
On July 8, 2010, federal securities regulators dropped all fraud claims against former
Joseph Ripp after he agreed to pay $150,000 to end allegations that he had helped inflate
AOL’s advertising revenue by $1 billion. Ripp had also agreed to cooperate with the SEC
U.S. in its case against AOL executives.