A government investigation into accounting practices at America Online has prompted Time Warner to set aside $500 million to cover the costs of potential fines.
The New York Times reported that the step led to a 7.8 percent drop in profits in the third quarter.
The Securities and Exchange Commission and the Justice Department are looking into the accounting for a $400 million payment that AOL received from Bertelsmann, the German media company that once owned half of AOL Europe. Regulators are questioning whether the payment was made to inflate the growth of AOL.
The Washington Post reported that the investigations concerned how financial results were reported as well as how subscribers were counted before and after the merger plan was announced in 2000.
The company has already restated $190 million in revenue that it said AOL improperly booked as advertising, falsely inflating ad revenue before the merger.
"These are clearly significant matters. We take them very seriously," Time Warner chief executive Richard D. Parsons said during a conference call with Wall Street analysts.
"The issue is closer to blowing over," said Rob Sanderson, an analyst at American Technology Research in San Francisco. "It hasn't blown over yet, but at least they put a number around it."
The SEC has also stated that Time Warner's financial reports, starting in March 2000, were incorrect because the financial results of AOL Europe were not fully incorporated. The company announced plans to restate results for its 2000, 2001 and possibly 2002 financial years.
The company also confirmed its plans to fire more than 700 AOL employees in early December, mainly because of lost subscribers who are abandoning AOL's dial-up service for cheaper and faster Internet services.
In the latest quarter, Time Warner had net income of $4999 million, down from $541 million a year earlier